The Democrats’ Economic Management Challenge

Can They Become the Party of Prosperity Again?

Once upon a time, Democrats were the party of prosperity.

For 74 years, Gallup has been asking a question about which party can do a better job “keeping the country prosperous.” In the first part of this period, from 1951 to the election of Ronald Reagan, Democrats had a large and robust advantage on this measure, averaging a 17-point lead over the Republicans. But from the Reagan election on, that advantage has vanished. While there have been many ups and downs, Republicans have averaged a slight advantage (two points) on which party can keep the country prosperous. The last two readings, in fall of 2021 and fall of 2022, had Republicans preferred over the Democrats by nine and 10 points, respectively.

This suggests the Democrats have an economic management problem. Where once they were trusted as the party that could manage the economy successfully and deliver prosperity, that is no longer the case. This is a huge part of the reason why, try as they might, Democrats have not been able to sustain a dominant political coalition since the Reagan era. The problem now is particularly acute as much recent data indicates.

The most recent Gallup polling finds 73 percent saying economic conditions are only fair or poor and 76 percent believing the economy is getting worse rather than better. Working-class (noncollege) respondents were even gloomier: 81 percent had a negative view of economic conditions and 87 percent thought the economy is getting worse. This is quite a contrast to the analogous point in Trump’s term when a solid majority felt the economy was getting better.

Consistent with this, in the recent Washington Post/ABC poll, the public preferred the job Trump did handling the economy over Biden’s by 54 to 36 percent. This included 55 percent of Hispanic and 62 percent of working-class respondents.

In short, views of the economy and how Biden and the Democrats have handled it are extraordinarily negative. This has puzzled Democrats, who point to robust job creation numbers,  very low unemployment and higher wages, and can’t understand why voters are so pessimistic about the economy and negative about them. No doubt they feel like the Rodney Dangerfield of political parties: they just don’t get no respect!

At any rate, they’re clearly not reclaiming their title as the party of prosperity. One obvious reason is the “higher wages” part of the above mantra. While it is true that, as Axios recently noted, average hourly earnings are up 17 percent since the pre-pandemic period, it is also true that adjusting for inflation completely disappears that 17 percent gain. In the last year, real (inflation-adjusted) hourly wages are actually down half a percent. And another measure, average real weekly earnings, shows a 3 percent decline since the beginning of Biden’s term.

It's hard to convince people they’re doing better when their paychecks aren’t buying any more—and sometimes less—than they previously did. High inflation is a killer to workers’ standard of living and, crucially, to their sense of economic optimism. It is worth noting that the country’s last experience with high inflation coincided exactly with the period when the Democrats lost their former dominance as the party trusted to deliver prosperity for the country.

Of course, Democrats argue that inflation has been moderating. That is true though it is also true that it is still quite high by recent historical standards—especially core inflation—and, as noted, is still holding down real gains in workers’ standard of living. Democrats are not unaware of these facts but they believe they have an ace in the hole that will turn negative economic views around and even re-establish their party as the party of American prosperity.

That is the adoption of a new “industrial strategy”, as instantiated in the three big bills passed in Biden’s first two years: the Infrastructure and Jobs Act, the CHIPS and Science Act, and the so-called Inflation Reduction Act (mostly a climate spending bill). These bills included $1.5 trillion in new spending to jump-start an economic transformation of the country built around the industries of the future, especially those related to clean energy.

That’s the theory and as theories go it’s not a bad one. Historically, America has worked best when public policy and private initiative have collaborated in service of great national goals. That goes all the way back to the early 19th century American System of infrastructure investment and industry promotion initiated by Alexander Hamilton and includes the great surge of innovation, widely-shared prosperity and American global leadership after World War II.

Thus aggressive public policy along these lines has considerable precedent and justification. But it doesn’t follow that Democrats today have the right strategy and are making the right investments. That’s an empirical question

What an industrial strategy or policy should accomplish is shifting a country’s output toward emerging industries that become competitively successful and spark overall economic growth and prosperity. Is that happening today? Are the Democrats, once again, on the verge of becoming the party of American prosperity?

Democrats say this is already happening and point to $200 billion in commitments by companies to projects in the semiconductor and clean energy areas. Of course, commitments are not the same as projects being completed but it is true that there has been a remarkable spike in manufacturing construction spending, more than doubling in the last year. Perhaps not surprisingly, there is an appetite for taking advantage of generous subsidies and tax credits.

But it is also true that inflation-adjusted construction spending is down in most other sectors of the economy and that overall private investment is going nowhere—it’s barely above levels seen before the 2008 financial crash. The boom, such as it is, appears to be highly localized and sector-specific.

This may explain why the advances touted by the Democrats have not been able to break through the general discontent about the economy. The point of being the party of prosperity is to produce, well, prosperity and workers in most communities just aren’t seeing that.

Until they do, the Democrats’ economic management challenge will remain. They would do well to remember that working-class voters do not share Democratic elites’ zeal for restructuring the economy around “green” industries and a rapid transition to an energy system based around wind and solar, which underpins much of the Democrats’ new industrial strategy. Working-class voters are much more pragmatic and will judge this strategy not by its greenness but by its concrete effects on their lives. That is the way—the only way—Democrats will regain their cachet as the party trusted to deliver American prosperity.