Jobs and incomes are America’s principal election issues.

This time will be no different, although wars in Europe and in the Middle East, the chaos of illegal immigration and drug smuggling along the border with Mexico will register with American voters.

The real election mover, however, will remain Reagan’s iconic one-liner that made all the difference in his tight race with Jimmy Carter. During his October 28, 1980, debate with Carter in Cleveland, OH – one week before the election – Reagan asked Americans to cast their vote based on a simple question: "Are you better off than you were four years ago?”

Reagan won the election with 51% of popular vote to Carter’s 41%. An even bigger landslide happened in the Electoral College, where Reagan won 489 electoral votes to Carter's 49.

By the time of next elections on November 5, 2024, Democrats won’t pass the Reagan test. With the economy on a sharply declining path to a 1% growth rate, from 2.4% in 2023, unemployment will continue to grow and real personal disposable incomes to fall.

That will be a serious indictment of America’s present economic management.

Losing jobs and incomes

At this point in the business cycle, the U.S. should be underpinning its economic activity with expansionary fiscal and monetary policies to moderate the slowdown and accelerate the recovery.

But there is no room to do that safely. With public finances grossly overstretched, and the core inflation rate stuck at 4%, there is no space for cyclical support without destabilizing an already unbalanced economy.

Taking that risk would be quite unwise, even though such a possibility cannot be ruled out in an unusually heated adversarial contest.

At any rate, the next government, whatever it is, will inherit a weak economy, increasing unemployment and rising political pressures to stimulate economic activity.

As always, the monetary policy will be a readily available instrument to do that.

Fiscal policy -- with a budget deficit of 7% of GDP and a public debt of $34.5 trillion (123% of GDP) – hopefully will be considered off limits.

Under those conditions, reversing an economic growth recession is a particularly tough call.

The monetary policy is a rough and ready broad spectrum instrument working with long and variable lags, ranging from three to eight quarters.

Apart from that, I am assuming that inflation will not preclude an aggressive credit expansion. In such a scenario, consumer prices are expected to stabilize around 3%, despite price rigidities in service sectors, and a high probability that food and energy prices could be fired up by wars affecting supply chains and delivery channels.

Peace dividend could be very large

And there is an overriding consideration: With its highly open economy, America should not go it alone by offering a large stimulus package. If it did that, most of the stimulus would leak out to the rest of the world by raising imports, suppressing domestic import-competing industries and boosting America’s already large trade deficits.

The new U.S. government should try to set up a coordinated stimulus with other major world economies.

The stagnant E.U. would benefit from such a move. The trading bloc would also have more room than the U.S. to expand its fiscal and monetary policies.

Actively trading countries like China, Japan and other East Asian economies would gladly participate in an effort to bring up world demand and output from its declining growth path.

Orchestrating a cooperative policy would also offer an opportunity to revisit international trade problems and reform the stalled World Trade Organization. That would be a way to decrease frictions and large U.S. trade deficits with China – ultimately making American foreign trade (roughly one-third of U.S. GDP) less of a drag on economic growth.

Such a new beginning of the American government in January 2025 would mark an effort to build a world of peace and prosperity by establishing stable and productive relations with Russia and China. Those three countries hold the key to the global security architecture.

The current U.S. administration has lost that opportunity. And should the Democrats remain in the White House for another four years, it is difficult to see how its main players could restore and repair gravely damaged relations with Russia and China.

The year ahead is a very difficult period for the U.S. economy. Its instruments of demand management have lost their effectiveness. The monetary policy is a slow-moving force, and the overextended fiscal policy is a spent force.

The incoming government must reinvent its economic toolbox. And that task would require Washington to become a cooperative global peacemaker.