A rundown of the economic implications from this week’s elections. Democrats’ big-government economic agenda was put into place and rejected, in large part because of voters’ dislike for inflation. If only Democrats hadn’t been so dismissive of Milton Friedman — someone whose ideas Republicans should also be holding in higher regard as they seek to fix what Democrats have broken.
Biden and Harris Got the Economic Policy They Wanted, and Voters Hated It
“Milton Friedman isn’t running the show anymore,” said then-candidate Joe Biden in early 2020, and he got elected and proved it. Never mind that Milton Friedman was never running the show — the federal government has by and large ignored his policy advice for decades. The Biden years generated takes like “The End of Friedmanomics” at the New Republic in 2021, or the retrospective “When Milton Friedman Ran the Show” from the Atlantic in 2023.
Democrats’ economic agenda the past four years was about as anti-Friedman as possible, and they implemented it successfully. This is a key point — Democrats can’t accurately say that their agenda was not tried.
The key tenets were government spending and regulation. The spending was to boost demand. Sometimes it was to boost demand for specific goods, such as electric vehicles or higher education. Overall economy-wide demand was boosted by massive budget deficits. Even with a growing economy, soaring stock market, and low unemployment, Biden wanted — and got — budget deficits as a share of GDP greater than those during the Great Depression.
The Biden administration’s regulatory burden far exceeded even the Obama administration’s. According to Dan Goldbeck of the American Action Forum, at this point in Obama’s first term, final rules imposed by his administration had cost $490 billion. Final rules imposed under Biden so far have cost $1.7 trillion.
Joe Biden’s “Investing in America” agenda was epitomized by major legislation that has passed into law: the American Rescue Plan Act, the infrastructure law, the CHIPS Act, and the so-called Inflation Reduction Act. These included major industrial-policy components, giving government more power to direct investment in specific sectors deemed vital to the national interest.
These laws were self-consciously and proudly advertised as big-government efforts to counteract the alleged failures of the free market. They were branded “pro-worker” by politicians and the press and included a bevy of benefits for labor unions and the strengthening of “buy American” rules.
Democrats aimed to and were praised for wanting to “run the economy hot,” meaning maintaining tight labor markets through continuous expansionary monetary and fiscal policy. This was supposed to be “inclusive” economic policy that would benefit low-income and racial-minority workers and reduce inequality.
Democrats invented the word “Bidenomics” to describe this supposedly new economic paradigm, which was really reheated Keynesianism with some “diversity” sprinkled in for extra flavor. Then, they stopped using the term, and it was adopted by conservative-activist groups such as Americans for Prosperity to denigrate the administration’s agenda.
When Democrats replaced Biden with Harris, they had an opportunity to also replace their unpopular economic agenda. They did not take it. Harris essentially ran a controlled experiment to test the hypothesis that the only problem with Biden’s economic agenda was that Biden was too old.
Despite constant hype about how Biden was “delivering” for Americans, and despite very low unemployment rates and the strongest GDP growth of any major developed economy, voters hated Bidenomics and rejected Harris’s promise to effectively continue it. Why? Inflation.
“‘Full employment’ and ‘economic growth’ have in the past few decades become primary excuses for widening the extent of government intervention in economic affairs,” Milton Friedman began his chapter about inflation in 1962’s Capitalism and Freedom. “These arguments are thoroughly misleading.”
That other great 20th-century free-market thinker, F. A. Hayek, in his 1960 book Constitution of Liberty, warned, “A conflict arises, however, if ‘full employment’ is made the chief objective and this is interpreted, as it sometimes is, as that maximum of employment which can be produced by monetary means in the short run. That way lies progressive inflation.”
It wasn’t just dead free-market guys who warned about this. Larry Summers did, too. He was Bill Clinton’s Treasury secretary and one of Barack Obama’s closest economic advisers.
But the Biden administration pushed him aside and moved closer to the view of the “modern monetary theorists” who believe that because the government has the power to print money, it doesn’t have to worry about paying for its policies. One of the top boosters of this administration’s economic agenda, the Hewlett Foundation, has been funding pieces in the Atlantic such as “Sometimes You Just Have to Ignore the Economists.”
Government is ultimately always the source of inflation. In the case of the past several years, the government’s spending spree was financed by the expansion of the money supply by the Federal Reserve. Combined with the government’s suppression of economic production during Covid, this monetary expansion created the classic inflationary imbalance: too much money chasing after too few goods.
Despite strong growth in nominal income, real median household income today is slightly lower than it was in 2019, because inflation counteracted the pay raises. The high interest rates that the Fed imposed — in response to the inflation that it created — shocked people who had become accustomed to the near-zero rates of the 2010s and suddenly found that financing for homes and cars was less affordable.
Despite getting just about everything they wanted on economic policy, some of it with bipartisan support but the bulk of it in two budget-reconciliation bills that passed without a single Republican vote, Democrats performed abysmally with voters on economic issues.
About one-third of voters in exit polls said the economy was their most important issue; Trump won those voters 80-19. Sixty-eight percent of voters said the condition of the economy was either “not so good” or “poor.” Trump won the “not so good” voters 54-44 and the “poor” voters 87-10.
