Joseph Stiglitz, winner of the 2001 Nobel Prize in Economic Sciences, during the 48th edition of the Cernobbio Economic Forum, Italy (2022) / Pier Marco Tacca-Getty Images
Photo: Getty Images – Pier Marco Tacca
If there is one event that can dominate in 2024, it will almost certainly be the US presidential election. Unless something unexpected occurs, it is very likely that we will see a new competition between Joe Biden and Donald Trump with a dangerously uncertain outcome. With a year to go, polls in key swing states show Trump has a lead.
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The election will be important not just for the United States, but for the world. The outcome could depend on the economic outlook for 2024, which in turn depends in part on how the recent Middle East conflagration unfolds. My best guess (and worst nightmare) is that Israel continues to ignore international calls for a ceasefire in Gaza, where 2.3 million Palestinians have lived in hardship for decades. What I saw as the World Bank's chief economist in the late 1990s was disheartening, and the situation has only gotten worse since Israel and Egypt imposed a total blockade in response to Hamas's takeover of the enclave 16 years ago.
Apart from Hamas' atrocities on October 7, the Arab street will not tolerate the brutality suffered in Gaza. In this context, it is difficult to imagine how we can avoid a repeat of 1973, when the Arab OPEC states organized an oil embargo against the countries that supported Israel in the Yom Kippur War. This retaliatory measure would actually not be costly for Middle Eastern oil producers, as the increase in prices would offset the decrease in supply. Not surprisingly, the World Bank, among others, has already warned that oil prices could rise to $150 a barrel or more. This would trigger further supply-led inflation, just as inflation is coming under control post-pandemic.
In this scenario, Biden will inevitably be blamed for higher prices and accused of mishandling the situation. Never mind that the conflict was reignited by the Trump administration's Abraham Accords and Israel's push toward a de facto one-state solution. Whether it's fair or not, regional unrest could tip the scales in Trump's favor. A highly polarized electorate and mountains of misinformation could give the world an incompetent liar ready to destroy America's democratic institutions and welcome authoritarian leaders like Russian President Vladimir Putin and Hungarian Prime Minister Viktor Orbán.
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The best we can hope for if Trump returns may be political gridlock, but only if Congress remains partially under Democratic control. At the global level, however, international agreements and the idea of an international rule of law are becoming exhausted forces as Trump impulsively withdraws the United States from agreements and institutions he does not like.
The tragedy is that Biden was an extraordinarily successful president. He handled the situation in Ukraine better than perhaps anyone else. He has set the United States on a new economic course with a major infrastructure bill, the CHIPS and Science Act, and the Inflation Reduction Act (IRA), which provides funding for the green transition. And since the start of 2023, he has had to contend with a House of Representatives controlled by Republicans who have proven themselves incapable of governing and uninterested.
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To the extent that the Republican Party has a policy agenda, it is not what Americans want. Most voters oppose regressive taxation and anti-worker policies (which contribute to inequality), attacks on universities and science (which will undermine future growth), and atavistic recourse to women's rights. Nevertheless, the Republicans have been very successful in influencing the election campaign in their favor and portraying Biden as too old.
Likewise, some renegade Democrats have openly promoted, like Republicans, the idea that inflation was caused by the Biden administration's spending on the pandemic recovery. However, this spending was implemented in the face of great uncertainty, before the extent and scope of the pandemic crisis was known. It was wise of the new administration to choose to do too much rather than too little, and Biden ultimately offered a dose of stimulus that was pretty close to what was needed. A careful analysis of the data shows that post-pandemic inflation was not primarily caused by excessive aggregate demand, but rather by supply constraints and demand shifts caused by the pandemic (and exacerbated by Russia's invasion of Ukraine in February 2022) .
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Those of us who defended this position believed that inflation would be contained and then begin to fall (although no one could predict exactly when). That's what happened. Unfortunately, central banks have mistakenly identified the cause of inflation as excessive demand and have done everything they can to curb it. This included a quick and rapid increase in interest rates.
Still, the United States is lucky because two mistakes cancel each other out. While fiscal policy is on track to be more robust than expected – the IRA is now expected to increase spending three times as much as expected – the Federal Reserve's excessive monetary tightening has offset this effect and led to a soft landing. That result alone would have greatly improved Biden's prospects had he not been struggling with unrest in the Middle East.
Looking forward, America's energy independence means that high oil prices essentially serve to redistribute income from consumers to oil producers. This regressive result could indeed be reversed by a well-designed windfall tax. Even if Biden fails to push such a bill through Congress, it could be politically helpful to vigorously defend it. Consumers would know that you are fighting for them, taking on the oil companies and the Republicans whose campaigns they fund. However, I fear that Biden will resist this option, as he did with the random tax proposals during the pandemic.
The rest of the world isn't so lucky. In Europe, where weaker fiscal policy does not balance contractionary monetary policy, higher energy prices will have devastating consequences. There are also serious questions about China's ability to overcome growing problems in its real estate sector or about the impact of the new Cold War on its exports. Especially now that his own government is tightening control over the private sector. And across the Global South, many countries have excessive debt that could become unsustainable in a global downturn, especially if accompanied by high interest rates and higher oil and food prices.
Before the Gaza conflict, I expected a soft landing in the United States, but tougher times for the rest of the world. Today I expect trouble everywhere and a greater chance of Trump returning to the White House. The world is entering perhaps the most dangerous time since the 1930s.
* Joseph E. Stiglitz is a university professor at Columbia University and co-chair of the Independent Commission for the Reform of International Corporate Taxation.
Copyright: Project Syndicate, 2023. www.project-syndicate.org