The Biden scorecard

0:06Pushkin. On this show, we're not too often interested in politics, but sometimes politics is interested in us. The U.S. election is 13 months away and Democrats and Republicans are arguing about the state of the economy. That's our turf. Democrats say the economy's great. Republicans say it's the worst economy ever. Which is it? Today on the show, we're going to ask, how good is Joe Biden's economy, really? This is Unhedged, the markets and finance show from the Financial Times and Pushkin. I am reporter Ethan Wu, joined today in the New York studio by uncle at the table shaking his fist, Robert Armstrong.

0:43It's true. I am the weird uncle of American financial commentary. You at least help clear the table. That's what matters at the end of the day. All right, Rob, on today's show, we have divided the aspects of Joe Biden's economy into two segments to give the kind of Biden balance sheet. Assets on the one hand, the good things, and liabilities on the other hand, what's not going right. Do you want to start with the good news or the bad news? I think the bad stuff is more fun. Okay, bad news it is. On the liability side of the balance sheet, we've got real wages, energy and gas costs, housing costs for people that don't currently own homes, and what the market's done.

1:22Maybe we can start with real wages. I mean, to me, that's kind of the biggest theme of Joe Biden's economy is he ran the economy hot. He did a lot of fiscal stimulus. The Fed helped out with low interest rates. And that very potent combination of low interest rates and a lot of fiscal spending, it led to an economy where output was growing really fast and there were a lot of jobs being created, but also there's a lot of inflation. Now, nerds like you and I, Ethan, can argue for quite a while about how to measure inflation or how to measure incomes. But I think we know that however we measure them, what we're going to find is it's about a wash.

1:57In other words, prices so far in the Biden presidency have moved up 15, 20 percent. Incomes, wages have moved up about 15, 20 percent. Of course, that's distributed unevenly across the economy and everything else, but it's roughly a wash. So if we agree that, you know, wages and prices have more or less roughly kept up with each other, I mean, shouldn't that be a neutral, right? Like if they cancel out, people are about as well off today as they were in January 2021 when Biden was inaugurated. It's absolutely not a neutral. It is a strong negative. And that is because people are loss averse, meaning losing something hurts them more than gaining something helps them or makes them feel good.

2:44So in this case, our median voter walks into the quickie mart, observes the price of Twinkies, sees them up by a fifth and thinks, damn that Joe Biden. Then they head off to their job where they're over the last couple of years, their wages have increased by 20 percent. And they think, damn, I'm a good work. Man, I deserve I deserve this 20 percent. Right. So I think the real wages picture is a definite liability for Joe Biden. And to your point, and this gets us into our next point about gas prices, but at the peak of the gas price increase in Biden's administration, there were all these stickers that people would put up on gas stations by the gas price.

3:25A picture of Joe Biden pointing at the gas price saying, I did this. Nobody does the equivalent for their W-2. No, indeed. Where it's Joe Biden saying, I did this. No, it's the worker that did that. Yeah. And the gas price, which is the first thing many people think of when they think of the economy, their mind immediately goes to the gas price. Very visible price that has a strong incremental impact on the family budget. Not only is it like 60 or 70 percent higher than the day that Joe Biden was inaugurated, but it's been an incredibly volatile path along the way. And I think that volatility itself, that unpredictability, adds another negative aspect to the whole situation.

4:09Absolutely. It creates a sense of anxiety and instability, one has to imagine. And another aspect of it is that it's not just the gas price. It's also utility bills that have been rising very fast and volatile. If you look at the Department of Energy's data on residential electricity costs, I mean, those have increased in a way we haven't really seen in recent history. None of this is like just Joe Biden pulled the lever that said your gas will be expensive now, right? It wasn't like that. There were, you know, a lot of dynamics, Russia's war on Ukraine matters. However, Biden gets the blame. Sure does.

4:41So that brings us to the third liability. And that's, man, unless you have a house already, which I mean, I do not, it's tough out there. Whether you're a renter or a prospective homeowner, mortgage rates are at 7%. Housing prices have gone straight up since Biden was inaugurated and have been going up for many years before that. And even if you're not a prospective homeowner, if you're a renter, the US national rent to income ratio is 30%, which for an individual is the designation of rent burdened. America is a rent burdened country. How in the name of the sweet Lord did we get into a situation where mortgage rates have more than doubled and house prices didn't fall?

5:27Yeah. Is this hell? What an outcome. It really is. And the way it's supposed to work is Jay Powell and the Federal Reserve put a hex on the housing market with higher interest rates. That's supposed to cut the legs out through demand destruction, right? Higher mortgage rates are supposed to make it unaffordable to own a house. So people stop and the house prices go down, right? And that's the whole idea. But what's happened instead is rates have gone up so much so quickly that people are just clinging on. Frozen market. Yeah. They're clinging on to their cheap, low-rate mortgages, and the market, in a lot of ways, is frozen.

