Evan Vucci/AP Photo
First100-021121
The spectre of Franklin Roosevelt looms large over Joe Biden's economic experiment.
It’s February 11, 2021 and welcome to First 100. You can sign up to have First 100 delivered to your email by clicking here.
First 100 logo
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.
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.
Read all of our First 100 Reports
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.
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.
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.
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.
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)
