If he is to set the US economy back on the right path, Joe Biden needs to turn away from his predecessor Donald Trump's policies. Image: AFP

US President Joe Biden’s falling approval rate, estimated at less than 40% according to the latest opinion polls, is largely due to his inability or unwillingness to fix many of America’s problems. Inflation is at a 40-year high at 8.6%, and that might be an understatement because of surging food, rent and gasoline prices.

Economists estimate that those three items account for a third of the household budget, and their average inflation was between 15% and 20%.

Other issues such as rising poverty, increasing political and racial tensions as well as the widening of the wealth gap are threatening to tear America’s socio-economic fabric apart. The growing ideological and racial divides, for example, could lead to more violent protests and mass shootings. Accounting for around 70% of GDP, the widening rich-poor gap could undermine consumption and lead to economic slowdown.

Yet the president seems to be prioritizing foreign policies over domestic ones, focusing on containing China and Russia instead of paying attention to domestic issues. Case in point is his spending billions on Ukrainian military aid instead of allocating that money to education, health care and other socio-economic programs.

Perhaps to deflect attention from his poor management of domestic issues such as surging gasoline prices, Biden has blamed Russia and big oil companies. China’s “Covid-19 zero tolerance” policy that disrupted supply chains was also accused of contributing to inflation and economic slowdown.

Blaming others will exacerbate US problems

However, blaming others will not solve America’s problems because they were, for the most part, self-inflicted. The inflation spiral was started by former president Donald Trump’s tariffs on $350 billion worth of Chinese imports and huge government spending. The former raised consumer prices and the latter distorted the demand/supply equilibrium, creating demand-pull inflation.

Biden exacerbated inflation by keeping and intensifying Trump’s policies as well as imposing sanctions on Russia. The current president, for example, spent trillions of dollars on keeping businesses and consumers afloat.

The massive injection of money into the economy distorted the demand/supply equilibrium further, accelerating the inflationary spiral. This led the US Federal Reserve to raise interest rates in an attempt to stifle demand, risking a recession. Or simply put, rising interest rates would escalate inflation and pull down demand, creating a perfect storm for stagflation of rising inflation and unemployment.

Unless the president turns the woes around, he will drag the Democratic Party down, losing one or both legislative chambers – House of Representatives and Senate – to the Republicans in the November midterm congressional election.

Biden will most likely lose a second term if he is not blocked from seeking re-election. Indeed, more than 70% of Americans do not what him to run for president in 2024. And no US president ever won re-election on a poor economy.

From this perspective, it is in Biden’s interest that he properly prioritize his policies, focusing on domestic issues rather than trying to pull down China, Russia and other countries that he considered “repressive” states.

Should he be able to tame inflation, for example, there is good chance that the Democrats could regain Congress and Biden himself might be re-elected in 2024 should he choose to run or the Democratic Party picks him as its candidate.

America’s problems can be fixed

The good news is that America’s problems can be fixed, but it does require political will and economic logic-based policies, balancing between the interests of his supporters and those of the nation.

Inflation can be tamed by rolling back Trump’s tariffs on Chinese-made goods, because they were responsible for raising production costs and consumer prices in the first place.

However, trade unions have opposed the dismantling of tariffs for fear of losing membership. And labor organizations are the Democrats’ major supporters. In this regard, Biden should muster the political courage to defy the major constituents’ demand.

How inflation might be tamed

Biden could tame inflation by tailoring policies in accordance with economic conditions instead of political expediency. International trade is based on the notion of comparative advantage, importing the goods in which a country has a cost disadvantage and exporting those products in which it has a cost advantage.

Unfettered international trade is based on the notion of comparative advantage. Or simply put, efficient allocation of resources will bring economies of scale or lower production costs.

China, thanks to its efficient transportation systems, comprehensive supply chains and skilled labor force, has a comparative advantage in producing a variety of industrial and consumer goods. So rescinding the tariffs on those goods would reduce the prices of imports and by extension, cutting prices and costs of production which, in turn, will lower prices further or improving America’s competitiveness.

From this perspective, rolling back Trump’s tariffs on Chinese goods would be a good start and would not negatively affect US workers and manufacturing. But it would encourage workers to be more flexible in adopting new skills to meet the needs of a changing economy.

Bring back manufacturing

Business executives’ main responsibility is to maximize the returns of the shareholders’ investment. So it should not be a surprise that managers have scoured the world to find countries or regions that can produce the goods more efficiently than in the US. They found that in developing countries whose wages were lower and environmental regulations less stringent than the United States’.

But by relocating production abroad, US companies simply abandoned factories at home, leaving the manufacturing heartland to become a rust belt. Moreover, companies automated jobs. The combination of those two factors left the US unable to produce many of the goods that the economy needed.

To bring manufacturing back home, Biden needs to invest heavily in vocational training to establish a pool of skilled labor that can handle manufacturing jobs.

Vocational training alone, however, is not enough. Biden must introduce investment-friendly policies. For example, he should offer tax incentives or subsidies to encourage industries to increase productive efficiency and innovation so that they can compete with foreign imports. The same financial assistances should be extended to retooling capital assets that were made redundant by globalization.

Prioritizing domestic policies

Fixing America’s problems first and being less obsessed with pulling down China and Russia would help Biden to regain his political capital and enhancing the national interest.

Lower inflation would increase America’s standard of living. Furthermore, lowering prices would stabilize or reduce interest rates, encouraging consumption, investment and therefore promote economic growth.

Investing in America’s future by funding education and investment incentives would not only bring manufacturing home, but would also narrow the rich-poor gap and improve socio-economic well-being. High-paying manufacturing and highly skilled jobs would increase the size of middle class.

Following the Trumpian policies of making enemies, on the other hand, would make things worse for Americans. Those policies not only distorted efficient allocation of resources, but also make America less secure.

Besides, sanctions and tariffs failed to push China and Russia down. That should be reason enough for Biden to put his policy priorities in proper perspective.

Ken Moak taught economic theory, public policy and globalization at university level for 33 years. He co-authored a book titled China’s Economic Rise and Its Global Impact in 2015. His second book, Developed Nations and the Economic Impact of Globalization, was published by Palgrave McMillan Springer.