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It's the Economy, Stupid

  • Sam Santavicca
  • Mar 10
  • 4 min read

Updated: 6 days ago

Despite having no constitutional authority to control government spending, the president is often blamed, but rarely credited, when the economy lags or booms, respectively. Elections are often decided by how the voters perceive “the economy.” Franklin Roosevelt won four landslide elections after the Great Depression, Jimmy Carter was elected following the oil crisis of the early 1970s, Bill Clinton defeated incumbent George H.W. Bush in 1992 following the Gulf War recession, and Joe Biden defeated Donald Trump in 2020 following, among other things, the COVID-19 recession.1 A bad economy, or the perception of a bad economy, can be devastating to a campaign. 


  So, what exactly do people mean when they say, “the economy?” In simple terms, the economy is the flow of money across governments, businesses, households, and other financial institutions. When the money flows quickly, stock indexes rise, relative household income rises, and inflation lowers. When the money flows slowly, the stock market goes down, workers lose their jobs, and inflation rises.2 This is known as the “velocity” of money. If $100 changes hands five times in a year, that same bill will have “created” $500 of value towards the GDP. If that $100 only changes hands once, it only creates $100 of value.  

  

A responsible government aims to create an economy that grows steadily and predictably. If money flows too fast, it could lead to a bubble, which, when popped, could trigger a recession or a depression. A recession is an economic downturn, typically measured by two quarters of negative GPD growth, while a depression is a “more severe version of a recession.”3 Colloquially, a recession is when your neighbor loses their job, and a depression is when you lose yours. 

  

In 2022, at the height of the COVID recession, the federal government spent $6.67 trillion, up $1.2 trillion from 2019.4 This increase in spending was due to Joe Biden’s economic agenda and the government’s response to COVID. The American Rescue Plan, as it was named, was a $1.9 trillion stimulus package aimed at “soft landing” the economy. The bill contained $1,400 stimulus checks for adults, $400 more a week in unemployment benefits, an increase in the child tax credit, and other funds targeting schools, healthcare, small businesses, and renters.5 By all major indicators, the American Rescue Plan succeeded, and the economy landed softly. 

  

A soft landing, in economics, is when the Federal Reserve increases interest rates to stabilize employment without a significant decrease in GDP. Typically, this comes at the cost of increased inflation, which the Fed tries to keep at two percent per year. A hard landing, by contrast, means higher interest rates and high unemployment, but low inflation.  

  

A properly balanced monetary policy would entail moderate interest rate increases, moderate inflation, and stable employment. For example, the tight (high interest rate) monetary policy of the late 70s and early 80s, where interest rates peaked at 19% in 1981, was designed to lower the inflation rate, which peaked at 17.6% the same year. As inflation cooled to a low of 2.5% in 1983, unemployment skyrocketed to 10.8% in 1982. By contrast, the soft landing of the 90s saw a peak interest rate of 6% in 1995 with peak inflation of 3.4% in 1996, and a steady decline in unemployment from 7.3% in 1993 to 4% in 1999.6 

  

COVID created an unusual economic problem: there was money to spend, but nothing to buy. This resulted in money staying in consumers’ pockets – and not flowing around the economy – which slowed growth and threatened a recession. To combat this, the Fed raised interest rates to a high of 5.33%.7 High interest rates incentivize spending money today, as opposed to tomorrow, when that money would be worth less. Inflation peaked at 7% in 2022, with the highest monthly peak of 9.1% in June that same year. By January 2025, inflation had cooled to 3%.8 After an initial peak of 14.8% in April 2020, unemployment fell to a low of 3.5% in July 2022, with fluctuations between 3.5% and 4.2% until January 2025, where the rate was 4%.9 

  

By all accounts, this was the soft landing that Joe Biden, Secretary of the Treasury Janet Yellen, and Chairman of the Federal Reserve Jerome Powell had hoped for. A modest increase in interest rates led to a modest increase in inflation, but the unemployment rate dropped and continued to stay low. 

  

So, what happens next? Right now, the American economy is booming, with real GDP exceeding pre-pandemic predictions. By contrast, comparable European economies missed their pre-pandemic projections by ~5%.10  

  

Donald Trump has, once again, inherited a remarkably strong economy. However, his threats of tariffs and holds on government spending have already shocked the market. Tariffs, a targeted tax on imports, are not new. New and emerging economies, like America until after World War One, use tariffs to protect domestic production and labor. A tax on imports or exports protects the domestic supply. If the government wanted to encourage domestic steel production, they could place a tariff on imported steel. This would make domestic steel cheaper by comparison, giving domestic manufacturers a leg up in the global market. 

  

However, tariffs also slow growth. A tax on a thing normally discourages use of that thing. Tariffs are also inflationary, increasing the cost of a good or service. Unlike a natural price increase, the extra money spent on a tariffed good is not reinvested directly into the economy.  

  

Threats of tariffs have also made the Fed uneasy. Powell has previously stated that he planned to lower interest rates in the coming year, but Trumps’s tariffs have forced Powell to reconsider the timeline to cut rates, prolonging the cuts until the full effects of the proposed tariffs can be observed.11 The attempt to freeze government spending, which accounts for about 25% of GDP, was also a blow to economic morale.12 Although the effects of COVID are fading, the bank J.P. Morgan claims a 45% chance of a recession by the end of 2025. Only time will tell.13


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