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Bidenomics is off to a good start


When this article is published, Joe Biden will have been US president for 18 hours. May we ask how it’s going yet?

I think we may. In part because few, if any, presidents have taken office facing such an urgent need to take forceful policy steps. In part because Biden himself has already made detailed policy commitments, in particular in the economic field we follow most closely in Free Lunch. Last week he sketched a legislative package for an “American rescue plan”, addressing the immediate public health and economic emergencies. Importantly, he promised that this was only the first part of a two-step plan. He will present the second instalment — for the “recovery” to follow the “rescue” — to Congress next month. We will have to see what the recovery plan contains, but this gives reassurance that his administration accepts the need to act fast not just to get out of the immediate difficulties but, as I argued last week, to reshape how the US economy works for the long term.

The rescue plan itself checks a lot of boxes, including direct payments to individuals, which add $1,400 to the $600 passed in December; financial aid to states; boosted unemployment insurance; expanded childcare assistance; and healthcare subsidies. These are all temporary measures. But the plan lays the ground for long-term structural changes. It includes the campaign promise to raise the minimum wage to $15, which will help to shift the US economy away from its scourge of low-wage, low-productivity employment. (Importantly, it also gets rid of loopholes such as tipped work.) And some of the measures could, in time, usefully be made permanent — such as making the child tax credit refundable so it benefits those too poor to pay much in taxes.

While waiting for the recovery plan, it is instructive to round up the advice others have sent Biden’s way. The need for deep structural reform is broadly shared now, whether to create more high-productivity jobs or to reverse the forces of polarisation in the economy.

But I would give pride of place to one stream of advice that might seem at first blush to be only tangentially related to economics. The Hudson Institute has produced a report arguing that the US must pick up the fight against kleptocracy, with no fewer than 70 ready-to-go specific policy proposals. As I mentioned in passing last week, one of the big structural reforms Biden should enact is to make money laundering and corruption through the US financial system much harder than it is.

The Hudson report explains why: illicit money flows threaten US national security and global interests, and corrode its domestic politics. Those alone give more than enough reason to care — but do not forget the economic consequences of corruption. It contributes to inequality (by making it easier to acquire and hide ill-gotten gains), twists governing institutions towards the service of corrupt interests and contributes to rigged markets. In short, the US’s infiltration by kleptocracy over the past decades has undermined the economy’s ability to work for everybody. Even for Biden’s domestic economic agenda, this must be a top priority and not just a nice-to-have.

Another intriguing piece of advice concerns fiscal policy — not in the short run, but how it should be institutionally organised to satisfy concerns about the sustainability of public finances. When Peter Orszag, Robert Rubin and Joseph Stiglitz — who span the full range of policy views in the Democratic party — produce a common position, it is worth listening to. They observe that the solidity of public finances is determined by factors that are deeply uncertain and likely to remain so. They therefore propose to jettison any simple limits for debt and deficit levels, and instead make more of government budgeting “semi-autonomous” in order to empower discretionary political decision-making to dealing with big surprises in the economy. Among other things, they recommend “automating” spending choices that we know are usefully adapted to the economic cycle. An example that has gained traction in Congress is automatically increasing and extending unemployment benefits in downturns.

One more point about fiscal policy should be mentioned. As the New York Times’s Neil Irwin sets out cogently, the most important economic policy lesson from the Trump years is that you can run aggregate demand pressure much stronger than most people thought without causing inflationary pressures. That is a lesson already taken on board by central bankers, as the Federal Reserve made clear with its monetary policy strategy update last year. It needs to be taken on board by elected politicians deciding government budgets, too. As Free Lunch has never tired of pointing out, the speed limit of the economy turns out to be flexible and not set in stone, with labour market participation and productivity responding positively to demand pressures.

This, too, is a structural as much as a cyclical issue. If supply capacity, to some extent at least, depends on demand, then short-term fiscal (and monetary) policy have permanent effects. So it is a good thing that Janet Yellen, the incoming Treasury secretary, publicly showed she was alert to this possibility already as Fed chair. In her confirmation hearing on Tuesday, Yellen told Congress that “the smartest thing we can do is act big”. (It is very welcome that she also recognised the importance of battling corruption.)

It is early days indeed. But as the new administration prepares (hopefully swiftly) its structural reform plans, it is not short of good advice, and it is already off to a good start.

Other readables

  • Three years ago, Free Lunch reported in depth on an initiative to rethink macroeconomics led by economists at Oxford university. They have now launched a second round of intellectual reconstruction, presented in the latest issue of the Oxford Review of Economic Policy.

Numbers news

  • China has returned to growth, but all that glitters is not gold. As Michael Pettis points out, Chinese consumption as measured by retail growth fell in 2020 overall. The country’s fourth-quarter growth was lower than the whole-economy rate, meaning consumption shrank as a share of gross domestic product. In other words, the superficially healthy growth figure only reflects a return to the state’s unbalanced stimulus of domestic investment, which Beijing had been trying to wean the economy off for years. For China’s economic reform strategy, it is a case of one step forward, two steps back.

  • International economic experts think Joe Biden’s election victory will boost growth in their own countries by about 1 percentage point in 2021.