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It’s About the Economy

Tim J. Leach
16 min readSep 30, 2024

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Part II: Inflation

Def: Inflation is a general increase in the price of goods and services over time in an economy.

During this presidential campaign, one of Trump’s primary attacks is to criticize high inflation rates during Biden’s term and has been trying to implicate Harris in the process. I am not surprised that Trump would highlight inflation. It is a shrewd political strategy because inflation in the prices of daily living items rose significantly during Covid and has been acutely felt by working class Americans, many of whom live in the key, battleground states. Attacking inflation as a political strategy is also shrewd because the causes of inflation are not well understood by people who aren’t economists or professionals in finance and the explanations are complex, therefore difficult to defend in our headlines and sound bite culture.

Spoiler alert: Inflation has been slower on average under Democratic presidents since WWII.

That said, similar to my earlier analysis of economic growth rates, it is important to understand the different causes of inflation, especially as we examine inflation during the last few years. It may sound strange, but there is good inflation, bad inflation and crisis inflation. Wait, what?

I will explain the differences later, but I conducted an analysis of inflation, looking at the period of Biden’s presidency and over the longer term since 1980 to establish a baseline. My conclusion is that the inflationary surge which began in 2021, peaked in 2022 and extended into 2023 and has been lessening since 2023 was crisis inflation directly related to the Covid pandemic and principally caused by three factors: federal stimulus to blunt the economic ravages of the pandemic, global supply chain disruption as a byproduct of the pandemic and global energy price shocks in reaction to the pandemic crisis, the war in Ukraine and crisis in the Middle East. Each of these factors were major contributors to price inflation suffered in the US during the last three years. Contrary to Trump’s claim that Biden is to blame, this analysis concludes that global supply chain disruption and global energy shocks are beyond any presidential administration. The only direct inflationary factor that US presidents are primarily responsible for is financial stimulus and in this case, contrary to the political story line from the Trump campaign that Biden spent too much, Trump’s administration approved 62% of the principal Covid stimulus packages since 2020 which explains a majority of the inflationary spike we experienced in 2021 and into 2022 from government stimulus. Because prices rose during Biden’s first year in office, Trump claims Biden caused the inflation, even though Trump wrote a majority of the checks. The best comparison is with the performance of the Euro economy under the same pandemic conditions. This comparison points to global factors (supply chain disruptions and global energy spikes) as major causes of inflation, especially in 2022 and 2023, despite Europe injecting about half as much stimulus as we did and experiencing only slightly less inflation than in the US. In contrast, our economy recovered and grew better than Europe’s, probably because of our decision to use far more stimulus. Most importantly, during the pandemic, did our government act prudently to counter the effects of the global crisis without causing excessive inflationary pain? My conclusion is yes.

Factors causing inflation during 2021–2023

Primary Covid-19 Stimulus Packages

  1. CARES Act (Under Trump)
  • Approval Date: March 27, 2020
  • Size: $2.2 trillion
  • Key Components: $300 billion in direct payments, $260 billion in unemployment benefits, $669 billion for the Paycheck Protection Program, $500 billion in loans for corporations, and $339.8 billion for state and local governments.
  1. Consolidated Appropriations Act, 2021 (Under Trump)
  • Approval Date: December 27, 2020
  • Size: $900 billion
  • Key Components: $600 direct payments to individuals, $300 per week in enhanced unemployment benefits, and funding for small businesses, vaccine distribution, and education.
  1. American Rescue Plan Act (Under Biden)
  • Approval Date: March 11, 2021
  • Size: $1.9 trillion
  • Key Components: $1,400 direct payments, $350 billion for state and local governments, $130 billion for schools, and $14 billion for vaccine distribution.

