By JOSH BOAK, Associated Press
WASHINGTON (AP) — As President Joe Biden sets sail for Asia on Thursday, he faces a new risk at home to the economy and his Democratic Party: a global slowdown caused by Russia’s invasion of Ukraine and the pandemic shutting down Chinese cities and factories.
The global economy cannot throw the United States. ballot papers. But it’s a hidden force in this year’s midterm elections that will decide whether Democrats retain control of the House and Senate.
It’s an added challenge that highlights the strong rise of Biden, whose approval ratings have plummeted as prices of daily consumer goods in the United States have soared.
Several economists have said they believe the United States is immune to rising energy costs threatening Europe and declining industrial production in China. But there are obvious fallouts as high gas prices continue to weigh on voters’ minds and bank accounts.
Federal officials acknowledge that world events could make it harder for inflation to fall from nearly 40-year highs to levels that would reassure the American public. Treasury Secretary Janet Yellen said in Germany on Wednesday that she believes the strength in the labor market means the United States can prevent the slowdown from being felt around the world.
“We have a lot of economic momentum in the United States,” Yellen said. “But you know, it’s a risk-filled environment, both in terms of inflation and potential downturns.”
Yellen’s successor as Federal Reserve Chairman Jerome Powell said in a radio interview for Marketplace last week that the central bank’s ability to bring inflation down while keeping the economy going could depend of what is happening in the world.
“There are huge events, geopolitical events happening around the world that are going to play a very big role in the economy over the next year or so,” Powell said. “So whether we can execute a soft landing or not, it may actually depend on factors that we don’t control.”
What is clear is that foreign affairs and geopolitics have once again become issues that could shape the opinions of American voters.
Even as the midterm races heat up, Biden is dedicating his time to other world leaders — not just Russian President Vladimir Putin and his attack on Ukraine. Biden’s trip to South Korea and Japan follows recent meetings with leaders of Italy, Greece and members of the Association of Southeast Asian Nations. He also met the leaders of Finland and Sweden, candidates for NATO membership, before his departure for Asia.
“Yes, geopolitics will matter again in the US election,” said Doug Elmendorf, dean of Harvard University’s Kennedy School of Government and former director of the Congressional Budget Office. “Terrorists and terrorist states have been powerful, China is not much like us, and Putin has gone to war.”
Elmendorf noted that turmoil around the world is resulting in higher energy costs, efforts to bring home supply chains from abroad, and increased spending on national security, all of which can “crowd out social spending.” and increase public borrowing”. This possibility could in some ways challenge Biden’s promises to reduce inflation, reduce the national deficit and increase spending on health, children and education.
Robin Brooks, chief economist at the Institute for International Finance, said the European Union appeared to be headed for recession as energy costs soared due to the war in Ukraine. Manufacturing output is stagnating in China after the coronavirus shutdowns, creating additional supply chain challenges for economies that rely on Chinese goods.
“The United States has major advantages over the rest of the world,” Brooks said. “The biggest advantage has been the fact that it’s far from Ukraine, unlike Western Europe where we now expect a recession for the Eurozone.”
Brooks added that the United States is also a major producer of oil and agricultural products, so higher prices that hurt Europe could actually help parts of the US economy.
This is in no way guaranteed. The aftershocks from Europe could, for example, limit Biden’s ability to deal with inflation.
Fed Chairman Powell said there was little the US central bank could do to deal with rising oil, food and commodity prices linked to geopolitics. Federal Reserve policies such as raising interest rates or shrinking Fed balance sheets have little impact on restarting shuttered factories overseas or on the production of natural gas and oil abroad. This complicates the administration’s message about the Fed’s ability to contain inflation which has become a major concern for US voters.
“Our tools don’t really work on supply shocks,” Powell said this month.
Adam Posen, president of the Peterson Institute for International Economics, said he expects the United States to be largely insulated from Europe’s woes, although he sees the main risks to the growth come from American policy.
He said Biden could take steps to improve the US economy and fight inflation by reducing tariffs imposed under Donald Trump’s administration and expanding legal immigration. These are politically controversial steps that Biden has been reluctant to take, actions that could alienate unions and some voters.
“We have an unreliable budget process and an inability to raise taxes, which contributes to inflation and volatility,” Posen said in an email. “We also have a hostile approach to trade and immigration because the Democrats have become mistakenly convinced that this is how they will win Joe Sixpack back, and the Republicans actually (wrongly) believe that foreigners and their products are dangerous.
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