The so-called “Washington consensus” is dead. This set of assumptions that has underpinned every American government since Ronald Reagan was based on a few core principles: governments should avoid budget deficits, trade should be liberalised, taxes and social programmes should not discourage work and the government should let markets work efficiently without interfering. These principles faded with the protectionism of the Trump administration, but we didn’t really know what would replace them until this month, when the Biden administration announced a series of fiscal stimulus measures that can be summed up as “Bidenomics.” While Bidenomics is in some ways an experiment, the rest of the world should watch closely as it could be transformational.
The Biden administration’s vision for the US economy is encompassed in the $1.9trn American Rescue Plan (ARP) that was passed in March 2021, the American Jobs Plan ($2.25trn), the American Tax Plan and the American Families Plan ($1.8trn). While the latter three have not been legislated for yet and may be whittled down to keep all Democrat senators on side, there is a clear message in the numbers: big government is back.
The blockbuster ARP was larger than most economists expected, providing cheques for individuals making less than $75,000 annually, extended unemployment benefits, continued eviction and foreclosure moratoriums, increased child tax credits, funding for state and local governments and subsidised Covid-19 testing, contact tracing and vaccination. The size of the envelope prompted some economists to fret the stimulus was too big and might overheat the economy, drive up inflation and force the Federal Reserve to hike interest rates.
The Biden administration is not worried about this. The ARP was more of a catastrophe mitigation programme, designed to make sure that small businesses and individuals weren’t falling through the cracks. It is the modern-day equivalent of the “relief” part of FDR’s “relief, recovery, reform” objectives in the New Deal. The real fiscal stimulus lies in the Jobs, Tax and Families plans.
When designing a fiscal stimulus programme, policymakers traditionally figure out the size of the hole that the economy has fallen into and then they come up with measures, work out how big the impact on growth will be and design a plan so that that hole is filled completely. But the Biden administration has ripped up the rule book. Rather than trying to nudge the economy back towards where it was before the pandemic, the President aims to transform the economy so that potential growth is fundamentally higher—he wants to live up to the slogan “build back better.”
For many economists, this is as exciting as it gets. The developed world has been stuck with low growth, low inflation and low rates for years. Experts disagree on whether this is a result of supply side constraints or weak aggregate demand. But whatever you believe, there is a common remedy for all of it: productive public investment.
The Biden administration seeks to focus public investment on infrastructure and human capital. The American Jobs Plan aims to upgrade traditional infrastructure like roads, bridges, ports and rail systems, modernise the electricity grid, build affordable housing, retrofit buildings for sustainability, install high-speed broadband and construct new green energy infrastructure like charging stations for electric vehicles. It also adopts a more flexible definition of infrastructure to include supporting care-taking roles and incentivising research and development.
The American Families Plan aims to extend the expanded child tax credit, provide tuition-free community college and pre-kindergarten, lower the cost of childcare for lower- and middle-income families, provide free or reduced-cost school breakfasts and lunches to those who qualify in the summer and over ten years scale parental, family and personal illness leave up to 12 weeks.
The capital expenditure involved in infrastructure spending will boost productivity growth. But the Biden administration is looking to boost human capital as well by supporting education, creating conditions that enable parents to work and upgrading the labour force. Infrastructure projects create the kind of high-wage, high-hour jobs that are needed. Green infrastructure does this doubly, as renewable sectors are more worker intensive than fossil fuel sectors. Care-taking jobs cannot be automated or sent overseas, and so the Biden administration has targeted them specifically.
This massive spending will be paid for over time primarily by corporations and wealthy individuals. To offset some of the increase in spending, the Biden administration aims to increase taxes on those making over $400,000 annually and to close loopholes allowing companies to escape the tax net.
Bidenomics will live or die on the alter of inflation. If the massive spending sustainably drives inflation up, the Fed may feel compelled to tighten monetary policy, pushing up borrowing costs and choking off the economic revival. The success of Bidenomics may also hang on politics. The Democrats have a razor-thin majority and many of the investment projects will only pay off over the medium- to long-term. If the Democrats lose control of Congress and the White House before voters feel the benefits, many of these measures could be reversed.
But there are reasons to think we don’t need to worry about a sustained spike in inflation. Inflation is increasingly determined by global rather than just national factors. Imports of goods to the US have hit record highs, and so some consumption will leak out of the country. If inflation remains muted elsewhere in the world, the US will be importing disinflationary pressures.
It is often in the face of crises and wars that bold new economic ideas are embraced. Council housing in the UK was born out of the First World War, and US social security emerged from the Depression. Bidenomics aims to be the latest example.
