The Cost of Living Crisis Claims Another Victim

Rising prices determine elections but they don't change the long-term trends. It's time to take The Sniff Test.

The Cost of Living

The end was quick and decisive, and not especially close. Harris underperformed Biden in 2020, Trump won a majority and all seven swing states, and was President by 5.30 a.m. on election night.

The stock market rallied in relief at a decisive result. The dollar and bitcoin strengthened, the latter in anticipation of more money sloshing around. Bond prices fell for the same reason, as they did after Rachel Reeves’ budget, which is the financial markets saying the voters got it wrong.

There is no American exceptionalism in this result. The election was about the cost of living, as with others around the world. Incumbents of left and right have been evicted because of the rising cost of groceries and fuel. Dictators know to control prices, while in the West we fall into the trap of believing politics is a moral crusade, rather than a way to fix people’s problems.

There are other trends calcifying in the Western world. Women are more progressive than men, the young stay progressive longer, and the college-educated lean left as well. It was not enough for Harris because she was in government with inflation rising. The US two-party system disguises discontent with traditional politics, but independents sapped Harris’ support, just as protest votes stole from the leading parties in other elections. The division between cities and the rest has not been this pronounced for decades.

The Ends of the Earth

There are few places where I feel more cut off than Australia. Perth is the city furthest from any other in the world, and when it’s daylight in Sydney it’s dark back home. The city looks familiar, but the creature comforts are different. The most popular sport is men dressed as porn stars, fighting each other while a bloke boots a footie.

Yet Australia is very much of the West. In the 2022 election, one third of voters said the cost of living mattered most, when it had not featured in 2019. Beyond that, supporters of the ousted centre right government worried about the economy, taxes and leadership. The backers of the victorious Labor party were more concerned over health, welfare and the environment. This divide repeats everywhere but is less immediate than prices.

Australia has a compulsory vote, which results in a turnout over 90% in every election. Barrack Obama is a fan and Democrats in the US would like this rule. While compulsion is intended to make elections representative of the population, only 12% of Australians believe their government runs for the benefit of the people. What is more surprising to those who assume it’s the downtrodden who don’t make it to the polls, is that 90% of voters make the same choice as 60% would.

This must be true if polls tell us anything. Clever pollsters can sample an electorate from a few thousand people, which is because most of us make up our minds well before election day. The media works itself into a frenzy fed by last minute rallies in constituencies that are too close to call, but mostly this is noise. In the US, Australia and the UK, the discomfort of higher prices bit hard and early.

Polls and Prediction Markets

The Harris campaign received a last minute fillip when a “respected pollster” called Iowa for her by three points. She lost by over thirteen. The five thirty eight website, which takes it share of brickbats, was much more accurate with its last gasp poll-of-polls in the seven swing states. Respected means one-of-us in the media, rather than someone who is right. Nate Silver, who founded five thirty eight, says something similar about academia.

Most polls were consistent showing Trump winning. In response, we heard about shy Harris voters who would appear on election day, but there were none. The blame was put on prediction markets, and in particular a French national who won almost $50 million betting on Trump. The story goes that this money moved financial markets and the people of Pennsylvania. A total of $3.2 billion was bet on Polymarket, compared with over $900 billion traded in US Treasuries every day. The tail does not wag the financial dog and Pennsylvanians pay no more heed to the French than to Keir Starmer’s platoon of meddlers sent to the state. The cost of this for Anglo-American relations remains to be paid to a President not known for magnanimity.

The prediction markets did their job and picked up the scent early on election night. This chart shows the nosedive in the odds of Harris winning on three different sites before the polls closed. The PredictIt site that had her ahead, allows only small bets and is popular among academics.

Small samples of the whole, if selected with care, make precise predictions about human behaviour. We are creatures of habit and conform to patterns. Years ago, an IBM data scientist showed me the map of an individual buying hydrogen peroxide and other ingredients for a homemade bomb. The would-be terrorist zig-zagged across London in what he thought was a random pattern, before returning home to find the police on his doorstep. An understanding of human nature is what makes comedians funny and eerily accurate when drawing election maps.

Some people have a spare $45 million and like a gamble. We read too much into individual actions and too little into the collective. Anecdotes sell news, but they are no substitute for analysis of the data.

The Most Consequential Election Ever

Another media meme claimed this was the most consequential Presidential election ever. This can only be told in hindsight, as few foresaw the Bay of Pigs crisis when choosing Kennedy over Nixon, or knew that a hairline victory in 2000 would allow George W. Bush to use 9/11 as an excuse to “finish the job” in Iraq. Even the usually measured Azeem Azhar considered this election to be the most pivotal.

Azhar’s reasoning is around AI, the energy transition, climate change and geopolitics. Trump’s politics are about the here and now, tax cuts, tariffs and day one boosting of energy production. Make America great and it will solve the long-term problems. The fundamental divide in societies is between those who want help and those who want to be left alone.

Women are more likely to work for the state, to be single parents and live longer collecting social security. They trust the collective more than men. Immigrants rely more on government and gather in cities among familiar faces. Inflation in house prices compared with wages makes it harder to get on the property ladder and establish independence. These are the long term trends that define voting patterns, rather than policy positions on technology and transition.

The President does not dictate developments in AI and is powerless to stop 2.8 billion people in China and India spewing more carbon. He does have a say in geopolitics, but even here the battlelines are well drawn. Historian Niall Ferguson raises the prospect of the US losing the new cold war and the ability of the US to spend enough to project power will come under intense scrutiny. If China and Russia get their act together and agree an alternative trading system that avoids recycling dollars into US treasuries, then the world order may unravel. This is more likely a 2028 issue, when the US stares down the barrel of empty Medicare and Social Security trust funds.

The next four years seem destined to be more of higher debts and government spending. Trump looks like Labour without the tax rises. Financial markets are flagging that Trump’s policies are at odds with his stated aim to “end inflation and make America affordable again”. That won him the election and may lose his party the next.

Tariffs and Taxes

Oil prices were one market that was little changed on the election result. It takes a long time for policies to result in more fuel at the gas station. Cheaper energy brings down prices, but the rest of Trump’s policies do the reverse.

Tariffs on foreign producers may secure more favourable trading conditions and open up markets to American goods. This takes time and if the concessions don’t come then tariffs will raise import prices. The global dollar network hinges on America importing a lot.

Tax cuts put spending power in people’s pockets. That means prices rise until companies increase supply, which is harder when foreign made components are more expensive. Trump’s gamble may be that more disposable income offsets concerns over price rises. Or he may not care that his political promises are at odds with each other.

Trump is a divisive figure, but so are politicians of the left. It takes two to tango. You cannot tax people and preach moral imperatives and expect everyone to agree. The young, immigrant and female voters in cities are more aligned with this message, while native, male and older voters in the suburbs are not. They come closer together to throw out governments who cannot control inflation. Once it is back in the bag, the divisions open up again.