Effect on Price Inflation (2020 through 2023)

Good inflation vs bad inflation vs crisis inflation

Good inflation is a byproduct of a rapidly growing economy. I think of ‘good inflation’ as a cost of doing business at higher speeds, not unlike a car engine running hotter while on a freeway. When an economy is growing at an above average rate, companies, and consumers (families) are all growing and prospering, spending money to grow and spending the extra money earned to grow their business and live nicer lives. Supply and demand forces drive economies. In the ‘good inflation’ scenario, companies and consumers have more capital (greater supply) and demand more goods, causing the price of goods to rise. I refer to this as good inflation, because while none of us wants to see higher prices, in a strong economy, most can afford it because wages in general grow faster than inflation and families feel they are staying ahead.

We can get a perspective of what good inflation looks like by reviewing the economic data since 1980 and examining the results for Democratic administrations.

Economic Metrics (1980–2023)

Average Annual GDP Growth Rate:

Average Annual Inflation Rate:

Average Annual Federal Deficit as a Percentage of GDP:

Note that under Democratic administrations since 1980, the economy grew at an above average rate (4.23% vs an average of 2.7%), while generating inflation at a below average rate (2.9% vs an average of 3.1%). Healthy economic growth produces only moderate inflation. Why? Because debt didn’t get out of hand. Notice that under Democratic administrations, deficit spending/going further into debt to run the government, was below average (2.1% vs an average of 3.6%) by 42%. It is key that under Democratic presidents, the economy grew faster than the increases to our debt (4.23% vs 2.1%). As prudent businesses know, growing your business faster than your debt is the way to stay ahead. Families know this too.

Turning to ‘bad inflation’, what I think of as irresponsible inflation. Bad inflation is caused by increasing the amount of dollars in the system by financing the cost of operating the government. Where would these additional dollars come from? Increased debt of the federal government. When there are additional dollars injected into the economy (increased supply of dollars) and the amount of governmental debt grows rapidly (weaker credit ratings for the US) the value of the dollar weakens (falls) and it takes more dollars to buy the same item in the store. Prices go up without the benefit of a rapidly growing economy with inflation growing faster than wages, resulting in companies and consumers (families) uncomfortably concluding that they may not be able to afford what they need. Families and businesses feel like they are losing ground.

We can gain a sense of ‘bad inflation’ by reviewing the above data on the economy from 1980 through 2023. However, this time pay attention to the economic metrics when Republican administrations were in charge. Note that under Republican presidents, the economy grew at a below average rate (2.4% vs an average of 2.7%), yet inflation under Republican administrations was quite a bit higher than average (4.1% vs an average of 3.1%). Weak economic growth and a much higher inflation rate than the growth rate (remember the old term ‘stagflation’?). What would cause this upside-down situation? Going rapidly into more debt. Notice that under Republican administrations, deficit spending grew at an above average rate (4.1% vs an average of 3.6%) and at a rate almost twice as fast as when democrats were in charge (2.1%). What caused such massive borrowing under Republican administrations? To boil it all down, beginning with Ronald Reagan, every Republican president has aggressively cut taxes but didn’t reduce spending enough to offset the income lost to the government from tax cuts. Going further into debt makes up the difference. We’ve been running the US government on credit, more so when Republicans are in charge.

To highlight this point, during Trump’s first three years in office before Covid hit, Trump initiated Reagan style tax cuts and made modest cuts to governmental spending. As a result, deficit spending under Trump averaged 3.93% of GDP during his first three years, higher than the average for all presidents since 1980 (3.6%). Note that Trump’s deficit record is bad, but slightly better than the Republican president average since 1980. So, Trump was better than other Republicans? Don’t jump to that conclusion. I showed Trump’s deficit rate for the first three years because I wanted to show his performance in ‘normal’ times. Deficit spending in 2020 soared to 7.0% because of Covid and over his full term, Trump’s record was an exceedingly high 4.7% deficit spending rate.

Why would our government risk causing bad inflation? I suspect political strategy because I don’t see an economic rationale. The economic plan created under Ronald Reagan was based on massive tax cuts, which became known as Reaganomics, and has been completely debunked in the years since. Despite having little economic reasoning, every Republican president since Reagan has copied that game plan as their core economic strategy.

