The Golden Opportunity—Squandered

Four years ago today, just as Biden had become president, I wrote the following on Facebook (in Danish):

“No more grumbling from here. How is the US economy doing? Today we got retail sales figures for January. They look extremely good—retail sales are now 10% higher than a year ago. That there is talk of fiscal stimulus in the US is somewhat of a puzzle to me, but that is nonetheless what is being proposed. Unemployment will plummet in the coming months and will soon be below 5%.

The graph below should illustrate what we can expect to happen with GDP growth in Q1. I wouldn’t be surprised if we exceed 5% growth in real GDP (year/year) in the first quarter. The US is long past the crisis.

And interest rates? Yes, I think it’s increasingly likely that the Federal Reserve will raise rates before the end of the year.“

The Reality of 2021’s Growth

Both fiscal and monetary policy had been eased to an extreme degree in 2020 under Trump and Fed Chairman Powell. Furthermore, lockdowns in American society were coming to an end.

While my prediction of 5% real GDP growth in the first quarter was overly optimistic—growth came in at 1.8%—the second quarter saw massive growth of 12.2%.

The Policy Mistakes

With such high growth rates, both fiscal and monetary stimulus should naturally have been rolled back.

But what did Biden do?

He implemented new fiscal stimulus packages that were just as large as Trump’s massive stimulus in 2020.

And what did the Fed do, despite clear signals that inflation was rising and monetary easing had gone too far? Nothing!

They kept interest rates unchanged and strongly signaled they had no intention of raising rates in 2021. Even as inflation showed clear signs of increasing early in the year, the Fed insisted that there would be no tightening.

The Predictable Outcome

The result was predictable (as I noted in multiple posts in April 2021 – see here) – U.S. inflation would likely approach 10%. And it did.

Only when very high inflation had become unavoidable did the Fed finally begin to raise interest rates, but by then, most of the damage had already been done.

Biden’s Compounding Errors

At no point did the Biden administration change course. There were no major reforms or attempts at fiscal tightening. Worse yet, Biden continued several COVID-related restrictions—such as mask mandates and school closures—despite clear evidence that the pandemic was no longer the same economic or public health threat it had been in 2020.

The Political Price

These missteps had political consequences. Four years later, the Democrats lost the presidency, and all indications suggest that high inflation was the key reason.

Imagine if Biden had used his strong political position in 2021 to push through reforms, tighten fiscal policy, and ease COVID restrictions. The U.S. could have experienced a non-inflationary boom, Democrats might have retained power, and geopolitically, the country would have been in a much stronger position to counter Russia’s invasion of Ukraine in 2022.

Trump’s Similar Mistakes

Now, in 2025, Trump has inherited a similar situation: inflation has finally come down, and growth remains robust. With control over both the Senate and the House, he could have introduced a long-term reform agenda to improve public finances while allowing the Fed to carefully cut rates.

But what is he doing instead?

• Implementing aggressive tariffs that harm the supply side of the economy.
• Failing to pass structural economic reforms that would ensure long-term stability.
• Pursuing short-term populist measures that will likely lead to the same inflationary mistakes as Biden.
• Seriously undermining the trust in US and global economic and financial institution and seriously increasing geopolitical risks.

A Deeper Democratic Crisis?

The fact that two consecutive presidents, from opposing parties, have made similar economic policy mistakes suggests a deeper crisis in the American democratic process.

The country appears to have lost its ability to embrace common-sense economic policies—the kind that both Reagan and Clinton understood.

To break this cycle and ensure a stable and growing economy, the following policies should be implemented:

• Significant fiscal consolidation through massive structural reforms, particularly entitlement reforms.
• Ensuring the independence of the Federal Reserve to guarantee nominal stability.
• Implementing reforms within a rule-based and constitutional framework to provide long-term economic predictability and growth.

The U.S. economy has proven resilient, but without responsible economic leadership, it remains at risk of repeating the same mistakes over and over again.

Until Washington regains a sense of economic discipline, the cycle of boom, inflation, and stop-go policy-making will continue, to the detriment of American democracy and economic stability.