How Bidenomics Seeks to Remake the Economic Consensus Into Fake Economics

 Greg Ip at the Wall Street Journal

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If you studied, practiced or wrote about economic policy in the past few decades you probably absorbed certain rules about how the world worked: governments should avoid deficits, liberalize trade and trust in markets. Taxes and social programs shouldn’t discourage work.

This canon came to be known globally as the “Washington consensus” and in the U.S. as neoliberalism. The latter label has always been more popular with its critics than its adherents. Nonetheless, by fusing the free-market foundations of classical liberalism with some redistribution and regulation, the term broadly described the economic policy of western leaders from Ronald Reagan and Margaret Thatcher through Bill Clinton and Tony Blair to George W. Bush, Barack Obama and David Cameron.

Neoliberalism has since fallen from grace under former President Donald Trump and now President Biden. But where Mr. Trump’s populism was never grounded in economics, Mr. Biden’s embrace of bigger government is: not the economics of the establishment but of left-wing thinkers in academia and think tanks and on Twitter.

Their views aren’t unified or entirely original. They lean heavily on ideas first advanced by Britain’s John Maynard Keynes in the 1930s, Democratic presidential advisers Walter Heller, James Tobin and Arthur Okun in the 1960s and Larry Summers in the 2010s—who, ironically, is often branded as being the embodiment of neoliberalism. All considered fiscal policy critical to achieving full employment.

So while the successor to neoliberalism lacks a label, Bidenomics will do for now. Here are some differences between the old and new thinking, though this doesn’t capture the breadth of views across both camps and in the Biden administration itself.

Growth

Old view: Scarcity is the default condition of economies: the demand for goods, services, labor and capital is limitless, their supply is limited. Over time the economy tends to operate at potential, i.e. full employment, so faster growth requires raising potential by increasing incentives to work and invest. Macroeconomic tools—monetary and fiscal policy—are only occasionally needed to deal with recessions and inflation.

New view: Slack is the default condition of economies. Growth is held back not by supply but chronic lack of demand, calling for continuously stimulative fiscal and monetary policy. J.W. Mason, an economics professor at John Jay College of Criminal Justice whose writing is a sort of handbook of post-neoliberal thought, explained on Twitter: The “economy doesn’t operate at potential on average, but is normally (at least in recent decades) somewhere well below it.” That suggests, he said, that “‘depression economics’ applies basically all of the time.”
Inflation and Fiscal Policy

Old view: Fiscal policy shouldn’t push unemployment below the level that causes inflation to rise, which would force the Federal Reserve to raise interest rates.

New view: Fiscal and monetary policy should push unemployment as low as they can because low unemployment doesn’t cause inflation and if eventually it does, that’s socially much less costly than persistent unemployment.

Debts and Deficits

Old view: Because savings are scarce, government budget deficits push up interest rates and crowd out private investment and should be avoided except during recessions.

New view: Low interest rates globally show that savings are plentiful and demand is chronically weak, so deficits aren’t harmful and may be necessary. Mr. Summers has labeled this secular stagnation. “Modern monetary theory”—which few economists, even on the left, embrace—goes further, arguing deficits never crowd out private investment or raise interest rates.
Social Programs

Old view: Aid should be targeted to those who need it most because money is scarce. Aid should encourage work because that raises gross domestic product and confers dignity. Thus, unemployment insurance is better than rebate checks and support for the poor should be linked to work.

New view: Because money isn’t scarce—see above—aid can and should be universal so that no one falls between the cracks. GDP and paid work are overrated because much of what makes life worthwhile, such as caregiving, is generated outside the market. This is the rationale for universal basic income and, to some extent, Mr. Biden’s expanded child tax credit.

Markets and Incentives

Old view: High tax rates on income and profits discourage work and investment while high minimum wages reduce employment for the low skilled. Market mechanisms can achieve social goals such as lower greenhouse gas emissions more cheaply than fiat regulations.

New view: Monopoly power and barriers to market entry are pervasive, enabling the rich and corporations to accumulate far more wealth and profits—and pay workers less—than a truly competitive market would permit. Higher tax rates have little effect on incentives and higher minimum wages have no effect on employment. Market mechanisms like carbon prices perpetuate existing inequities.

Bidenomics in part reflects what economists have observed in the past 20 years: government debt rose sharply while interest rates fell and unemployment hit historic lows without unleashing inflation. New research found policies like minimum wages and tax cuts affected behavior much less than textbooks predicted.

But Bidenomics is more a political movement than a school of economic thought. The Democratic base has moved left, energized by inequality, climate change and the coronavirus pandemic, as well as by Mr. Trump and the Republican Party’s rightward shift. That base now seeks, through Mr. Biden, to reshape the economy and society for years to come.

The problem with economic policies subordinated to political imperatives is that they have no limiting principle: if $3 trillion in stimulus is OK, why not $6 trillion? If a $15 minimum wage is harmless, why not $30?

Mr. Biden can ignore limiting principles for now for one reason above all: interest rates are near zero. In fact, Fed Chairman Jerome Powell is the single most important player in Bidenomics. But low rates and the Fed’s relaxed attitude toward inflation are products of today’s circumstances, not permanent new features of the economy. The longer Bidenomics proceeds as if limits don’t exist, the more likely it is to hit them.