Caveat: I will share my opinions of why the Republican party has made tax cutting the foundation of its economic strategy. While I don’t have hard data to support these conclusions, decades of experience have shaped my views. My sense is that there is a disequilibrium between the preference for tax cuts and the objections against spending cuts. Political parties want to remain in power. Republican administrations probably realized huge political support benefits by cutting taxes, especially when tax cuts primarily benefit high income and high net worth families. And few if any taxpayers, including those who may benefit little from tax cuts will complain. In contrast, cutting government spending disproportionately affects working class families, seniors, and people with special needs. I am confident that these recipients of governmental services, who represent millions of voters, complain loudly when spending cuts are proposed and it makes sense to me that neither party is willing to risk a major voter rebellion. During Republican administrations, the result has been exceptionally large tax cuts but only modest cuts in governmental spending compared to the magnitude of tax cuts, with the difference made up by borrowing significant new amounts of debt.

Crisis inflation is the result of a government responding to a crisis, which typically is an exogenous crisis like the OPEC embargo of oil in the 1970’s or the global pandemic we are living through. However, sometimes crisis begins here at home like with the ‘great recession’/debt crisis of 2008–9. I think of ‘crisis inflation’ as the result of prudent government decisions to navigate between unknown shorter-term vs longer-term risks. This crisis management strategy to risk igniting inflation is intentional, and during periods of significant economic crisis, justifiable. In a crisis of sufficient proportions to cause a major economic decline, which in the worst cases could include an economic depression, government may decide to provide financial stimulus directly into the system, not unlike an IV being used for a patient in a health crisis, in an attempt to stimulate the economy and avoid much of the economic damage that may likely occur. Economic damage from a crisis typically includes high rates of business and personal bankruptcies, layoffs, and loss of property/homes. However, like common side effects of medicines, financial stimulus has side effects, including the risk of igniting price inflation for a period of time, which puts pressure on many families with respect to daily expenses. In crisis situations, a government using financial stimulus intends to avoid long term losses for families and businesses while perhaps causing shorter term inflationary pain/discomfort.

It is through this lens that I see the Biden presidency with respect to inflation. When Biden took office in early 2021, the teeth of the pandemic had already sunk in. The Covid pandemic hit early in 2020, during Trump’s last year in office. In the winter of 2020, when the world went into lockdown, the US economy was cratering, heading into a major recession or worse. During 2020, the US economy shrank by -2.77% in recession. Of note, and I think quite appropriately, the fact that we experienced a recession during Trump’s term is not being used as a political hammer in the current election, because the president didn’t cause a global pandemic. While Trump publicly seemed to want to downplay that anything negative was happening while on his watch, Congress concluded that to turn the trajectory of the US economy, major economic stimulus (spending/support) needed to be injected. I suspect that Congress anticipated the risks of inflation, but concluded it was worth it to save millions of households and companies from financial ruin. The CARES Act ($2.2 trillion) was approved in March 2020. A second shot was within the Consolidated Appropriations Act ($900 billion) approved in December 2020 before Trump left office.

Biden took office in January 2021, when the US economy was still on the mat. The question that the new administration and Congress faced was: Has enough stimulus been applied to turn the economy around? This was a major unknown given the lack of experience anywhere in dealing with the first global pandemic in a century. Was the pandemic likely to continue, lessen or perhaps get worse? Ultimately Congress approved the American Rescue Plan Act ($1.9 trillion) in March 2021, a year after the CARES Act, in what I see as the equivalent of buying an insurance policy to significantly increase the odds that the economy would recover well from this crisis. However, this third, large amount of injected stimulus increased the risk that corrosive inflation would heat up and the legislation was hotly debated prior to its approval. No one knew how the unique way that Covid was affecting our economy might result in inflationary risks.

In the current political criticism of Biden, claiming that he caused the heated inflation during Covid, the Inflation Reduction Act ($891 billion), approved by Biden in August 2022 is pointed at as further evidence. I discount this political criticism because the IRA allocated money to long term projects that will spread stimulus over many years in contrast to the short-term Covid relief bills. For example, now in the fall of 2024, only 47% of the IRA funding has been allocated, and inflationary pressures have been lessening for a year.

