Joe Biden, the economy, and the Fed

Data released last week shows that economic growth has slowed significantly since the beginning of the year, to an annual rate of 1.1 percent from 2.6 percent in the previous quarter. With this news comes heightened fear that the U.S. economy is headed for a recession.

Some analysts expected that we would be in a recession by now and, in fact, spending on goods has slowed considerably. However, spending on leisure and entertainment has remained strong, with weekly movie theater visits surpassing pre-pandemic levels and spending at restaurants and bars rising by more than 10 percent, year-to-year. This spending has buoyed the economy.

But now, the number of people dining out is declining and travel agents are reporting slowdowns in demand. This isn’t too surprising, given that “services” are the portion of the economy where inflation has been most persistent.

Speaking of inflation, it has slowed considerably, overall. However, inflation remains a concern for Americans, and therefore a problem for Joe Biden.

When I shop for groceries, I’m relieved that I’m paying about the same amount I paid three months ago. However, I’m upset that I’m paying 30 percent more than I did a year and a half ago.

To be sure, Americans will be much less upset if prices remain stable for another year. But this won’t help Joe Biden if the economy is in a recession by then, or even if there’s an economic turndown that doesn’t quite satisfy the criteria for a recession.

Why has the economy turned down? The main culprit is the Fed’s interest rate hikes. The main culprit for those hikes is the inflation they were designed to combat.

And the main culprit for the inflation? I think it’s the massive increase in government spending, for which the Biden administration and congressional Democrats bear primary responsibility.

Another factor cited as causing the economy to slump is the banking turmoil. Here, too, the Fed must take some of the blame.

Indeed, the Fed is blaming itself. In a report on the demise of Silicon Valley Bank, it admits that it failed to take sufficient action to prevent the collapse.

Mary Daly is president of the San Francisco Federal Reserve. Silicon Valley Bank fell under her jurisdiction.

Daly is a labor economist. According to her Wikipedia entry, she has published work on economic inequality, wage and unemployment dynamics, increasing output through workforce development, and disability and retirement policy.

I have nothing against labor economists. I have friends who are labor economists.

But mastery of labor economics and issues of economic inequality does not provide either the macroeconomic chops the Fed should be looking for in a regional president or the expertise needed to help prevent banking collapses. Moreover, I’m told that Daly is not that good of a labor economist.

Daly says her career "just kind of exploded" after Janet Yellen, now Joe Biden’s Treasury Secretary, was named president of the San Francisco Fed. Maybe this explains how a so-so labor economist became president of the San Francisco Fed.

Fed officials have taken pains to say that Daly isn’t responsible for the Fed’s SVB-related failures. Regional presidents aren’t generally responsible for direct supervision of the banks in their districts, they explain.

I assume that’s true. However, even if a regional president isn’t responsible for direct supervision of a bank in her district, perhaps she should at least be aware that such a bank is on the verge of creating turmoil throughout the economy.

Ultimately, though, the buck stops with the president of the U.S., not the president of a regional Fed. If the economy is in recession a year from now, Joe Biden will be blamed. For the reasons stated above, he should be.

I’m pretty sure that, in my lifetime, no president has been reelected in a recessionary year. Even so, we shouldn’t underestimate the GOP’s ability to alienate the electorate, as it did last year when history suggested the party would romp to victory in the House and Senate, instead of losing ground in the Senate and barely squeaking out a majority in the House.

There’s also a wild card in the deck. Depending on how the current debt ceiling standoff plays out, Biden might be able to shift blame for a recession, in the electorate’s eyes, to House Republicans.

This is just speculation. It’s less speculative to say that the economy is weakening and that growing weakness would pose a big obstacle to Biden’s reelection efforts.

M