By JOSH BOAK, Associated Press
WASHINGTON (AP) — As President Joe Biden heads to Asia on Thursday, he faces a new risk at home for the economy and his Democratic Party: a global slowdown caused by Russia’s invasion of Ukraine and the pandemic that is affecting China Cities and factories close.
The world economy can’t cast the US ballots. But it’s a hidden force in this year’s midterm elections that will determine whether Democrats retain control of the House and Senate.
It’s an added challenge that underscores the steep rise for Biden, whose approval ratings have plummeted as US staples prices have soared.
Several economists said they believe the US is isolated from rising energy costs threatening Europe and China’s slowdown in industrial production. But there are clear side effects as high gas prices continue to weigh on voters’ minds and bank accounts.
Federal officials acknowledge that global events could make it harder for inflation to fall from near 40-year highs to levels that would reassure the American public. Treasury Secretary Janet Yellen said in Germany on Wednesday that she believes the strong labor market means the US can avoid the global downturn.
“We have great economic momentum in the United States,” Yellen said. “But you know, this is a risky environment, both in terms of inflation and potential slowdowns.”
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 down inflation while keeping the economy afloat could depend on what happens around the world.
“There are huge events, geopolitical events around the world that are going to play a very important role in the economy over the next year or so,” Powell said. “The question of whether or not we can do a soft landing may actually depend on factors beyond our control.”
What is clear is that foreign policy and geopolitics have returned as issues that could shape US voters’ minds.
Even as the mid-term races heat up, Biden is devoting his time to other world leaders — and not just to 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 meets with the leaders of Finland and Sweden, who are aspiring to NATO membership, before leaving for Asia.
“Yes, geopolitics will play a role 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 were powerful, China isn’t becoming so much like us anymore, and Putin has gone to war.”
Elmendorf noted that global disruptions are manifested in higher energy costs, efforts to bring supply chains home from abroad, and increased national security spending, all of which can “crowd out social spending and increase national debt.” That possibility could jeopardize Biden’s promises to lower inflation, reduce the federal deficit, and increase spending on health, children, and education.
Robin Brooks, chief economist at the Institute for International Finance, said the European Union appears to be headed for a recession as energy costs have risen due to the war in Ukraine. Manufacturing output in China has stagnated following the coronavirus lockdown, creating additional supply chain challenges for economies that rely on Chinese goods.
“The US has some great advantages compared to the rest of the world,” Brooks said. “The biggest benefit was the fact that it’s far from Ukraine, as opposed to western Europe where we now predict a recession for the eurozone.”
Brooks added that the US is also a leading oil and agricultural producer, so higher prices hurting Europe could actually help parts of the US economy.
This is not guaranteed in any way. For example, the aftershocks from Europe could limit Biden’s ability to deal with inflation.
Fed Chairman Powell said there was little the Federal Reserve could do to address geopolitically driven higher oil, food and commodity prices. Federal Reserve actions, such as raising interest rates or reducing the Fed’s balance sheet, have little effect on restarting idle factories abroad or generating more natural gas and oil production abroad. That complicates the administration’s message about the Fed’s ability to curb inflation, which has become a top concern for US voters.
“Our tools don’t really work for supply shocks,” Powell said this month.
Adam Posen, president of the Peterson Institute for International Economics, said he expects the US to be largely spared Europe’s woes, although he sees major risks to growth in US politics.
He said Biden could take steps to improve the US economy and fight inflation by lowering tariffs imposed during Donald Trump’s administration and expanding legal immigration. These are politically contentious moves that Biden has been reluctant to take, moves that could alienate unions and some voters.
“We have an unreliable fiscal process and an inability to collect taxes, which contributes to inflation and volatility,” Posen said in an email. “We also have a hostile stance on trade and immigration because the Dems are mistakenly convinced that this is how they will win back Joe Sixpack, and Republicans actually (erroneously) believe that foreigners and their products are dangerous.”
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