Trump, Biden and Animal Spirits

Small business optimism climbs as Bidenomics departs

WSJ editorial. 

"If you want to understand the results of the recent presidential election, Tuesday offered an explanation in revealing split-screen. President Biden gave a speech praising his economic policy as a great and historic success. Meanwhile, NFIB released its latest monthly survey of small business sentiment showing that optimism soared in November—after Kamala Harris’s defeat.

“After decades of trickle-down economics that primarily benefited those at the very top, we, we’ve written a new book that’s growing the economy—the middle-out and the bottom-up—that benefits, thus far, everyone,” Mr. Biden said at the Brookings Institution.

Hmmm. If that’s true, then why did his Vice President lose the election, and why did voters say in every exit poll that they were so unhappy with Bidenomics?

The short answer is inflation, which Mr. Biden tried to explain away as the result of the pandemic and supply-chain problems. He made no mention of his record spending or the Federal Reserve’s policies that monetized it.

Another answer comes in the NFIB survey showing that its Optimism Index rose by eight points in November to 101.7. That followed 34 months of remaining below the 50-year survey average of 98. It’s the highest reading since June 2021. Of the 10 components in the index, nine increased and one was unchanged.

Could this surge of optimism have anything to do with the election results? You make the call. The nearby chart tracks the NFIB index over time, starting in January 2019. It had soared after Donald Trump’s election in 2016 and stayed high until the pandemic hit.

The optimism index popped back up briefly in spring 2021, but then fell into what you might call the Bidenomics trough. It has now jumped up again, as small business owners express renewed hope about the future.

The optimism surge is especially notable for small business because Mr. Biden claims to favor the little guy. Ms. Harris campaigned specifically as a champion of small business, offering new subsidies. Yet the people who run those businesses seem delighted that Mr. Trump won a second term.

To borrow the famous phrase from John Maynard Keynes, Mr. Trump’s victory has revived what he called the “animal spirits” of business. Those spirits have been dampened throughout the Biden Presidency by inflation, waves of regulation, antitrust barriers to merger efficiencies, and higher taxes. The Trump victory lifted the pall of uncertainty about the much higher taxes that Mr. Biden had proposed and Ms. Harris had endorsed.

Those taxes would have hit small businesses especially hard, since many of them pay taxes at the individual rate. They’ve also benefited from the 20% income exclusion that was part of the 2017 tax reform that expires at the end of next year. Small businesses feel the burden of regulation more acutely than the Fortune 500 because they can’t as easily absorb the costs of compliance.

None of this is a prediction that the next four years will be boom times. Some of the current exuberance may be related to ample credit conditions. As Wednesday’s consumer price index for November showed, inflation remains sticky at 2.7% and is up since September. The Fed may be repeating a mistake with rate cuts that will make higher rates necessary next year.

Soaring asset prices could be in for a rude correction. Mr. Trump’s tariffs, if they are as broad as he is advertising, will add uncertainty and higher costs for business and consumers. A narrow GOP majority in Congress will also have to succeed in extending the pro-growth policies in the 2017 reform.

But there’s no denying that Mr. Trump’s victory has unleashed animal spirits that the economy hasn’t seen in four long years."