It is easy for armchair quarterbacks to second guess decisions made in the face of unknowns. Let’s examine the data regarding the three Covid stimulus actions and draw some conclusions. I judge it fair and objective to compare the results here in the US against the Euro economy, given its equivalent size and similar economic structure. Importantly, the global pandemic affected all economies and with similar challenges. I also felt it appropriate to measure the period 2020 through 2023, even though 2020 was Trump’s last year in office, because the majority of Covid stimulus was approved and allocated during that year.

Economic comparison during Covid (2020–2023)

United States (2020–2023)

Euro Area (2020–2023)

Note that in this comparison, focusing on the period averages, the US economy fared twice as well as the Euro economy during the Pandemic (1.78% vs 0.83% in the Euro economy). Inflation in the US was only slightly higher (4.5% vs 4.15% in the Euro economy), despite the much larger injection of stimulus we deployed in the US, as measured by the size of deficit spending (9.48% vs 4.88% in deficit spending in the Euro economy). Inflation in the US was almost twice as high in 2021 as Europe’s inflations rate, driven by the short-term effect of our larger stimulus strategy. However, inflation in the US and in Europe followed similar patterns to each other in 2022 and 2023, because global supply chain disruptions and global energy spikes were the primary inflationary pressures, but inflation was higher in Europe during both years. My conclusion is that our at-risk decisions, made by both the Trump and Biden administrations to inject major stimulus into our economy, disproportionately resulted in superior economic growth while ‘costing’ us only slightly more inflation in the short-term than the comparable economy in Europe under the same general circumstances. As evidence of the short-term nature of this inflation, it has already been abating over the past year.

With the ‘clarity’ of hindsight, some have questioned whether the American Rescue Plan that Biden signed off on in 2021 was excessive, that it should have been a smaller dose of stimulus. Might this have materially blunted the painful inflation experienced during the last three years? If we assume that 100% of the higher inflation experienced in the US compared to Europe was due to the much higher governmental stimulus in the US, I calculated that if we had reduced all Covid stimulus by 50%, which would have eliminated the entire American Rescue Act allotment and reduced the stimulus that Trump approved by $600 billion, the data suggests that US inflation would have been reduced by a nominal amount (-3.89%). Instead of an average inflation rate of 4.5% we would have still experienced an inflation rate of 4.33% during the period 2020–2023. But consider the impact on economic growth, which is why our government injected a significant amount of stimulus. Under the same 50% reduction of stimulus, the stronger economic recovery and growth that we experienced in the US compared to Europe would have been reduced by 26.69%. The trade-off of growth/inflation was a prudent decision.

Another claim being made by the Trump campaign is that workers lost ground in wages relative to inflation. Here again, I find this claim false. The data listed below shows average wage growth for the Covid period of this analysis to have been approximately 6.0%, a significant margin above average inflation and a larger margin than average earnings grew in corporate America.

United States (2020–2023)

In conclusion, I find that the wholesale, political criticism of Biden for inflation during his presidency to be false. The US economy has fared better than any other economy during the pandemic and the spending measures have been critical during the pandemic to help save lives and have also financed infrastructure projects that were both long overdue and necessary for the US to remain competitive in the future. However, inflation rose to a painful level and has been very tough for working families. Luckily, the Federal Reserve is the best/strongest central bank in the world and one of its primary roles is to manage inflation, which thankfully has fallen dramatically over the past year and the Fed is poised to ease interest rates which will take some of the pressure off households and companies. If I were to criticize Biden about inflation during his presidency, I would say that he should have communicated better about the dire nature of the economy he inherited and the tradeoff between financial ruin, which is devastating in the long-term for both families and businesses vs inflation, which is painful in the shorter term, but treatable, as we have seen.

