There is no shortage of recognition that President Joe Biden’s economic policies are something completely different from what we have seen in the US — or indeed anywhere else — for a long time. The sheer magnitude of the policy push has taken many by surprise, given that Biden was long known as the consummate centrist among Democrats. Yet in only about 100 days, he has put down three plans, each of which would be radical on its own: the American Rescue Plan, the American Jobs Plan and the American Families Plan. The first has been passed, the last two still have to get through Congress.
The political logic — or potential risks — of this approach has also been much commented on. Less so its intellectual basis. But this matters: if the policies are driven largely by political considerations, we should expect them to have less staying power than if they are based on something such as principled conviction and a coherent analysis of the economy. Megan Greene recently argued that “Bidenomics” is indeed the latter, a “different framework” that inures it against some of the criticism levelled at its size, and could “revolutionise” economic thinking if it is seen as successful.
I believe she is right, but don’t take my word for it. In the past week, the Biden administration has come out swinging in defence of its plans. What is striking is the very explicit appeal to a different analysis of how the economy works than what came before. Last week’s briefing note from Biden’s Council of Economic Advisers (CEA) says the Trump administration’s tax cuts “reflected the old orthodoxy of lower taxes [while the] economic theory underlying President Biden’s American Jobs Plan and American Families Plan is different”.
And on Tuesday, Treasury secretary Janet Yellen went into the lions’ den, as it were, defending the administration’s package of public spending and tax rises in a speech to the US Chamber of Commerce. Here, too, the appeal to a different analysis of the economy is explicit: “I believe we must reorient our framing of US fiscal policy. For decades, the prevailing focus has been on the need to decrease and then limit the size of government as a share of the economy . . . it is the time to recommit our government to playing a more active and smarter role in the economy.”
The recurrent argument in both documents is that Biden’s economic policy strategy will boost the productivity of the private sector and national economy as a whole. The CEA note highlights four different elements underpinning the three plans, all of which are reasons to think productivity is lower than it should be because of past policy failures the plans intend to correct.
The first is that public capital (such as infrastructure) and spending on innovation have positive spillover effects to (other) private sector companies. Falling public spending on both has left both undersupplied. Restoring such spending can, from a whole-economy perspective, more than pay for itself. Yellen points out that while any individual public investment may lose money, “what we propose is a portfolio of public investments that together will have a significant positive payoff directly to the American people” (my italics).
Second, the administration highlights the need for a government role in co-ordinating private sector behaviour to make it as productive as possible. The examples offered are the supply chain disruptions in the pandemic and the carbon transition — both cases where arguably private sector optimisation can end up co-ordinating on better or worse investment paths, and the government can help ensure it is the better.
Third, Biden’s economists cite the overwhelming evidence that investing in early childhood care and education has huge economic returns by fostering a population of higher skill, competence and productivity.
And, finally, while combating inequality is a goal in its own right, the CEA note also highlights the rising evidence that greater equality is good for innovation and productivity, and not just for its own sake.
Each of these theses is sensible enough, so much so that it may not be obvious how much they reshape the overall policy and political argument. If productivity depends on policy choices in this way, then, in Greene’s words, “the economy could converge towards a number of different regimes”. The role of policy, she rightly concludes, then must be more ambitious than stabilising the economy around its previous path, and instead “prevent it dropping down to a fundamentally lower equilibrium or push it up to a higher one”.
I would add two things. First, this economic analysis also affords the administration a potent political argument. If Biden’s strategy can push the US economy to a permanently higher or even faster growth path, everyone can, in fact, be made better off — including those he is asking to pay more in tax. And Yellen wields precisely this argument: “We are confident that the investments and tax proposals in the Jobs Plan, taken as a package, will enhance the net profitability of our corporations and improve their global competitiveness. We hope that business leaders will see it this way and support the Jobs Plan.”
The other implication is that the debate about whether Bidenomics will stoke inflation misses one big point. If the administration is correct that its policies can shift the US economy to a higher and possibly faster growth path, then its supply capacity will expand to satisfy more of the current demand stimulus than standard analysis would predict. A positive productivity shock is disinflationary, after all, so the productivity theses built into the administration’s arguments imply that price pressures may abate and let the Federal Reserve keep interest rates low.
Do not be blinded by the size of the spending. This is supply-side economics, but not as you thought you knew it.
Other readables
The International Energy Agency dropped a bombshell on global climate change when the multilateral think-tank said no new fossil fuel exploration should take place from this year if the world is to reach net zero carbon emissions by 2050.
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Chronicles of the splinternet: Chinese authorities are moving to limit the transfer abroad of data generated by intelligent cars.
The Resolution Foundation and the Centre for Economic Performance at the London School of Economics have launched “The UK’s decisive decade”, a high-powered inquiry into how the country must reform its economy towards 2030.
Numbers news
In his long read for FT Weekend, Ruchir Sharma shares fascinating research on billionaires, how their fortunes come from different sources in different countries and how they have increased their share of their societies’ wealth during the pandemic. Who knew billionaires own a larger share of national wealth in Sweden than in the US? Or that France is the country whose billionaires owe most of their wealth to their parents?
Source: Economy - ft.com
