Monday , May 17 2021

Ip on Bidenomics

Summary:
Greg Ip has a great column in the WSJ on Bidenomics.  It's not long, it's so well written that it's hard to condense the good parts, and you should really read it all. There is an intellectual framework to Bidenomics, and with that a scarily more durable move on economic policy. There used to be "certain rules about ...

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Greg Ip has a great column in the WSJ on Bidenomics.  It's not long, it's so well written that it's hard to condense the good parts, and you should really read it all. 

There is an intellectual framework to Bidenomics, and with that a scarily more durable move on economic policy. 

There used to be 

"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."

By contrast President Biden's (really his team's) "embrace of bigger government" is founded on different economic ideas. To wit, abridged: 

Growth

Old view: Scarcity is the default condition of economies: the demand for goods, services, labor and capital is limitless, their supply is limited. ...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.. said, that “‘depression economics’ applies basically all of the time.”

I guess I'm an old fogie. 

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.

I'm off in a third space here. The Phillips curve is not causal, inflation is not primarily caused by unemployment (known better as job search). But neither is the Phillips curve static and exploitable, a lesson I thought we learned long ago.

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.

Again, I like in a third space. One cannot look the data in the face and worry that deficits push up interest rates. Deficits do put us in danger of a sovereign debt reckoning. A minority view. But the new view that more debt is always good, or not a problem because we print money is absurd in my view. 

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.

I'm a bit more nuanced than the Old View here. Means-tested benefits that lead to lives of non-work are horrible for the people who face those disincentives, their families and communities. It's not just about GDP, which is mostly produced by high earners. But the new view basically denies incentives. Economics is incentives, politics is redistribution. 

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. 

Again, I'm a bit out of the box. The real problem with minimum wages is not total employment but that it hurts the most disadvantaged the most. But sign me up -- economics is all about incentives. 

In all these cases, though I have to point out the nuance of my views, really who cares -- Greg accurately describes the consensus that spans strange bedfellows from Reagan to Obama, and how different the new view is. 

Greg hits a nail on the head. Carbon taxes are the only thing that will actually lower carbon. Yet in the new view, every single action must on its own seem to reduce inequality -- no general equilibrium or offsetting actions allowed. You can't pass a carbon tax which doubles the price of gas, but you can force car companies to switch to electric which doubles the price of cars that the same disadvantaged must buy. 

Greg does not go on to the significant feature of Bidenomics, weaving social and racial issues along with climate dirigisme into every act of the Federal government. More is coming. 

This is an insightful column. There is an intellectual movement here. His analysis is also spot on. 

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.

In short words, none of this adds up. 

The movement raises a deep question. Is economics a science or a fashion? My commenters are likely to pounce, to ridicule economics as science. But first hear me out. Do we learn anything? Is there a cumulative knowledge? Do we not learn, to take one example,  that social programs in which you lose more than a dollar's benefits for each dollar you earn have bad outcomes, not just for the taxpayer but for people and communities involved? Don't call it science if that term offends you, call it knowledge, experience, lessons of history. Or is it fashion which may come and go as pleases? 

I feel unfashionably old, and recognize how widely the new views are held by young economists. But is there no claim on logic, and the distilled experience of centuries, that some old things are durable even if they're old? Am I old for holding on to F=MA (as a good low-speed approximation)? 

 Ip calls the New Economics  

"not the economics of the establishment but of left-wing thinkers in academia and think tanks and on Twitter."

I think Ip is behind the curve here. If you read what young economists are working on in conferences, SSRN, NBER working papers, seminar lists; Federal Reserve IMF and other agency research groups, you will see that these ideas are thoroughly absorbing the "establishment." 

Also these 

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. 

I feel for Summers here. Though I disagree with him on these issues, Summers' writings on "secular stagnation" and "hysteresis" in the last decade have to weigh as some of the most influential the decade has seen, inspiring much of the new view.  But the young have indeed thrown Summers under the bus. Kudos to Summers for speaking publicly that there is such a thing as too much fiscal stimulus, and this Administration is doing it. A bit like Mickey Mouse in the Sorcerer's Apprentice, the army of brooms is filling the castle with debt and disincentives, out of the sorcerer's control, and then throwing him out too. 

 

John H. Cochrane
In real life I'm a Senior Fellow of the Hoover Institution at Stanford. I was formerly a professor at the University of Chicago Booth School of Business. I'm also an adjunct scholar of the Cato Institute. I'm not really grumpy by the way!

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