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February 11, 2021

Defining Bidenomics

The president is determined to run the economy hot to make up for past
economic errors

 

The spectre of Franklin Roosevelt looms large over Joe Biden's economic
experiment. (Evan Vucci/AP Photo)

The Chief

Since 2012, Japan has engaged in an economic experiment known as
Abenomics. Attempting to pull the country out of a deflationary and
low-growth cycle, then-Prime Minister Shinzo Abe (he retired last fall)
laid out a three-pronged attack, which included significant monetary
actions (a higher inflation target, quantitative easing, negative
interest rates), fiscal actions (large economic stimulus and public
investment), and structural reforms (some international trade
agreements, tax changes, labor law reforms).

Not all of this was truly implemented, particularly on the structural
reforms side. And a doubling of the consumption tax defied the purpose
of the fiscal stimulus. In the short run, however, employment surged
,
particularly among women. The weaker yen was good for exports. And the
persistently high initial deficit had little impact on economic growth.
GDP grew at a faster rate than Japan's "lost decade" in the 1990s,
though below Abe's target. Equity markets and large firm profits rose
while wages failed to break out of a long-running stagnation. The
inflation goal never got reached, as wages stayed flat.

Different analysts have different thoughts

about the legacy of Abenomics. I have contradictory thoughts about it.
But there's no doubt that he tried something new and a bit radical for
an industrialized country, running up significant debt and making a
whole-of-government effort to bring the economy back to life.

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Japan, with an aging population, has different challenges than the
United States. But there is such a thing as Bidenomics, judging from his
team's early actions. And the debate over whether the American Rescue
Plan is "too big" or too untargeted should look to the context of
where the United States stands economically, pandemic or not.

At this moment, there are 18 million more people

on continuing unemployment claims as there were a year ago. Over 11
million of them

risk losing benefits in a month. This pain has been almost entirely
concentrated

in the low-wage sector, and by "low-wage" I mean making under
$30,000 a year. Even now, as Federal Reserve chair Jerome Powell said
yesterday, we have an unemployment rate at around the highs of the Great
Recession
,
masked by misclassification and statistical error. And prior Fed
pronouncements indicate that the bottom quartile has unemployment rates
at the Depression level of 20 percent or more. That comes on top of a
situation in America where we have the highest poverty rates
in
the developed world, and among the most threadbare safety nets
.

When the pandemic hit we had to spend a lot of money because we were
practically building a safety net from scratch, with few automatic
stabilizers that kicked in. The Biden rescue plan attempts to continue
that approach, not as "stimulus" but as basic survival for a large
cohort

suffering from unemployment, housing debt, and food insecurity. We have
no good data on who precisely is in this predicament, and in America the
precarity is pretty deep and nobody is really safe, so you have to set
the aperture wide. Then you have pandemic control, which is not only
necessary in a disaster but couldn't possibly have a higher fiscal
multiplier. The economic consequences of getting back to something
resembling normalcy is almost incalculable.  

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Biden adds to that an actual safety net, with child support policies
,
increased health insurance subsidies, and more. These are far from
perfect but certainly in a better direction than the
"settle-for-less" posture of the past.

Plus, there's a second reconciliation package we're going to see
later this year, focused mostly on infrastructure spending, and probably
rebalancing the tax code to add revenue from high-income earners and
corporations. This has an interesting parallel to Abe's consumption
tax, although it's much better targeted. This is designed to add a set
of good-paying jobs to the labor force to pull up wages and maximize
employment. And it builds public investment, something that has been
savagely cut back over the past four decades. Obama's team boasted

about producing the lowest level of discretionary spending since
Eisenhower, when that was a tragedy of persistent underinvestment.

