President Biden’s approach to economic policy in its first 100 days can be summarized in just five words: ‘Go big or go home’. Following arguably the most difficult transition process in living memory, the administration hit the ground running with more executive orders, memoranda, and proclamations than most predecessors at the same point.
The Biden administration has so far promised more than $4 trillion in spending with more to come, far outstripping the fiscal response to the 2008 global financial crisis. But even more impressive than the numbers, ‘Bidenomics’ is building a new paradigm for America’s economic success.
Joe Biden has been much more active in undoing past actions than all his three predecessors, with 19 of his 39 orders revoking prior ones. When it comes to staffing up, his rate of Congressional nominations lags behind that of Obama at this stage of his presidency, but exceeds those of Trump, George W. Bush and Clinton. And his administration has also gone big when it comes to the size of measures as well.
Far larger support than expected
The blockbuster American Rescue Plan (ARP) passed in March 2021 amounted to $1.9 trillion, far larger than most economists expected. The ARP provides stimulus payments of $1,400 for those making $75,000 or less annually, extends unemployment benefit, continues the moratoriums on eviction and foreclosures, increases the child tax credit, provides funds for state and local governments, and subsidizes COVID-19 testing, contact tracing, and vaccination.
Most analysts anticipated the bill would be trimmed down to keep moderate Democrats onside or garner Republican support. Ultimately, the bill was passed through the ‘reconciliation’ process with a simple majority and the Democrats managed to maintain unity without reducing the price tag.
In fact, the debate among economists was whether the ARP was too big and risked overheating the economy and generating much higher inflation which, in turn, would prompt the Federal Reserve to tighten monetary policy and pitch the economy into recession.
The ARP should actually be considered more of a ‘catastrophe mitigation’ programme rather than a traditional fiscal stimulus – the modern-day equivalent of the ‘relief’ part of President Roosevelt’s ‘relief, recovery, reform’ objectives in the New Deal.
Usually when designing a fiscal stimulus, policymakers figure out the size of the hole the economy is in – the ‘output gap’ – or the difference between GDP growth and potential growth by choosing fiscal policies, measuring the multipliers of those policies, and trying to fill the hole precisely.
Although the ARP is several times the size of the output gap, government officials insist they are not worried it is too big because it is designed to get money to the most vulnerable and to provide a bridge to the other side. If some goes to those who do not need it now, it will still help power the recovery once the virus has been contained. And part of the ARP was earmarked to establish one of the fastest and biggest vaccination rollouts in the world to accelerate exactly that.
ARP is also just the first act, with President Biden announcing a $2.25 trillion Build Back Better (BBB) programme over the next eight years. BBB must still be legislated and, as with the ARP, it may pass through the reconciliation process with amendments to keep all Democrat senators onside. But its contours give insight into the priorities of Bidenomics.
BBB’s primary focus is infrastructure and jobs, upgrading traditional infrastructure such as roads, bridges, ports, and rail systems, modernizing the electricity grid, building affordable housing, installing high-speed broadband, and constructing new green energy infrastructure such as charging stations and retrofitting existing structures.
But it also adopts a more flexible definition of infrastructure in order to include the expansion of long-term care for older adults through Medicaid, investing in community-based violence reduction programmes, supporting research and development, and bolstering manufacturing.
Infrastructure projects are worker-intensive, and create the kind of high-wage, high-hour jobs that can help upgrade the US labour force. BBB also focuses on care jobs with an aim to transform them from low-wage, low-hour jobs to high-wage, high-hour as well. Care jobs cannot be automated or sent overseas, and the Biden administration has identified them as a way to support the domestic labour force. The administration is also supporting pro-union legislation that would make it easier for workers to organize and negotiate higher wages.
BBB will be paid for in part by raising the corporate tax rate from 21 to 28 per cent, establishing a 15 per cent minimum ‘book’ tax, increasing the global minimum tax, ending tax breaks for the oil patch, and ramping up tax enforcement. The Biden administration expects BBB proposal to pay for itself over 15 years.
But in announcing the programme, the president was careful to link US domestic policy with the country’s standing in the global economic order – particularly with respect to China. As Biden argues, China is ‘counting on American democracy to be too slow, too limited and too divided to keep pace … We have to show the world. Much more important we have to show ourselves that democracy works. That we can come together on the big things’.
Bidenomics also represents a fundamental paradigm shift. BBB sounds the death knell for the neoliberal era first ushered in by Ronald Reagan, where markets were deemed to be efficient and best left alone to function. Neoliberalism was already being questioned as the global financial crisis showed financial markets could bring economies to their knees, while rising inequality caused people to question whether capitalism was really working for them.
The world is watching the US
Other countries will be carefully scrutinizing this shift to see if it does boost growth while addressing issues of inequality and sustainability, because these are not unique to the United States. Bidenomics should shape the debate elsewhere on whether to ‘go big’ on measures, and on the wider role of government in the economy. In the UK, there have already been leaks about proposed tax hikes to pay for the relief measures deployed over the past year, but Bidenomics suggests the UK government need not be hasty about withdrawing support and retrenching.
The same goes for the European Union (EU), which has deployed the Next Generation EU Recovery Plan with a focus on digitization and sustainability and suspended the fiscal rules in the Stability and Growth Pact. If Northern European countries rebound faster than Southern EU member states – as seems likely – the call for retrenchment may return prematurely. BBB absolutely dwarfs the Next Generation EU Recovery Plan, and Bidenomics suggests that rather than withdraw support, EU governments should double down on government measures and go even bigger.
BBB represents a watershed moment, redefining the role of government in the economy and directing investment into specific sectors and activities. The measures in BBB should not only reverse a long-term downward trend in public investment but also encourage private investment. The result could be an overall rise in national investment, offsetting some of the global savings glut which contributed to secular stagnation and kept growth, inflation, and rates so low for so long.
The sheer size of the BBB package suggests President Biden is trying to do something truly transformative. Bidenomics is focused on workers, inequality, and sustainability – all pillars which have not been supported enough since the global financial crisis.