The exit polls asked about inflation specifically, and it’s basically a perfect correlation: The more upset about inflation you were, the more likely you were to vote for Trump. Among the 22 percent of voters who said inflation caused them “severe hardship,” Trump won 74-24. Among the 53 percent who said inflation caused them “moderate hardship,” Trump won 51-45. And among the 24 percent who said inflation caused “no hardship,” Harris won 77-20.
Friedman won the Nobel Prize in economics in part for the book he coauthored with Anna Schwartz, A Monetary History of the United States. It is a painstaking account of the nitty-gritty details of monetary policy. Other economists sometimes made fun of him for his obsession with the topic. But Democrats would have been wise to pay a little more attention to inflation and heed Friedman’s warnings about the dangers of expanding government involvement in the economy. Not only is it bad policy, but it turned out to be bad politics, too.
What about Trump and Vance?
Democrats’ big-government economic faceplant is bad news for some on the right who also want to eschew Friedman and replace free-market economic policy with a more socially conservative form of statism. Vice President-elect J. D. Vance has been considered one of those people. As a senator, one of his signature legislative efforts was teaming up with Democrats to expand regulation of railroads, framed by Vance in terms of class war against “woke” corporations.
That bill failed to pass, or even receive a vote, but Senator Vance has sought to chart his own course as an economic nationalist-populist. He has walked the picket line with the United Auto Workers, has said, “I don’t think we need to be cutting the corporate-tax rate further,” and has said the Biden-appointed progressive FTC chairwoman Lina Khan is “doing a pretty good job.”
Now he will be Vice President Vance, working under President Donald Trump. The UAW endorsed Harris, union president Shawn Fain called Trump a “scab,” and Trump called for Fain to be “fired immediately.” Trump has said he wants to build on his first term, when he signed the law that cut the corporate-tax rate from 35 percent to 21 percent, by further lowering the rate to 15 percent. And Trump’s victory will be the end of Lina Khan’s FTC career.
Senators have a lot of independence to chart their own course. They are more insulated from voters with six-year terms in office, and they are one of 100 members of a legislative body that is not strictly majoritarian. Given that the 60-vote threshold prevents most sweeping partisan legislation from passing, senators can afford not to be team players with little cost to themselves because they’ll likely never be asked to fall in line on a major vote.
Vice president, on the other hand, is the most team-player job in American government. Vance will now be expected to support and defend everything Trump does. And Trump just got done running a campaign centered on tax cuts and deregulation, against the party of big government that voters just blamed for the recent bout of inflation.
It would be disingenuous to call Trump a free-market supporter without qualification. On trade, both he and Vance are committed protectionists who want higher tariffs and other restrictions on imports. This agenda would hurt the people it is supposed to help, manufacturing firms and workers, and Trump’s first-term tariffs on steel and aluminum yielded poor results.
Trump and Vance have also ignored the traditional free-market call for fiscal responsibility. Budget deficits in Trump’s first term were too large, and Biden’s even greater deficits will make the work of balancing the budget that much harder. With the U.S. now in a period of mandatory-spending dominance, where entitlements and interest costs are eating up a larger and larger portion of annual spending, Trump and Vance have promised not to reform entitlements. The national debt has been growing by a trillion dollars roughly every 100-200 days.
The trade and budget policies Trump and Vance have voiced support for represent genuine departures from previous Republican economic policy, to both men’s discredit. If their trade restrictions are implemented to the extent that they have discussed during the campaign, with tariffs on all imports, they will make Americans worse off. The national debt and the pressing fiscal questions Congress will have to answer next year are the most important economic issues the country faces. Inflation has a way of returning “unexpectedly,” even though history shows that it rarely spikes just once, and failing to get government spending under control increases the chances of its return.
That being said, the major focus of congressional Republicans for the next year will be extending the Tax Cuts and Jobs Act from Trump’s first term. When looking for offsets during the budget-reconciliation process, they will be drawn to cutting subsidies from the CHIPS Act and so-called Inflation Reduction Act, undoing parts of Biden’s industrial-policy agenda.
Trump has been talking nonstop about how the government needs to make it easier to build things in America, a clear call for taking back up his deregulatory agenda from his first term. He wants to make energy more affordable by making it easier to drill for oil and natural gas and build nuclear-power plants. He has said zoning, regulatory costs, and environmental hurdles make it too hard to build housing, and those barriers need to be reduced.
And Trump has said “inflation is a country buster.” He correctly understands that inflation is pernicious in a way that few other policy errors are. It erodes people’s savings, taxes them without legislation, and undercuts their basic expectation that stuff will be roughly the same price a year from now as it is today. People really hate it, and voters just shouted that they hate it, even some who don’t like Trump much at all.
“Political freedom cannot be preserved unless inflation is kept in bounds,” Friedman said on his TV program, Free to Choose. “Inflation is made in one place, and one place only: here in Washington,” he said. Voters just switched out the leadership in Washington, in no small part because they hated inflation. That should be a sign to Republicans that the old leadership’s big-government agenda is not the way to go, and that hating Friedman doesn’t reduce the value of his economic thought.
