THE AFFORDABILITY CRISIS

Roughly a year ago, the Biden inflation helped re-elect Donald Trump.

Last week, the same problem, repackaged as an affordability crisis and stamped upon the Trump administration, helped elect Zohran Mamdani as Mayor of New York City.

These developments have reinvigorated the socialist wing of the Democratic Party that a) helped drive the failed Biden agenda in the first place, b) was relegated to a state of disarray by Trump’s re-election and c) then made Mamdani their new standard bearer.

Uncharacteristically, Trump’s response to voter’s concerns sounded a bit like, well, Joe Biden’s; a recent Wall Street Journal article (November 7) noted, “Trump Dismisses Affordability Concerns, Insists Prices Are Coming Down.”

To understand these improbable developments, let’s begin with the economics of the matter.

THE UNDERLYING ECONOMICS

While a host of factors can have a temporary impact on prices, persistent inflation is, as Milton Friedman put it, always and everywhere a monetary problem, i.e. - sustained inflation happens when central banks consistently increase the money supply at rates that exceed growth in the real economy.

As recent history has also taught us: in addition to consumer price inflation, excess money creation can also lead to asset inflations. In other words, when the Fed dumps too much money into the system, the excess money might inflate everyday prices, or it might cause the price of assets like homes to escalate or, in severe cases, it might push up both consumer prices and asset prices. Asset inflation can be especially problematic for people who don’t own assets (like homes or stocks) that, at least temporarily, benefit from these artificial inflations, which is one reason why the Fed’s monetary manipulations of the past few decades have done so much damage to our system.

An important subtlety here is that when the Fed drives housing prices up by 50% without a commensurate increase in homebuyer incomes, it creates an affordability problem that persists even after inflation subsides. Even if subsequent increases in home prices then come back down to 2 or 3% per year, the previously created disconnect between home prices and incomes still exists. Surprisingly, both Biden’s and Trump’s comments seem to reflect a lack of understanding of this reality.

Historically, large and persistent budget deficits have been a chief culprit in pushing the Fed into monetary mistakes. When spending exceeds revenues, governments can borrow to make up the funding gap, turn to the central bank’s printing presses, or do both. And when debt levels are already high, it puts added pressure on the central bank to bear a greater burden of the government’s largesse.

THE POLITICS OF THE BIDEN INFLATION

As former Democratic Senator Joe Manchin recently observed on the All In Podcast, Joe Biden effectively made a pact with the far-left, socialist wing of the Party to gain the Presidential nomination that led to his election in 2020. Even though the economy had already fully recovered from the Covid recession by the time Biden took office, and against the advice of more moderate advisors (like Larry Summers, who served under Bill Clinton), Biden agreed to run the largest peacetime deficits in our history. As we now know, this disastrous policy failed to reinvigorate income growth for working class Americans, but it did lead to the highest inflation since the 1970s and pushed home prices up by over 50%. All of which helped create our current affordability problems.

ZOHRAN MAMDANI AND THE POLITICS OF THE AFFORDABILITY CRISIS

There’s an old saying that the difference between fiction and non-fiction is that fiction must be believable. Somewhat unbelievably, the same socialist wing of the Party that pushed Biden into the spending blowout that helped re-elect Donald Trump has now managed to rebrand the failure of those policies into the affordability crisis that helped Zohran Mamdani become mayor of New York City.

What are we to make of this?

First, while I could scarcely disagree more with Mamdani’s policies, give the young man credit for possessing an abundance of political talent. In addition, we should all take pride in living in one of the few countries in the history of the world where a first generation ethnic and religious minority could rise to such commanding heights in such a short time – in this limited regard, bravo, America! None of which is meant to dismiss the fundamental irony and danger in all of this: the socialist policies that helped elect Mamdani are designed to topple many of the foundations of Western civilization that created his historic opportunity in the first place.

In effect, Mr. Mamdani is threatening to bite off the capitalist hand that fed him!

Nonetheless, let’s also remember: Mamdani’s victory came in a one-party city against a weak and disgraced member of his party’s “old guard”. In other words, Andrew Cuomo could scarcely afford to rail against affordability problems that arose under another member of the Democratic old guard (Joe Biden) that voters see Cuomo as a part of.

Like I said, if this was fiction, it would scarcely be believable!

THE POLITICS OF THE TRUMP ADMINISTRATION

Like a wrecking ball accelerating down a mountainside, the socialist left has spent the last half century amassing increasing influence over the educational system, traditional media and, more recently, the Democratic Party. As they’ve done so, they’ve worked to: replace free speech with cancel culture (of which the “Hitlerization” of Trump is the latest and most extreme example), meritocracy with political appointment (DEI) and, during the Obama and Biden administrations, to push spending and deficits up to levels that have moved us ever closer to their dream of replacing markets and entrepreneurs with politicians and their Brain Trusts as the chief architects of the economy.

Given the real origins of the Affordability issues discussed earlier, Trump’s frustration with getting blamed for problems he inherited is understandable. But denying the existence of the issues is unlikely to work out any better for Trump than it did for Biden. Furthermore, browbeating the Fed into another bout of easy money risks making things even worse. In a healthy economy – where market forces naturally keep incomes and prices aligned – 3% inflation may not be that big of a problem. But in an economy already struggling with mounting monetary mistakes, even relatively small doses of added inflation are like dropping salt into a gaping affordability wound.

So, how are we to work our way out of this salty wicket?

POLICY OPTIONS

As noted above, the core problem is that the excess money the Fed dumped on the system has pushed prices out of align with stagnant incomes. This has been especially frustrating for young people and others who don’t own assets that, at least temporarily, benefit from the Fed’s policies.

The solution is to unleash real economic growth while curtailing additional inflation, which will enable rising incomes to finally start catching up with inflated prices. Fortunately, the administration has taken a number of important steps that will help with the growth side of the equation, including deregulation, a growth-oriented AI strategy, and preserving the tax cuts from Trump 1.0.

Unfortunately, the administration is also pushing the Fed back towards the easy money policies that created these problems in the first place. If this leads to rising levels of inflation, then even rising incomes will be chasing a moving price target, thereby forestalling needed improvements in affordability. Furthermore, Republicans must start to show progress on bringing the deficits down. If this doesn’t happen, markets may lose confidence in the Fed’s ability to resist further monetizing the deficits, which would cause interest rate premiums (the spread between interest rates and inflation) to increase. Rising interest rates will impair the inflated asset valuations the Fed’s policies have created, thereby magnifying a related downturn.

SUMMARY

After first backing off its pressure campaign against the Federal Reserve, the administration would be wise to clearly and consistently communicate the following to America’s voters:

Today’s affordability problems are the direct result of failed experiments in government spending and the money printed by the Fed to help fund the related deficits. The best way to address these problems is to reinvigorate real economic growth, follow sound money policies and to get our deficits back under control.

Returning to an agenda of increasing government-driven “solutions” to try and solve problems created by the last round of such policies is like pushing the socialist’s wrecking ball back up the mountain, only to have it roll back down again with even greater force, just as it has time and again throughout world history.

Today we face important challenges, but none that are greater than those we have overcome time and again throughout our storied history. Here’s to hoping your day is as bright as America’s future.

- Todd, November 16, 2025

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