The shortcomings of bidenomics
US President Joe Biden set out to emulate Franklin D Roosevelt by spending huge sums of money, which FDR avoided doing until World War II. This threatens to trigger the kind of inflation that ruined Keynesian economic policies in the 1970s.
As of January 2021, the Biden administration has spent or committed to spend $ 1.9 trillion for immediate relief from Covid-19, $ 2.7 trillion for investment and business support, and $ 1.8 trillion for well-being and education. This represents $ 6.4 trillion, or nearly 30% of US GDP. The $ 1.9 trillion already provided by coronavirus-related spending will decline, leaving $ 4.5 trillion, or about 20% of GDP, to be spent over the next ten years.
The spending will be funded largely by bond purchases by the US Federal Reserve, with tax hikes to come. But will it represent the largest mobilization of American public investment since World War II, or rather inflationary madness?
We don’t know that yet, because we have no precise way of measuring the output gap, that is, the difference between actual and potential output, or, roughly speaking, the amount of slack in the output. saving that can be absorbed before prices start to rise. The International Monetary Fund predicted that the US economy will grow above its potential by the end of this year and that European economies will be close to their potential. This signals the coming inflation and the need to reverse deficit financing.
Against this static view is the belief – or hope – that government investment programs will increase the potential output of the US economy, and thus enable faster non-inflationary growth. Much of Bidenomics aims to improve workforce productivity through education and training. But it is a long term program. In the short term, “bottlenecks” on the supply side could lead to inflation. There is therefore a palpable danger that an overly ambitious agenda will give way to sudden policy reversals, another recession and disillusionment.
There’s a more stable course, but the Biden administration has ignored two sweeping suggestions that might make his life easier. The first is a federal employment guarantee. Simply put, the government should guarantee a job for anyone who cannot find work in the private sector, at a fixed hourly rate not lower than the national minimum wage.
Such a scheme has many advantages, but two are essential. First, a federal employment guarantee would eliminate the need to calculate output gaps, as it would target not future demand for output, but current demand for labor. This in turn underlies an unambiguous definition of full employment: it exists where all who are ready, willing and able to work have paid employment at a given base salary. On this basis, there is significant underemployment in the United States today, including among those who have withdrawn from the workforce or who work less than they want.
Second, the job guarantee acts as a buffer on the labor market which automatically expands and contracts with the business cycle. The 1978 Humphrey-Hawkins Law in the United States – which was never implemented – “authorized” the federal government to create “public employment pools” to balance fluctuations in private spending.
These reservoirs would deplete and automatically fill up as the private economy grows and shrinks, creating an automatic stabilizer much more powerful than UI. As Pavlina R Cherneva from Bard College said, a guaranteed employment “continues to stabilize economic growth and prices, using for this purpose a pool of employed people rather than a reserve army of unemployed”. No “management” of the business cycle, with its well-known political risks, is involved.
The second radical idea is that of the economist Vladimir Masch compensated free trade plan. America has lost millions of manufacturing jobs so far this millennium, largely due to the offshoring of production to cheaper labor markets in Asia. The counterpart to this has been a structural deficit in the US current account of about 5% of GDP on average.
One of the main goals of the Biden administration is to rebuild American manufacturing capacity. While Covid-19 has fostered conventional wisdom among all deindustrializing countries that they should reserve ‘essential’ purchases for domestic manufacturers, Biden’s’Made in americaThe efforts echo the “America First” approach of former US President Donald Trump. But Biden’s plan to rebalance U.S. trade through tax subsidies for domestic producers, trade deals, and international agreements, rather than tariffs and slurs, is vague and unconvincing.
In a world of second-tier options, the Masch plan offers Biden the fastest, most elegant way to secure the balanced trade he wants. The basic principle is simple: any government in a position to do so should unilaterally set a cap on its overall trade deficit and cap the value of permitted imports from each trading partner accordingly.
For example, China, which represents about 300 billion dollars of the current US trade deficit – half of the total – could be limited to $ 200 billion in annual exports to the United States. If China exported more, it could either pay a fine equal to its excess quota or face a ban on exporting excess.
According to Masch, compensated free trade “would stimulate a return to the United States of companies and offshored jobs”. It would also automatically prevent trade wars, because “any attempt by the surplus country to decrease the value of its imports from the United States would automatically decrease the value of its permitted exports.”
Policymakers seeking to stimulate the economy must pay more attention than Keynesians of the past to avoiding inflation and ensuring that job creation in the country is not offset by a capacity drain. production abroad. The Biden administration will have no choice but to learn these lessons. If it is wise, it will eschew both austerity and unfettered trade in favor of full employment and the manufacturing capacity needed to achieve it.