In an article featured in the latest edition of Foreign Affairs, Jason Furman, a former chair of the White House Council of Economic Advisers and professor of economic policy at Harvard University, sets out what went wrong with “Bidenomics” – a post-neoliberal policy approach of running the economy hot and with a proactive industry policy. Australia does not have the benefits of financial power of the reserve currency, or a big and diverse economy like in the United States, but there is still much to learn from the Biden administration’s attempt to replace the neoliberal economic policy approach. Furman’s critique is a good place to start.
There are two central critiques of the neoliberal economic approach – inequality and externalities. Biden’s heterodox policies failed to address either of these critiques.
Allowing markets to operate relatively free from constraint, including relatively free trade, has winners and losers. The problem is that while the winners can compensate the losers, there is no guarantee that this happens. And the losers can be geographically or otherwise concentrated, as in rust-belt states, and non-college educated manufacturing workers. Markets take no account of either the direct costs to the workers and industries that lose their jobs and investments, or the indirect costs. These indirect costs can be considerable, ranging from opioid epidemics to secular stagnation as income and wealth gets more concentrated in higher saving households.
As Furman noted, US governments had traditionally expanded social safety nets, and/or middle class welfare, to reduce these indirect costs. But despite providing stimulus cheques to households, Biden failed to embed the expanded child tax credit, or raise the minimum wage, which would have provided a more long-lasting counterweight to market driven inequality.
Regulation has been expanding rapidly as politicians respond to concerns raised by interest groups. While many of these concerns are valid, too much regulation has lost sight of the aim of internalising externalities – forcing those making the decisions about what and how to produce, consume, or behave – to consider, and pay for, the harm that this does to others now and in the future. Economists prefer pricing approaches, but restricting choice through regulatory requirements is far more common. And even if prices (or fines) can be imposed, regulatory systems often become onerous, administratively costly and slow to make decisions. While the right to appeal decisions can improve fairness, it adds to costs and can be a mechanism for delay.
Furman rightly criticised Biden’s infrastructure investment policies for failing to address the regulatory barriers that have driven up the financial and time cost of building major infrastructure projects in the United States.
Furman’s other critiques focus more on the failure of Biden’s economic team to recognise inherent economic constraints on their post-neoliberal “heterodox” policy solutions. Furman lists the failure to recognise budget constraints, cost-benefit analysis, and tradeoffs as why Bidenomics did not deliver the promised rising real wages, manufacturing jobs, and infrastructure construction boom.
Furman points to the interest rate impact of rising deficit spending, but should acknowledge that the United States is in the enviable position of being able to finance an ever growing government debt at a much lower cost than other countries. As Liz Truss found in the United Kingdom, financial markets are much quicker to punish most governments for fiscally unsound policies.
But even the United States is not exempt from macroeconomic constraints as the combination of stimulus payments, backlog of deferred demand with record household saving, supply chain constraints, and government investment programs pushed inflation higher for longer. Private sector investment was crowded out by the increases in interest rates aimed at cooling demand, and by rising costs of construction as government projects competed for workers and materials.
Government activity will crowd out private activity where there are budget constraints.
Implicit in Furman’s critique is that the budget constraint applies to the workforce and the skills available as well as to the government budget. When rising demand hits budget constraint, prices go up. Workers and industries in demand (including foreign exporters) are winners, but others are losers as their costs rise faster than their wages or prices.
Biden’s industry policies came in for the same critique. Furman recognised that there could be national security objectives with the CHIPS Act, for example, which aimed to bring computer chip manufacturing back onshore. He is much more critical of Biden’s “localisation” policies, such as “Buy American” rules for government procurement, keeping the Trump tariffs, restricting imports of green technologies, and the massive subsidy and tax concessions for green technologies in the Inflation Reduction Act. These industrial policies have yet to deliver more manufacturing jobs, in part as it takes time to build new plants, but also because manufacturing continues to become more automated.
Furman makes the excellent point that targeted industry policies do not solve the winners and losers problem, it just changes who these are. There is a trade-off, and compared to the market-based solution of pricing carbon emissions, IRA is not only far more costly, but also much slower in delivering reductions in emissions.
As we often learn more from failure than success, there is much that Australia can learn from Bidenomics.
- Lesson 1: Heterodox policies (industry policy and labour market regulation) cannot replace redistributive policies.
- Lesson 2: Attention to the accumulation of regulation and the barriers they pose to efficient investment remains essential for economic efficiency – heterodox approaches should not add to this regulatory burden.
- Lesson 3: Government activity will crowd out private activity where there are budget constraints. This includes through the cost of capital (deficit financing), and in competition for workers and skills.
- Lesson 4: Industry policies create losers as well as winners – unless the industry policy also delivers on reduced externalities or improved national security the loss will exceed the gains (do a cost-benefit analysis).
- Lesson 5: National security can be a sound justification for an industry policy – but be aware of the costs – and whether it actually makes us more secure.
