From California Capitalism to Bidenomics
The Biden administration's ambitious spending and investment programs are precisely what the US economy needs to thrive in the twenty-first century. Best of all, the economic strategy now being pursued at the national level has already proven highly successful in the country's wealthiest, most dynamic state.
BERKELEY – US President Joe Biden’s first months in office have been impressive. The number of COVID-19 vaccines that have been administered is more than twice what he promised, and the spread of the coronavirus has slowed sharply. In the first quarter of this year, the US economy grew by 6.4% (the fastest quarterly rate since 1984), owing to monetary and fiscal stimulus and the broader reopening of the economy.
Economists at Goldman Sachs expect the 2021 US growth rate to be the fastest in three decades and recent research by the McKinsey Global Institute finds significant acceleration in productivity growth to follow. Under Biden, consumer confidence has rebounded: 55% of voters feel good about the state of the economy, up from 43% when he took office and 34% in May 2020.
Many commentators have compared the Biden administration’s economic agenda to Franklin D. Roosevelt’s New Deal or to Dwight D. Eisenhower’s post-Sputnik expansion of federal science and infrastructure spending. But the best analogy for Bidenomics is California, which has pioneered a strategy of innovation-based sustainable and inclusive growth.
A fundamental component of both Bidenomics and California’s economic strategy is robust world-class research to support innovation in global growth sectors. It is these sectors that will drive productivity growth, create good jobs, and fuel US exports and wealth creation now and in the future.
California has led the United States (and the world) in innovation since World War II. It is home to a first-rate public college and university system, private universities like Stanford, CalTech, and the University of Southern California, and six federal research labs (along with hundreds of private ones). While skeptics have once again been proclaiming the impending demise of the California economy, the state has in fact extended its lead in the innovation economy during the pandemic.
A few indicators demonstrate the point. In 2020, more than 440,000 Californians started a new business, up 22% from 2019 and far exceeding all other states (not adjusted for population).
Moreover, in 2020, 50% of the country’s venture capital funding went to California – double the combined share of the next three states (New York, Massachusetts, and Texas). Of approximately 750 venture funding rounds or initial public offerings with valuations exceeding $1 billion, roughly 494 have been in California (San Francisco alone has had more than Texas, Florida, and North Carolina combined). And 17 of the 22 US startups ever to have been valued at $10 billion or more in a funding round are based in the San Francisco area.
Whereas the 236 publicly listed companies in Silicon Valley, Salinas Valley, and Monterey Bay had a combined market cap of $4.75 trillion a year ago, that figure has now surpassed $8.5 trillion, implying 80% growth in one year (and during a recession, no less).
Although the rest of the US cannot become another Silicon Valley, new mechanisms to spread investment and venture capital more broadly around the country certainly would help the national economy, not least by helping firms everywhere take advantage of remote work and other pandemic-driven trends. Likewise, a more open immigration system would allow the US to tap into a global pool of talent. It is worth remembering that around half of all Fortune 500 companies in the US were founded by immigrants or their children.
California has benefited greatly from its leadership in the innovation economy. With a highly progressive tax system that taxes capital gains as income, approximately 90% of the state’s income tax revenues come from the top 10% of taxpayers. And because innovation drives so much growth in the state’s capital and real-estate markets, it generates a large (but volatile) revenue base with which to invest in education, infrastructure, and safety-net programs. Even during the COVID-19 recession, California maintained a budget surplus, now projected to reach a record $75.7 billion for 2021-22.
That surplus is important for another reason as well. Like much of the rest of the world, California is already experiencing the direct effects of climate change. Wildfires and droughts have become annual events, as have hurricanes and floods in other parts of the country. A combination of drought conditions and record-breaking temperatures caused extensive fires throughout the state in 2020, and the dangers are even greater this year, which is why Newsom has proposed significant increases in fire prevention and forest resilience measures in the 2021 budget.
Unlike many other parts of the country, California has taken the lead in adopting policies to reduce carbon dioxide emissions and build a more resilient infrastructure. Through strict emissions and air-quality standards, carbon pricing, and public support for electric vehicles (the state’s largest export product in 2020), high-speed rail, and clean energy, the state is increasingly decoupling its growth from a carbon-based economy.
The Biden administration wants to pursue similar actions nationally. America has rejoined the Paris climate agreement and Biden is seeking congressional approval for billions of dollars in investments in clean power, electrification of transport and buildings, low-carbon manufacturing, public transit, and other key features of a green economy.