There's no question that "running hot" is not how we have dealt
with recessions over the past 40 years. It's also true that those
recoveries have been ghastly. A few years ago everyone was repeating
this chart

from Pavlina Tchernava, showing that the gains from economic growth
after recessions used to go to the bottom 90 percent of the income
scale, but that has completely reversed, to the extent that in the last
economic cycle, more than 100 percent of the gains accrued to the top 10
percent. Part of what the Biden team is thinking through is how to learn
from the failed recoveries of the past.

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And therefore we have large deficits planned, with no concern about
inflation
.
We have fiscal support flowing in beyond what the experts who engineered
those bad recoveries say is needed to fill the "output gap." Instead
of just topping up enough to hit a statistical target, Biden's team is
buying recovery insurance
in the
hopes that enough of the money will leak out to support those who
actually need it. This is how you get the familiar refrain
of "the cost of
doing too little is greater than the cost of doing too much." It's a
popular approach

as well.

The Fed, in concert with the White House, plans to accommodate this

with loose money policies. You have a central bank unafraid and eager to
accept inflation above target for a little while. You have a
policymaking apparatus focused on full employment
,
unconstrained by persistently wrong arguments about how much the economy
can bear. By filling bank accounts and going above the timidity of past
recessions on both the fiscal and monetary side, we could actually see a
recovery that's broadly shared.

So put it all together: accommodative monetary policy, expansive fiscal
policy, and structural reforms, not around "competitiveness" but
around restoring public investment and building a half-reasonable
welfare state. It's not Abenomics but it definitely rhymes, and it
attacks similar policy targets, full employment being the biggest.

This is not a new posture, it's just a reversal of 40 years of
neoliberal/conservative ideology. Biden is a throwback "run it hot"
Democrat, who believes in pouring in money and public investment to
shape outcomes. He might think that's a return to the days of FDR,
though it's much more LBJ. And that's actually the one glaring
problem.

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As I noted yesterday
,
there's more in heaven and earth than the macro-economy. There are big
supply chain issues that demand reshoring. Over-financialization

of the economy ruins the chance for inclusive prosperity. Lack of access
to capital could prevent small business formation and subsequent job
growth. Bad housing policies threaten to eat up recovery funds. The
changing post-pandemic workplace

will strand a lot of economic activity.

In a brilliant New York Times op-ed
,
historian Louis Hyman explains that the forgotten power of the New Deal
lied in industrial development. That includes the Reconstruction Finance
Corporation's ability to finance public works, the Home Owners Loan
Corporation's rescue of the public's main capital asset, the Federal
Housing Administration's insurance that spurred the modern mortgage
system, the funding of rural electrification and the aerospace industry,
the policing of corporate power through the Antitrust Division of the
Justice Department, and the Securities Exchange Act's setting of rules
for financial markets. Roosevelt's project "rejigger[ed]
capitalism's tools for socially progressive ends," routing public
investment to the broad middle of society.

The lesson here is that untangling the 40-year mess will take more than
the right macro-economic policy. Bidenomics has the noble goal of
building back better, but you have to do it with more than throwing
money at the problem.

What Day of Biden's Presidency Is It?

Day 23.

We Can't Do This Without You

Today I Learned

* I was on Rising with Krystal and Saagar talking about the direct
payment debate. Watch here
.
(YouTube)

* Why is the Biden administration taking Betsy DeVos's side

in a loan forgiveness complaint? (Politico)

* Here are some of those people who are "too rich
"
for a check. Spoiler: they're not too rich. (HuffPost)

* Lisa Cook would be a fantastic member

of the Federal Reserve Board of Governors. (Axios)

* The White House considers domestic travel restrictions

to prevent the spread of variants. (McClatchy)

* So much of Trump's immigration cruelties came in the fine print of
forms
.
Biden's team must carefully root that out. (New York Times)

* Congress put in so many anti-fraud protections into this latest
version of the PPP that the money can't get out
.
(Politico)

* This is a terrible Greg Ip analysis

that gets one thing right: the OCC fight is a proxy fight about
Obama-era financial regulatory policy. (Wall Street Journal)

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