Inflation is not the only reason governments are getting trounced

John Maynard Keynes was fond of repeating a phrase, attributed to Lenin, that “the best way to destroy the capitalist system is to debauch the currency”. The quip, which featured in Keynes’s best-selling The Economic Consequences of the Peace (1919) has been repurposed for the current day to explain why governments across the world are getting trounced at the ballot box. In the world of free-floating currencies, the debasement has come in the form of raging inflation.
The evidence seems compelling. In every major national election held in 2024 — the first post-pandemic political cycle — incumbent parties have either been kicked out or returned to power with a lower vote share for the first time since records began 120 years ago. News this week that Romanians voted for a hard-right, anti-EU, pro-Putin candidate in the first round of presidential elections is a continuation of the trend. Ireland is likely to join the statistics this Friday, after its ruling Fine Gael party has fallen from first to third in the polls. Germany should join the pile after its historically unpopular Social Democrat-led coalition was forced to hold early elections next February. Incumbents in Canada and Australia are poised for a similar fate in 2025.
The idea that inflation is the key explanatory variable for this dismal political record is a powerful one. Recent history is replete with examples of Lenin being right. One can point to the punishing food price inflation that sparked the Arab Spring over a decade ago or the quashed Tiananmen Square protests in 1989.
In advanced economies, it was the neuralgic experience of runaway prices in the 1970s that ushered in a revolution in economic policy-making and the birth of the neoliberal era. Governments handed over power for price management to technocratic central banks, who used interest rates to manage economic cycles, while fiscal policy busied itself with reducing the size of the state through lower tax burdens. As voters can’t dissolve their central bankers and elect new ones, anger has now been directed at governing politicians.
Inflation as political kryptonite has become the mantra of US commentators after Kamala Harris’s loss to Donald Trump. Democrats are also trapped by post-election fatalism and the idea that, actually, nothing could have been done in the face of this inexorable wave of incumbent-killing. Having ditched American exceptionalism on the economy, centrists are comforted by the US going the way of the rest of the world. Harris and her strategists were powerless to resist forces that France’s President Macron or the Tories also succumbed to, they say.
This reductive take is soothing for liberals who now claim that economics rather than cultural issues were instrumental in deciding the election. Their other mistaken takeaway is that Biden’s progressive pandemic-era spending policies unleashed inflationary forces that ultimately felled his party. Both are misguided.
To start, there are exceptions to 2024’s anti-incumbent backlash. Mexico is the biggest anomaly as its left-wing government increased its vote share in a landslide election in July, when the sitting president handed over to a female successor. The incumbent left campaigned on an economic record built on “two key pillars: increasing social spending and raising the minimum wage,” say the Peterson Institute. Mexico’s real minimum wage, which strips out the impact of inflation, grew by 90 per cent and social transfers rose by 2 per cent of GDP between 2020-2024.
If you extend the political horizon to the past 18 months, Spain’s socialist Pedro Sánchez also retained power after amassing a narrow coalition against the hard right and conservatives. His party did lose vote share but Sánchez’s legitimacy was underpinned by sound economic management and his crucial decision to de-link Spanish energy prices from Europe’s gas market at the height of the 2022 crisis, protecting households from the worst of the energy price shock.
Spain and Mexico may be dismissed as the exceptions that prove the rule. But there are instructive lessons for all incumbents, such as the state taking bold measures to limit energy price shocks before they happened, as Sánchez did. In Mexico the welfarist policies of the left were partly replicated by the Biden administration at the start of the pandemic. This may have been more important in deciding the election than the impact of inflation alone.
The economist Nathan Tankus says a pernicious cliff-edge was created by the end of Biden’s welfare provision in 2020-2021, where the state was handing out generous child tax credits, food stamps, unemployment insurance and stimulus checks. This temporary social safety net smoothed out extreme income volatility for poorer households during the lockdowns. But its expiry created a “brutal double whammy” as it collided with a jump in energy and food prices in early 2022. Rather than doubling down on income inequality, the Biden administration shifted its focus to foreign policy goals and showered US corporates with federal largesse instead, Tankus says.
Perhaps the more worrying statistic for US political elites is not that 2024 was a global annus horribilis for all sitting governments, but that it was the third time the incumbent party lost the White House: the first time this has happened since the 1800s.
This is also why Democrats should not dismiss the role of identity and tribal politics on economic variables like inflation. Studies show that America’s extreme partisanship can determine how voters experience inflation, with Republicans and independents more likely to report suffering from higher prices and blaming the government for it. Over 70 per cent of registered Republicans said inflation was a “big or very big” problem compared with 36 per cent of Democrats.
All of this is to say that deposed parties should not be given a free pass for losing elections in 2024. The salience of inflation cannot be disentangled from other economic variables such as real wage losses, broader indices of the cost of living like rents and house prices, and trust in political parties to create fairer economic conditions.