Moreover, Biden’s $2.3 trillion American Jobs Plan and $1.8 trillion American Families Plan include substantial investments in the country’s social infrastructure. These investments promise to scale up efforts, already underway in California, to strengthen the social safety net, open a path to a $15 minimum hourly wage, expand the earned-income and child tax credits, support paid family leave, and broaden health coverage.
The early public response to Bidenomics is extremely positive. With the exception of some Republican voters, many of whom still believe the 2020 election was stolen from Donald Trump, supermajorities of citizens (including Republicans) support key elements of the American Jobs Plan and the American Families Plan. Around 68% of Americans support the Biden administration’s infrastructure proposal, and 64% support its plan to expand health care, childcare, and other family programs.
Members of Congress should listen to their constituents and take a page from California’s playbook. A new era of sustainable, inclusive growth awaits.
Beware America’s Soaring Public Debt
In the near term, strong economic growth could shield US President Joe Biden from the consequences of his reckless spending. But if his administration’s growth forecasts prove excessively optimistic – or even if they turn out to be accurate – he may come to regret it.
STANFORD – America needs to rein in its soaring national debt. But US President Joe Biden seems eager to do just the opposite. The risks are too big to be ignored.
In the aftermath of the 2008 financial crisis, President Barack Obama ran the largest budget deficits of any president since World War II (adjusting for the automatic revenue and outlay effects of the business cycle). His successor, Donald Trump, surpassed him.
Biden plans to top them both. Though America’s gross federal debt now stands at 107% of GDP – a post-WWII record – the Biden administration’s 2022 budget has the country running by far the largest-ever peacetime deficits.
To be sure, I support policies to mitigate the short-run economic pain caused by a crisis like the COVID-19 pandemic and help spur recovery, as long as the long-run cost is reasonable. But Biden’s spending plans don’t meet that condition. Instead, they would create huge deficits that persist long after the economy is back to full employment.
For the five fiscal years from 2022 to 2026, the Biden administration would run deficits of 5.9% of GDP, on average. That level was reached only once between 1947 and 2008 – in 1983, when the unemployment rate averaged above 10%. But the administration’s projections put unemployment at 4.1% in 2022 and 3.8% from 2023 and onwards.
Biden claims his proposals will add only modestly to the public debt (which is set to grow anyway, owing primarily to ever-rising expenditure on Social Security and Medicare). But there are good reasons to believe otherwise.
For starters, the Biden administration hopes to offset higher spending by increasing corporate and capital-gains taxes. But these tax hikes are unlikely to pass an evenly divided US Senate as proposed. Moreover, such taxes are particularly harmful to growth, so if some version of them is enacted, the Biden administration will likely find that its revenue projections were overly optimistic.
Biden’s spending proposals also include several expensive entitlements, such as improved home care for the elderly and people with disabilities, universal free preschool, and two years of free community college for young adults. History suggests that such programs are likely to become permanent, with costs that grow far in excess of projections.
Meanwhile, even as China and Russia build up their militaries, Biden has placed a lower priority on defense spending, with an increase that does not keep up with inflation. Under his administration’s budget, defense spending will fall to its lowest share of GDP since before WWII.
Some argue that the US has nothing to worry about. Deficits supposedly don’t much matter when an economy borrows in its own currency; the US Federal Reserve just needs to buy up the debt from the Treasury. And with government-borrowing rates lower than the projected growth rate, the debt can be rolled over forever. Deficit finance becomes a “free lunch.”
These claims merit considerable skepticism. The reasons why are highlighted in recent technical papers by me, my Hoover Institution colleague, John Cochrane, Greg Mankiw and Laurence Ball (of Harvard University and Johns Hopkins University, respectively), and Boston University’s Larry Kotlikoff, along with his co-authors.
Historically, huge debt buildups have usually been followed by serious problems: sluggish growth, an uptick in inflation, a financial crisis, or all of them. We cannot be certain which problems will occur or what debt-to-GDP ratio will signal trouble for which countries. And the US does have the advantage of issuing the world’s leading reserve currency. But inflation risks are rising – a trend that more deficit-financed spending will only accelerate.
Higher debt also increases the temptation to stoke inflation, particularly if foreigners hold a large share of it. The grossly simplistic assumption that debtors are rich and creditors are poor is likely to reinforce this temptation, especially in a political climate where many politicians and voters support tax and other policies that target the wealthy.
Yet another problem is that more public debt will eventually push interest rates higher, crowding out investment and harming the economy’s potential growth. The Congressional Budget Office (CBO) expects ten-year Treasuries to rise sooner and faster than the Biden budget does.
