It’s always ‘the economy, stupid’

What did Americans vote on yesterday? Iran, Ukraine, oil? James Carville’s slogan – which helped Bill Clinton win back in the now-distant 1992 – probably still holds true: ‘It’s the economy, stupid’. But which economy? It has changed so much since then. Things are moving along: production, employment, wealth accumulation, the availability of capital, liquid money circulating on the stock market – none of this is lacking. So why complain? The mystery of America Inc. lies between two distinct concepts: trickle-down and affordability. Let’s start with the first, a mantra from the Reagan era adopted by Trumpism. When the President says he couldn’t care less about inflation, he isn’t merely mocking the Democrats, the Federal Reserve and those who are alarmed because consumer prices continue to soar and mortgage rates have risen above 7 per cent. The Donald cannot fail to know that first the tariffs, then the Persian Gulf crisis, played a decisive role in fuelling a boom that Joe Biden has sustained through public spending on consumption and wages. No, Trump is articulating an economic theory, whether he realises it or not. 

Let Wall Street break new records, let the tech bubble inflate, let the rich get richer; a good portion of that bonanza will trickle down anyway to the poorest of the poor. That was the mantra of the Reagan era, and on the whole it was successful. Will it be effective today as well? There are many differences: the most important is that back then, the trickle-down effect was aided by the liberalisation of markets (both financial and commodity markets); today, however, we are in the midst of neo-protectionism, with the state intervening in large corporations, subjecting them to the primacy of politics. This is not just about the military-industrial complex – which was powerful enough even under Reagan to help bring the Soviet Union to its knees. It is about intertwining the interests of the president and his family with those of the tycoons in cryptocurrencies, oil, gold and even AI.

Has trickle-down worked? According to the S&P 500 index of the 500 largest companies, a staggering 17,000 billion dollars has flowed into the stock market since the end of 2024, but 90 per cent of the gains have gone into the pockets of the 10 per cent of households that were already the wealthiest. A few drops have trickled down to the bottom of the social ladder, but barely 0.6 per cent. These estimates do not come from the opposition or the socialist wing of the Democrats, but from the Federal Reserve, the central bank led by Kevin Warsh, a conservative appointed by Trump. The Economist has done its own calculations: in one year, ‘Trumpnomics’ cost the poorest 10 per cent of households $37,000, whilst the richest 10 per cent gained half a million dollars. The paradox is that both groups share the same percentage: the former lost 3 per cent of their income, whilst the latter gained the same amount.

The boom in AI and its entire supply chain (from materials to chips, via call centres) has sent Wall Street soaring, without destroying jobs – thereby proving all the naysayers wrong (there are some on both the right and the left) – though it has created few new jobs: just 180,000 in AI-related businesses. Productivity, calculated as output per hour per worker, has begun to rise. Over the last five years, it has averaged 2 per cent – not much, but still double the rate of the previous decade. The latest quarter shows a rise of 1.4 per cent, whilst manufacturing in the strict sense has performed better (up 1.9 per cent). We are a long way from the promises made by the AI’s evangelists; nevertheless, the glass is half full because the index has continued to rise for five consecutive quarters. In short, this could be the start of gradual growth leading up to the exponential growth that is so often dreamt of. We shall see; we can wait, but the voters cannot.

A look at the macroeconomy tells us that GDP is rising by 2.2 per cent a year, just as it was in 2024 when Biden lost the White House. Employment remains strong and the unemployment rate stands at just 4.2 per cent. However, this stability has come at the cost of a severe imbalance in the public finances, with a deficit amounting to 6.5 per cent of GDP and a colossal debt, not only in absolute terms (40,171 billion dollars) but also as a proportion of GDP (123.3 per cent). The United States has found itself trapped in the ‘twin deficits’ trap, which has always proved very costly: the public deficit is accompanied by a current account deficit with other countries amounting to 3.5 per cent. And this is a clear failure of the ‘beautiful tariffs’. Neo-protectionism has failed to bring businesses back home. The ‘manufacturing revival’ has been disappointing, with the share of employment in non-agricultural industrial sectors falling to its lowest level since 1947. Meanwhile, wages have risen less than inflation – by 3 per cent on average, whilst prices have risen by over 3.7 per cent, as we have noted.

Is everything going the Democrats’ way? Not so fast. The ‘affordability’ theory is borne out by all this data: Trump’s policies have made the cost of living, in the broadest sense, less sustainable. However, the opposition’s proposals – which are too numerous, contradictory and, above all, confusing – do not seem capable of reversing the trend. Moreover, voters do not decide solely on economic grounds; they also consider cultural and identity-related factors, including religious beliefs, national symbols—often including the Confederate flag—and attitudes toward gun rights. Behavioural economists, therefore, must incorporate these irrational elements into their models or risk invalidating their analyses. There is, therefore, a serious risk that trickle-down economics will prevail because even the poorest Americans have always felt like rich people who are merely temporarily unlucky. Once again, Ronald Reagan offers us comfort: in 1980, he defeated a Jimmy Carter who was not only sacrificed on the altar of the Iranian ayatollahs, but also shot down in a televised debate when Ronnie asked him – and the average voter – ‘Are you better off today or four years ago?’. That was also when the concept of ‘affordability’ was born.