What’s the Biggest Thing to Happen in the Biden Administration So Far?
No, it isn’t the impeachment trial. No, it isn’t the executive orders. It’s this, as lucidly captured by John Cassidy of The New Yorker:
“If there were any doubt that Joe Biden’s economic proposals represent a big break with the policies of the Obama and Clinton Administrations, the debate about Biden’s $1.9 trillion covid-19 relief plan dispelled it. For good or ill—and, in my view, it is very positive—the Biden White House is pursuing a bold and aggressive program of Keynesian economic management, the likes of which Washington hasn’t seen since the nineteen-sixties.
The argument began, last week, with a warning about the Biden plan from Lawrence Summers, the Harvard economist who served as the Secretary of the Treasury toward the end of the Clinton Administration and as the director of the White House National Economic Council during Obama’s first term. Whatever good the Biden spending package might do in boosting output, wages, and profits, Summers wrote in the Washington Post, it was so large that it could also “set off inflationary pressures of a kind we have not seen in a generation, with consequences for the dollar and financial stability.” Over the weekend, Olivier Blanchard, a former chief economist at the International Monetary Fund, seconded Summers’s concerns, tweeting, “The 1.9 trillion program could overheat the economy so badly as to be counterproductive.”
Appearing on CNN’s “State of the Union,” on Sunday, the Treasury Secretary, Janet Yellen…said that the possibility of inflation picking up as the economy rebounds from the pandemic was “a risk that we have to consider,” but she also insisted that policymakers have the “tools to deal with that risk if it materializes.” Delighting Democrats who want to break with the past, Yellen emphasized the need to pull the economy out of its covid-19 slump rapidly and restore full employment. Citing a Congressional Budget Office study that predicted that the jobless rate wouldn’t return to its pre-pandemic level until 2025, she said, “There is absolutely no reason why we should suffer through a long, slow recovery.” CNN’s Jake Tapper pressed Yellen on how quickly the Biden plan might bring down the jobless rate, which is now at 6.3 per cent. (Before the pandemic, it was just 3.5 per cent.) Given the danger of making a bold promise that opponents could seize upon, most politicians would have punted on Tapper’s question. Yellen tackled it head on. “I would expect that if this package is passed we will get back to full employment next year,” she said…..
The message implicit in the Biden plan is that prior Democratic Administrations have been too modest in their ambitions and too committed to the old orthodoxy about the relationship between inflation and unemployment. Biden’s advisers haven’t made this argument explicitly, but Josh Bivens, an economist at the Washington-based Economic Policy Institute, laid it out clearly last week. “The U.S. economy has run far too-cool for decades, and this has stunted growth and deprived millions of potential job opportunities and tens of millions of potential opportunities for faster pay raises,” Bivens wrote, praising the Biden plan. Ever since the inflation of the nineteen-seventies, policymakers, led by the Fed, have sought to exert downward pressure on rising prices, a policy of “opportunistic disinflation,” Bivens noted. “The Biden plan is essentially the reverse of opportunistic disinflation—it’s opportunistic go-for-growth.”
As such, it marks a return to an older Keynesian tradition, which dominated economic policymaking in the nineteen-sixties, when the U.S. government sought to keep unemployment at very low levels to spur wage growth and capital investment. (In 1968, the jobless rate hit 3.4 per cent.) Skeptics will point out that this period ended with rising inflation and higher unemployment—the phenomenon known as stagflation. As Yellen made clear, the Biden Administration hasn’t discounted the risks of going big. But its policies are based on the conviction that these risks are far less serious than the danger of not doing enough to revive the economy and alleviate the suffering that Americans have endured over the past year. “We have got to address that,” Yellen said on CNN. “That’s the biggest risk.”
Somewhere John Maynard is smiling. As for Summers and the newly-awakened deficit hawks–to hell with them! Full speed ahead!