WASHINGTON — Democrats received a clear message in 2024: A strong labor market isn’t enough to win elections. That reality could shape how the government responds to the next economic downturn.

Scarred by the long, slow recovery following the 2007-09 recession, President Joe Biden and his advisers banked their political fortunes on going big. In early 2021, Democrats pushed through a staggering $1.9 trillion fiscal package meant to bolster hiring and an economy still weathering the uncertainties of the COVID-19 pandemic.

Their bet worked — but not exactly as they hoped. The labor market recovered rapidly and remains solid today, but a surge in inflation soured Americans’ views of the economy, helping to power President-elect Donald Trump to a second term. Republicans placed blame for inflation squarely at Biden’s feet, arguing the Democrat-driven stimulus bill supercharged demand and stoked prices.

Now, with Biden set to hand the presidency over to Trump and Republicans in control of both chambers of Congress, economists and policymakers are asking what lessons to draw from the nation’s first inflationary surge in decades — and what it all might mean the next time the U.S. economy needs rescuing.

“Part of why policymakers did too much in 2021 was overlearning the lesson of 2009,” said Jason Furman, a Harvard University professor and former White House chief economist under Obama. “I worry that next time they’re going to overlearn the lesson of 2021, and we’re going to end up doing too little because the next recession is unlikely to be a pandemic-induced recession.”

In early 2021, inflation was low — and had been for several years. Many Americans had no direct experience with high inflation. But many did remember the Great Recession, both the surge in unemployment it caused and the more than six years it took for employment to return to pre-crisis levels.

When Biden was elected, the labor market was improving rapidly, having recovered about half of the jobs lost due to the pandemic. But just before his inauguration, the December 2020 employment report showed the economy had shed 140,000 jobs, underscoring the uncertainty about the economic outlook that remained at the time.

“There was a desire to make sure that we did enough support for people that they could get through an extended period of time, and that we would accelerate the pace of the economic recovery,” said Bharat Ramamurti, who served as deputy director of the White House National Economic Council from early in the Biden administration.

Fiscal-fueled demand

But COVID-19 vaccines, while not widely available, had begun to work their way into the American populace. As Democrats put together the American Rescue Plan — which included direct checks to Americans, a temporary expansion of the child-tax credit and an extension on enhanced unemployment benefits alongside other aid — some economists warned it risked stoking inflation.

Critics, including Former Treasury Secretary Lawrence Summers and congressional Republicans like Mitch McConnell, cautioned that the package was too large.

The economy reopened and strong demand from consumers flush with pandemic cash bumped against a limited supply of labor and materials. Meanwhile, the Federal Reserve was slow to counteract swelling price pressures with higher interest rates. By June 2022, inflation reached 9.1%, the highest in more than 40 years.

“The big lesson is that it is possible for fiscal stimulus to generate a costly overshooting of the recovery in a way that results in high inflation,” said Karen Dynan, a Harvard University professor who worked on economic policy at Treasury during the Obama administration.

In a newly released co-authored paper, Dynan finds the inflation surge was primarily driven by excess demand relative to the supply capacity of the economy at the time. Economists at the San Francisco Fed estimated pandemic aid passed under both Trump and Biden contributed roughly three percentage points to inflation by the end of 2021.

Dynan does worry that policymakers, leaning on the experience of the last few years, might be too conservative with aid should another economic crisis arise — particularly given ever-growing concerns about U.S. debt levels.

If there is a crisis, Jared Bernstein, the outgoing chair of Biden’s Council of Economic Advisers, said policymakers should respond forcefully.

“When faced with an economic shock, it’s important to hit back hard,” Bernstein said.

Political cost

Inflation-weary Americans gave the Biden administration little credit for employment’s return to pre-pandemic levels by mid-2022 or how the economy avoided a recession many economists predicted with near-certainty as the Fed raised rates. Deep voter dissatisfaction with high prices loomed heavily over the 2024 presidential election.

Voters consistently ranked the economy as their top election priority in polls, and gave Trump better marks on the issue than Biden and, later, Vice President Kamala Harris.

“The political cost of high inflation is greater than the political cost of high unemployment just because it affects everybody instead of only affecting the jobless,” said Tobin Marcus, head of U.S. policy and politics at Wolfe Research and a former Biden adviser.

But it’s also not clear if Democrats would have performed better politically had they done a smaller package in 2021 given the global jump in inflation, he added.

“Consider the likely consequences of an alternative fiscal response, one solely aimed at preventing the post-pandemic surge in prices without considering the consequences for unemployment,” outgoing Treasury Secretary Janet Yellen said in a speech this month. “That could have meant millions more people out of work, households without the income to meet their financial obligations and lackluster consumer spending.”

Meanwhile, economists have developed tools since the pandemic that should help them better understand how supply considerations might impact the outcomes of fiscal policy, said Ernie Tedeschi, who served as chief economist at the CEA during the Biden administration.

“We should not abandon full employment as a goal,” Tedeschi said. “We need to do a much better job of keeping the short-run supply in mind when we design and calibrate these packages.”

———

(With assistance from Josh Wingrove.)

©2025 Bloomberg L.P. Visit bloomberg.com. Distributed by Tribune Content Agency, LLC.