Choose your own recovery

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Continuing with Ed’s fairy tale theme of last week, I am thinking about Goldilocks in light of all the good economic news that just keeps coming in the US. Already this year we’ve had the biggest productivity jump since the pandemic, a red hot third-quarter growth number of 4.9 per cent and income growth that’s (finally) outpacing core inflation. Last week, stocks had their biggest weekly gain of the year, after a muted but perfectly respectable job growth number and a Fed decision to hold rates steady.

It seems, at least at this point, that this recovery is everything that we could have hoped for. It is certainly far better than any of our peers have had. There are still plenty of wild cards on the horizon, to be fair. Conflict in the Middle East could raise oil prices (The World Bank warned as much as 75 per cent in a “large disruption” scenario outlined in a report). It’s also unclear where jobs will be in another month or two (with the consumer savings cushion from the pandemic spent down, most people can’t afford to be unemployed).

But I think that the current economic situation in the US reflects something important: the kind of recovery that we have is a choice. In the past, we’ve mainly chosen high unemployment in lieu of more fiscal stimulus, which many economists feared would cause inflation to rise too quickly (think Larry Summers and Jason Furman and the whole idea that fiscal stimulus must be “timely, temporary and targeted”).

This White House chose differently. Biden and his top advisers, many of whom are veterans of the Obama White House and saw how post-2008 choices resulted in higher asset prices but Main Street decline, reasoned that it was better to spend big on pandemic relief to keep the real economy and employment afloat, even at the risk of inflation, than to underspend and leave average Americans unemployed.

At this point, it’s looking like they bet right. While inflation is still higher than we’d like it to be, we’ve had a pretty decent cooling given all the headwinds out there. Meanwhile, labour action is keeping wages ahead of overall inflation, and yet not so out of proportion that we are seeing major lay-offs. Childcare subsidies helped keep women at work, which in turn helped balance out what might have been a far tighter labour market. The typical American is richer now than before the pandemic — and yet, we haven’t seen some major collapse in Wall Street, which belies the idea that there must be a trade-off between the two.

As the National Security Council’s former chief economic adviser Jennifer Harris told me in a very interesting Economists Exchange interview last week, “It adds up to a reckoning with how political power moves through the economy; how economic power can warp our political system; and the necessary — not exclusive but necessary — role of both government and public investment in solving the big problems of the day, starting with a clean energy buildout that doesn’t simply trade energy dependence on the Middle East for supply chain dependence on China.”

In short, the kind of recovery we have is the recovery we choose. Ed, do you see the picture differently? Would you have chosen yet another type of recovery, from a policy standpoint? And do you believe that Goldilocks is here to stay through the election, or no?

Recommended reading

• Maybe demographics is destiny after all: the New York Times’s Jamelle Bouie on how younger voters are turning left and staying there, regardless of what the polls say.

• Venture capitalist and Cambridge professor Bill Janeway is quite right that having lots of capital is not in and of itself a business strategy. It’s obvious, and yet a point worth making particularly as Sam Bankman-Fried faces up to 110 years in prison.

• Lots of great opinion pieces in the FT this week, including Harvard professor Willy Shih on how the US is on the verge of losing its last large-scale domestic syringe manufacturer, which seems absurd given what we’ve been through the last few years. And Pilita Clark on what performance reviews miss. Answer: most things. Companies are still doing a terrible job at figuring out who does what and how well they do it.

Edward Luce responds

Rana, I agree that we can shape the kind of recovery we want — and Biden deserves credit for ensuring America’s was stronger that it could have been. The US has clearly outperformed other western economies. But there are quite strong headwinds going into the 2024 election and reasonable grounds to be deeply fearful of which way the US electorate will turn next year. As you say, income growth is now outstripping inflation. But higher interest rates weigh far more heavily on consumer minds. Think of how much more expensive it is to buy a house or lease a car nowadays. That is highly unlikely to change in the next twelve months. 

As I have pointed out, there is very little that Biden has been able to do about this since the House turned Republican in last year’s midterm elections. The Federal Reserve may or may not carry out the final rate increase that is indicated on its dot plot. Either way, long bond yields are likely to stay high and do much of the Fed’s anti-inflationary job for it. America now faces rising and increasingly expensive federal budget deficits in a climate of high interest rates, which means debt servicing will eat up a growing share of the public outlay. At some point spending cuts will need to be made, possibly to the entitlement programmes. My priority, and yours, I imagine, would be for tax increases at the top. But they wouldn’t cover nearly enough of the deficit, so there would also have to be a broad-based lifting of the tax rate. Perhaps we should look at a graduated value added tax that excludes goods that eat up the budgets of the poor, like food and clothing, and escalate for luxury goods. 

Either way, the medium-term economic outlook is tough. Whoever wins in 2024 — and I pray it isn’t Trump — will face an unenviable challenge. Perhaps another time we can discuss whether Trump’s opponent should still be Biden, or someone else. His political shelf life is looking increasingly threatened.