6:01It's not really what anyone predicted, and it means a lot of people are locked out. And it goes on top of a longer-term, multi-decade, under-construction problem in America, where we just have not built enough housing units to keep up with population growth and household formation. I wish politicians talked about this stuff more. I mean, it's just so tough on young families, the way the housing market works in America. We need to do something about it. Absolutely. And once again, you have to imagine Biden gets the blame. But that brings us to the fourth liability, which is market performance. I mean, if you're an average retiree and you've got 70 % of your portfolio in stocks, 30 % in bonds, returns have not been so good since Biden was inaugurated.

6:38You know what the real problem is here, Ethan? Yeah. We're spoiled. Since about 2012, both the bond market and the stock market have been giving us extraordinarily high returns by historical standards. and grouches like me have been writing in columns for that entire 10 years, eventually asset returns revert to a stable mean. The fact that we are getting 14 % a year means we will be getting less than 7 % a year before long. It's happened. Again, president's fault, probably not, probably just mean reversion and a pandemic and rates rising and whatever else. But this is a historically normal event we've seen in markets in terms of gains and losses following gains or weak performance following strong performance.

7:28But we're used to strong market performance, so it's natural we should be disappointed in the last couple of years. Yeah. And I think the element of it that you could plausibly blame on Biden is the inflation element, right? One thing that really killed returns for an average stocks and bonds portfolio is the fact that inflation went up so high that rates had to jump over five percentage points in a very short period of time. That just killed the returns on bonds. Ethan, if you think you're going to draw me into an argument about whose fault inflation is, you're wrong. Yeah. There's a whole different discussion, but I'm just...

7:57I think if you are pulling the lever in 13 months, you're checking your Fidelity account or your Schwab account or whatever, and you're like, what's my 401k done in the past year or so? And overall, it probably hasn't lost money, but it doesn't feel particularly good. Nope. So that brings us to the asset side of the balance sheet. There is good news in this economy. It's really not all bad. And the main thing that Biden has going for him in his economy is the employment picture. I mean, we've just had a relentless pace of gains at first fueled by kind of the recovery from COVID. But even after the pandemic distortions faded further into the rear view, we've had just months and months and months of strong payroll gains.

8:35And the labor market really shows no signs of slowing below a level that would be considered strong. It's just a tremendous job market. Almost everybody in America who wants a job has one. a lot of those people have a higher paid job than they had a few years ago in nominal terms and in many cases in real terms. The bottom end of the job market has gotten better, which is the part that we most should most care about as Americans. So I think there is, you know, to the degree that the president has anything to do with employment, a victory lap for Biden is fully warranted. Yes. I'm glad you brought up the kind of distributional and inequality elements of the labor market because, you know, one of the dynamics we saw is people that quit their jobs, especially at the lower end of the income ladder, were rewarded for it early on.

9:26They got a wage premium for leaving their job. And that gave like an incredible amount of leverage to workers that, you know, maybe in a different labor market would have been stuck in a job they didn't like or a job that didn't pay them that well because, you know, they didn't want to starve. And that has been one of the big features is the high quits rate for a long time. Which leads us to our next point nicely, you put a couple of bucks in an American pocket, that American reaches into the pocket, takes those bucks out and spends them. We have seen a consumption driven economy that has been stronger than anyone, us included, expected.

10:05The rate of growth has been remarkable. No one that I know of called it. It's been exceptional relative to the rest of the world. And it has been largely driven by strong consumption. Absolutely. You know, all the Wall Street recession calls have been just foiled again. And our recession call, to be fair. We were totally in the recession camp for a while. 100%. Has been foiled again and again and again by the persistent strength of the US consumer, the unwillingness of Americans to stop buying the things they'd like to buy. That's propping on this economy. And that, I think you have to say, is sustained in large part by the labor market, but also, and this brings us to our next asset, which is wealth, by the gains a lot of Americans have in their net worth.

10:50So if you look at the numbers, the picture for wealth is a lot like the picture for income. The nominal increase in American wealth has roughly matched the rate of inflation. So you're about where you were a couple of years ago. But happily, the part of the wealth distribution that has seen the largest percentage gains is the lower end. Yeah, the bottom half. Bottom half. And the bottom half, those people own houses and cars and washing machines. The value of all those assets and their retirement accounts, all of that has increased in value at a greater than inflationary rate. And so there's a lot of voters out there who feel like the household balance sheet is probably okay right now.

11:42Yeah, yeah. And it ties into conversations about excess savings that people have been having. And there's more wealth out there than there was before, just put simply. And so the third point on the asset side of the balance sheet is in kind of a curious tension with our discussion of employment and wealth, which are kind of like an anti-inequality story. The housing market is a little bit of like a pro inequality story in the sense that the people that are benefiting in this housing market are the people that have locked in low interest rates that are already homeowners and are sitting on 30 % house price gains.

