Global elections show voters' wrath against rising inflation levels

The US election shows the conventional wisdom was right all along: Controlling inflation should be the primary focus of macro policy

A spectre is haunting the elected heads of the world — the spectre of inflation. It seems voters hate nothing more than inflation, and this has caused multiple incumbents across the world to lose support in elections.

 

The resounding defeat of the Democratic Party in the United States’ recently concluded presidential elections has been assigned to many factors — the foolhardy decision of the incumbent president, Joe Biden, to run for a second term before he was pushed out; the growing divide between conservative men and progressive women; and the loss of faith among Hispanic voters in the centre-left. All of these are probably relevant. But the truth is that the result is probably overdetermined. And in the end, the inflation effect on voter preferences will have swamped everything else. 

The US is, as has been pointed out by data analysis in the Financial Times, far from unique. Every single incumbent party in a developed economy that faced an election this year lost vote share — the first time this has happened on record. (Records begin in 1905.) This is a phenomenon that requires an explanation, and none is forthcoming other than the global surge of inflation that followed the pandemic. 

While more work needs to be done on the public reaction to this inflationary moment, some trends are immediately apparent. Put together, they serve as a reminder of the importance of orthodox assumptions about how to maintain low and stable inflation. 

First, the public cares about the price level, not just whether they are going up or down at a particular point. The Democrats in the US repeatedly argued that an initial surge of inflation had been controlled, and inflation was back down to normal amounts. But they were not given credit by voters for that achievement. Instead, voters compared the price levels in 2020 and those in 2024, to the incumbent administration’s disadvantage. This means that the political effect of past inflation is quite persistent over time. 

Second, the public response to technocratic solutions targeting specific solutions to sectoral price increases is quite tepid. Such actions do not necessarily pay political dividends. In the US, for example, the administration and Democrats in Congress have made much of the possibility of investigating whether excess profits were earned by some companies that possess monopoly powers in sectors where price increases were seen. But this effort did not cut through with voters, who did not shift responsibility away from politicians to corporations. The term “greedflation”, coined to try and cement this shift, did not catch on either. 

Third, aggregate figures can hide a great deal. In the US, the electorate was angry even though their real wages rose. In other words, data on the average nominal wage showed that it increased by more than the consumer price index (CPI). If, nevertheless, people felt shortchanged, what does that mean? One possible explanation is that the consumer price index does not properly reflect the weight that some vocal sections of the electorate place on certain sectors. For example, by some estimates, the price of housing and transportation have increased more than nominal wages in the US. This seems to have caused resentment, regardless of what the CPI may say. Thus, a relentless focus on a single price index is dangerous. It is important to remember that the CPI is just an artificially constructed indicator, not reality.  

Fourth, the relationship between unemployment and inflation, whatever it may be in reality, has a very different political salience from what was earlier assumed. Progressive economists have congratulated themselves that recent US policy has delivered a “soft landing” for employment. In other words, inflation has come down while the US labour market has remained relatively tight. This has been in spite of some publicly expressed concerns that inflation reduction would need a spell of higher unemployment to take hold. But a tight labour market, particularly at the lower end, has proved to be politically not quite as much of a benefit as expected. Indeed, the relative persistence of high prices in services that require unskilled labour — food delivery for example — has proved to be more politically disadvantageous than unemployment being a few percentage points lower has been politically beneficial. 

Sixth and finally, the US’ bold experiment in 21st-century industrial policy has turned out to be a political dud. The Democrats have spent trillions of dollars trying to get good, unionised, industrial jobs back to the US and have nothing to show for it in terms of political results. They have been given zero credit by the communities they targeted. Even the unions have been ambivalent about the party. Meanwhile, the enemies they created in the process had better memories. In retrospect, Mr Biden’s single greatest error might have been snubbing Tesla’s Elon Musk at the time that policy around electric vehicles was being designed, because that company is notoriously un-unionised. Mr Musk helped bankroll Donald Trump’s campaign and created a supportive media environment for the Republicans. 

If you put these various lessons together, a bleak picture emerges. The conventional wisdom that the primary aim of macroeconomic policy should be to maintain price stability has been strongly reinforced by recent political events. Although this might feel surprising, it should not actually be that much of a shock. This wisdom emerged, after all, from events. The focus since the 1970s on price stability exists because of the political instability that the inflation of the 1967-1977 period delivered. The political class of the West forgot that at its peril. 

It seems very important, therefore, if the rise of populist forces is to be controlled, that steady macroeconomic policy is restored. This means that deficits will have to be sensibly controlled, taxes raised and spending pruned, central bank independence preserved — all the standard requirements of traditional economic prudence. Politicians, emboldened by the apparent absence of a budget constraint, have got a little drunk on state power since the pandemic. The markets have not, in all cases, given them a black eye in response. But it seems that voters have. It’s time for a return to macro sobriety. 

The writer is director, Centre for the Economy and Growth, Observer Research Foundation, New Delhi