Analysis tool: Microsoft Copilot

Sources:

Pages 2–5: Factors causing inflation during 2021–2023

1 usbank.com, 2 frbsf.org, 3 bls.gov, 4 cepr.org, 5 bls.gov

6 dallasfed.org, 7 bing.com, 8 clevelandfed.org

Copilot commands: What were the primary stimulus packages approved by the US government because of the Covid pandemic? When were these stimulus packages approved by Congress and what was the size of each stimulus act? What percentage of each of the approved stimulus acts has been spent? Relative to the size of the US economy, what effect did Covid stimulus have on price inflation during 2020, 2021, 2022 and 2023? Relative to the size of the US economy, what effect did supply chain issues have on price inflation during 2020, 2021, 2022 and 2023? Relative to the size of the US economy, what effect did energy spikes have on price inflation during 2020, 2021, 2022 and 2023? Show sources

Pages 5–6: Economic Metrics (1980–2023)

1 en.wikipedia.org, 2 fred.stlouisfed.org, 3 thebalancemoney.com

4 cbo.gov, 5 fred.stlouisfed.org, 6 cbo.gov, 7 cbo.gov, 8 brookings.edu

9 cbo.gov, 10 politifact.com, 11 whitehouse.gov, 12 cbo.gov, 13 cbo.gov

Copilot commands: For the following economic metrics: determine the average annual GDP growth rate, average annual federal deficit as a percentage of GDP rate, average annual inflation rate, average annual corporate earnings rate, average annual job creation rate, and average annual wages growth rate during the period 1980 through 2023. Determine these metrics and during the same time period for Republican administrations combined and for Democratic administrations combined. Show sources

Pages 11–12: Economic comparison during Covid (2020–2023)

1 statista.com, 2 bea.gov, 3 cbo.gov, 4 fred.stlouisfed.org

5 thebalancemoney.com, 6 data.worldbank.org, 7 ec.europa.eu

8 ec.europa.eu, 9 ec.europa.eu, 10 ec.europa.eu, 11 ec.europa.eu

12 usinflationcalculator.com, 13 bls.gov, 14 cbo.gov, 15 ecb.europa.eu

16 ecb.europa.eu, 17 ecb.europa.eu, 18 ecb.europa.eu, 19 ecb.europa.eu

20 ecb.europa.eu, 21 ec.europa.eu, 22 destatis.de 23 cbo.gov, 24 cbo.gov

25 cbo.gov, 26 bea.gov

Copilot commands: During the period 2020 through 2023, determine the average annual growth rate of GDP, the average annual inflation rate, the average annual federal deficit as a percentage of GDP. Compare to the same metrics and for the same time period for the consolidated EURO economy. Show sources

Pages 14–15 Wage growth during Covid (2020–2023)

1 fa-mag.com, 2 cbo.gov, 3 stlouisfed.org, 4 ec.europa.eu, 5 ecb.europa.eu

6 ecb.europa.eu, 7 usinflationcalculator.com, 8 investopedia.com, 9 cbo.gov

10 ec.europa.eu, 11 ec.europa.eu, 12 ecb.europa.eu, 13 ecb.europa.eu

14 money.usnews.com, 15 stripes.com, 16 bea.gov,

17 tradingeconomics.com, 18 insight.factset.com, 19 op.europa.eu

20 ecb.europa.eu, 21 ecb.europa.eu, 22 economy-finance.ec.europa.eu

23 ecb.europa.eu, 24 ecb.europa.eu, 25 statista.com, 26 statista.com

27 visualcapitalist.com, 28 statista.com, 29 americanprogress.org

30 ec.europa.eu

Copilot commands: What was the average annual growth rate of corporate earnings, the average annual inflation rate and average annual growth rate of wages for the period 2020 through 2023? What were these same metrics for the consolidated Euro economy for the period 2020 through 2023? Show sources

Economics
Inflation
Politics
Biden
Trump

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Tim J. Leach
Tim J. Leach

Written by Tim J. Leach

73 Followers
33 Following

Semi retired Wall Street exec., Chairman of MN8 Energy and three NY investment companies

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