12:15For them, it must feel good. Of course, those are the people that are a little bit better off in society. Let me just tell you, I own a house. I have a 3 % mortgage. I am like Scrooge McDuck over here. Listeners, you can't see it, but I have a top hat on and I'm wearing a monocle. Yeah. Feels pretty good. Feels good. Somebody else is on the other side of that market and that stinks for them as we discussed. And that's probably the more important part of the story. But the simple fact is that people who are in houses that they own at the old mortgage rates are experiencing a positive wealth effect.

12:51Yeah, absolutely. And that's tens of millions of people. So just taking stock on the asset side, employment, wealth, housing for current homeowners. on the liability side, real wages, gas prices, housing costs for non-homeowners, and market performance. To me, Rob, I think it's a bit of a net positive, maybe slightly small net positive. It at least does not seem deeply negative. I think you can make a strong case that this is overall pretty decent economy. Could be better. It's not perfect. The question though is, I'm a professional pinhead. We think about this stuff all day. We write about it.

13:28We look at the data, blah, blah, blah. Does it matter in American politics, you know, whether it's a little net positive or a little net negative on the Biden balance sheet? Well, I think there's a couple of points to make here. The first is about the balance you just said, you know, if you just have a time, a snapshot in time of where we are right now, and you put the positives and the negatives on the scale, I think, yeah, the positive side's a little stronger. And that's especially remarkable given that we had a global pandemic a couple of years ago. The problem is that we have also had remarkable volatility.

14:05As we know from studying financial markets, sometimes the volatility level is more important than the absolute level. And I think now I'm just going with my intuitions here, that most dangerous of all activities. Journalist reflects on his intuitions, But my intuition is that the slightly rollercoaster ride aspect of the American economy will have a negative overall effect on voters' perceptions. Certainly, we know from financial markets that an asset that has, say, strong growth or et cetera, if it's a volatile asset, people will pay less for it. And I think the same might be said of the American economy.

14:54Yeah, there's a lot to be said for that. and Democrats polling on the economy is not particularly good. It's largely, I think, a Republican issue. It's a difficult thing for Biden to trumpet. He is trying to. He's trying to make the case for his economy because there is data you can point to. There are facts you could point to. Now, there's a separate question, of course, which we should probably just kick to our colleagues down in the Washington office, which is, does any of this matter to voting? So there's this plausible view that the election is just going to be decided by like 35 people in Wisconsin, Arizona, and Pennsylvania.

15:29And it's like, is it raining on those people that day in November? And we find out who gets to be president. Absolutely. Listeners, if you're interested in more discussion of these topics, we have a great newsletter for you. It's called Unhedged. We have just written a collaboration with the Columbia historian Adam Tooze thinking about the Biden economy and what it might mean for elections. We'll have a link to that in the show notes. And we'll be back in a moment with Long Short.

15:59Welcome back. This is Long Short, that part of the show where we go long a thing we love, short a thing we hate. Rob, you feeling long something? I'm going to be long third quarter earnings. Third quarter earnings season begins next week when the big banks start reporting. And I think that overall earnings are going to be good, better than expected. That leaves open the question of what companies say about the future, of course, their guidance. That is a harder question. But as we just discussed on the show, US economy still humming, spenders still spending, we're going to be fine. Yeah. No, I think highlighting the guidance is absolutely right, especially just because on the growth picture, it looks like third quarter growth is coming in pretty strong.

16:44But fourth quarter growth, when you have oil prices, student loans, higher rates, this and that, The fourth quarter might be the real test for corporate America, but definitely for the third quarter, I share your long. I think that's right. Well, Rob, I'm short the just avalanche of Sam Bankman-Fried and cryptocurrency-themed books. There's too many of them. There have been like four major releases. We have a good book review in the FT today from Brooke Masters, who's been on the show. How many times can people write 300 words on how much of a quirky vegan Sam Bankman-Fried is? I know. It's so boring.

17:17I'm sick of it. I'm sick of the talk about the bushy hair and the t-shirts and the shorts and this. You know, as finance writers, Ethan, we need new frauds to come on. Yeah. Come along with a certain regularity. So if you are a fraud out there listening to the show, we'd appreciate your malfeasance coming to a head in the coming weeks and you going to jail so that we can write something new. I'm starting a new company called El Combinator, and it's about accelerating frauds with venture capital money. So we can have more blow-ups and write more interesting articles. We're going to be a very rich man, very briefly.

17:58And of course, I mean alleged fraud. Bankman Freed has not been convicted on anything. All right, Rob, thanks for being here. We'll have you back soon. And listeners, we'll be back in your feed on Tuesday with another episode of Unhedged. Catch you then. Unhedged is produced by Jay Carper and edited by Brian Erstad. Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Jacob Weisberg, and Jess Trulia. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else.

18:33Just go to ft.com slash unhedged offer. I'm Ethan Wu. Thanks for listening.

18:48We'll be right back.