If one event dominates the coming year, it will almost certainly be the US presidential election. Barring something unexpected, we are likely to see a rematch of Joe Biden vs. Donald Trump, with the outcome being perilously uncertain. One year out, polls in key swing states give Trump the advantage.
The election will matter not just for the United States but for the world. The outcome may hinge on the 2024 economic outlook, which in turn will partly depend on how the latest conflagration in the Middle East evolves. My best guess (and worst nightmare) is that Israel will continue to ignore international pleas for a ceasefire in Gaza, where 2.3 million Palestinians have been destitute for decades. What I saw during a visit in the late 1990s as the World Bank’s chief economist was heart-wrenching enough, and the situation has only gotten worse since Israel and Egypt imposed a full blockade 16 years ago in response to Hamas’s takeover of the enclave.
Regardless of the atrocities carried out by Hamas on 7 October, the Arab street will not tolerate the brutality being visited on Gaza. Given this, it is hard to see how we can avoid a repeat of 1973, when Opec’s Arab members organized an oil embargo against countries that had stood by Israel in the Yom Kippur War. This retaliatory measure would not really cost Middle Eastern oil producers, because the increase in prices would make up for the reduction in supplies. No wonder the World Bank and others have already been warning that oil prices could rise to $150 per barrel or higher. That would trigger another bout of supply-driven inflation, just as the post-pandemic inflation is being brought under control.
In this scenario, Biden will inevitably be blamed for the higher prices and accused of mismanaging the Middle East. It will hardly matter that the conflict was reignited by the Trump administration’s Abraham Accords and Israel’s lurch toward a de facto one-state solution. Justly or not, regional turmoil could tip the scale in Trump’s favour. A highly polarized electorate and mountains of disinformation could once again saddle the world with an incompetent liar who is bent on eliminating US democratic institutions and cozying up to authoritarian leaders such as Russian president Vladimir Putin and Hungarian prime minister Viktor Orbán.
The best that one can hope for if Trump returns may be political gridlock, but only if Congress remains at least partly under Democratic control. Globally, however, international agreements and the very idea of international rule of law will quickly become spent forces, as Trump impulsively withdraws the US from accords and institutions not to his liking.
The tragedy is that Biden, objectively, has been an extraordinarily successful president. He has managed the situation in Ukraine better than perhaps anyone else could. He has set the US on a new economic course with a major infrastructure bill, the Chips and Science Act, and the Inflation Reduction Act (which provides funding for the green transition). And since the beginning of 2023, he has had to cope with a House of Representatives controlled by Republicans who have shown themselves to be unfit to govern—and uninterested in trying.
Insofar as the Republican Party has a policy agenda, it is not what Americans want. Most voters oppose regressive taxation and anti-labour policies (which contribute to inequality), attacks on universities and science (which will undercut future growth), and atavistic reversals of women’s rights. Nonetheless, Republicans have been extraordinarily successful in shaping the electoral battlefield to their advantage and depicting Biden as too old.
Moreover, some turncoat Democrats have loudly echoed Republicans in pushing the idea that inflation was due to the Biden administration’s spending on the pandemic recovery. But that spending was pursued in the face of deep uncertainty, before the length and depth of the pandemic downturn was known. The new administration was wise to err on the side of doing too much, rather than too little, and Biden ultimately delivered a dose of stimulus that was remarkably close to what was needed. A careful examination of the data shows that the post-pandemic inflation was primarily caused not by excessive aggregate demand but by pandemic-related supply shortages and demand shifts (exacerbated by Russia’s invasion of Ukraine in February 2022).
Those of us who defended this stance suggested that inflation would be contained and then start to decline (though no one could predict precisely when). That is indeed what happened. Unfortunately, central banks misidentified the source of inflation as excessive demand, and did everything they could to dampen it. That meant raising interest rates fast and furiously.
Still, the US is lucky, in that two errors will offset each other. While fiscal policy is on track to be more robust than anticipated—the IRA is now projected to drive three times more spending than expected—the US Federal Reserve’s excessive monetary-policy tightening has offset that effect to produce a soft landing. That outcome alone would have substantially enhanced Biden’s prospects, had he been spared the Middle East turmoil.
Looking ahead, America’s energy independence means that high oil prices mainly serve to redistribute income from consumers to oil producers. True, this regressive outcome could be reversed with a well-designed windfall-profits tax. Even if Biden cannot get such a bill through Congress, taking a strong position in favour of it could help politically. Consumers would know that he is fighting for them and standing up to oil companies and the Republicans whose campaigns they fund. But I fear that Biden will shy away from this option just as he did with windfall-tax proposals during the pandemic.
The rest of the world is not so lucky. In Europe, where weaker fiscal policies have failed to counter contractionary monetary policy, higher energy prices will be devastating. There are also serious questions about China’s ability to overcome mounting problems in its real-estate sector or the new cold war’s impact on its exports—especially now that its own government is tightening control over the private sector. And across the Global South, many countries have excessive debts that could become unsustainable in a global slowdown, especially if combined with high interest rates and higher oil and food prices.
Before the Gaza conflagration, I expected a soft landing in the US, but harder times in the rest of the world. Now, I expect hardship all around, with an increased chance of Trump returning to the White House. The world may be entering its most perilous period since the 1930s.
Joseph E. Stiglitz a Nobel laureate in economics, is university professor at Columbia University.
©2023/PROJECT SYNDICATE
www.project-syndicate.org