While large changes in interest rates are unlikely in the near term, the fact is that financial markets and government and private forecasters have often failed to anticipate them – for example, during the inflation of the 1970s and the disinflation of the early 1980s. After 2008, all grossly underestimated how long the Fed would keep its target interest rate at zero.
Sooner or later, there will be another crisis. If the US government continues to expand its debt now, lack of fiscal capacity could hamstring its policy responses when the economy really needs the support. In the meantime, the advanced-economy debt deluge is making it harder for poor countries with limited debt capacity to respond adequately to the COVID-19 crisis, worsening the human tragedy.
Despite all of this, the argument that the US can finance its debts for free is pervasive, and it is encouraging elected officials to disregard fiscal discipline. This raises the risk that the Biden administration will not only spend too much; it will effectively throw money away, by funding projects with low – even negative – returns, much as the Obama administration did with its 2009 “stimulus.”
The content of Biden’s spending proposals is not encouraging on this score. Consider the $2 trillion American Jobs Plan. It is billed as an “infrastructure bill,” yet only a small percentage of the spending it includes would go toward traditional infrastructure. And even here, the CBO estimates a rate of return half that of the private-sector investment that will be crowded out.
In the near term, strong economic growth could shield the Biden administration from the consequences of its reckless spending. But if its mediocre long-run growth forecasts prove accurate – or worse, turn out to be optimistic – all of us, including Mr. Biden, may come to regret it.
Joe Biden’s Pro-Market Agenda
With a new executive order cracking down on anti-competitive practices across the US economy, President Joe Biden has set his sights on a problem that has been building for years. Workers, consumers, and small businesses are all being shortchanged, and it is government, not the market, that offers them the best hope.
NEW YORK – For free-marketeers, government is always the bad guy. As President Ronald Reagan memorably put it in his first inaugural address, “In this present crisis, government is not the solution to our problem; government is the problem.”
Since the 1980s, markets have been idealized as the only way to achieve an optimal allocation of resources. A sound economy is guided by the spirit of entrepreneurialism, not politics, because the price mechanism reliably conveys information about the value of goods and services. Buyers bid, sellers sell to the highest bidder, and all parties are well-informed, rational decision-makers. An equilibrium price is always reached, ensuring an efficient outcome. It’s a perfect world.
The real world, however, is not perfect. Market participants face transaction and information costs. Negative externalities and market failures are inevitable. Even ardent advocates of laissez-faire agree that some government intervention is sometimes needed, though the state should not do anything that will distort market outcomes.
But what if the greater distortion is coming from market players themselves? Given that today’s overlapping financial, health, and climate crises are fundamentally different from the “present crisis” that Reagan had in mind, we should consider whether it is now the market that is the problem.
The current US administration seems to think so. President Joe Biden’s July 9, 2021, executive order on “Promoting Competition in the American Economy” reads like a litany of market distortion and rigging. The list is long, but among those singled out are big players in the agricultural, health, financial, pharmaceutical, technological, and transportation sectors.
The executive order is an opening salvo against several problems afflicting the US economy. These include excessive consolidation within key industries; a lack of market transparency; unfair, discriminatory, and deceptive pricing; barriers to market entry erected by incumbent firms; and anti-competitive distribution practices. Among the victims are average internet users, social-media and retail-platform users, airline customers, new entrepreneurs, and a range of small- and medium-size businesses, including independent brewers and farmers.
All of these groups are being shortchanged by companies that distort the market to their own advantage. In this new environment, “buyer beware” is a hollow adage. Once upon a time, a farmer could inspect a cow before buying it. If he failed to notice that the animal was limping, that was his problem. But this kind of simple exchange between relative equals has been replaced by a highly uneven arrangement in which anonymous customers are pitted against big businesses in an asymmetric relationship that admits of no bargaining or negotiation.
Worse, the same big businesses have consolidated their dominant positions through a host of deceptive practices such as misleading advertisements, ancillary fees and other pricing strategies that impede product comparison, and measures to frustrate customer attempts to recover fees charged for services that were performed poorly.
In the finance sector, fraud, deception, and misrepresentation have long been addressed through regulatory oversight. Companies wishing to issue stocks or bonds on official exchanges must disclose information that investors need, and this compliance actively monitored and enforced.
To be sure, this system is far from perfect. In recent decades, regulators have been under-resourced, and there has been an expansion of private securities offerings. Still, the broader point stands: markets work only when everyone plays by the same rules.
Companies will always be tempted to flout the rules in order to gain an advantage. But in some sectors today, the erosion of the market principle has gone far beyond cheating consumers or hard-balling potential competitors. Pharmaceutical companies, for example, are major beneficiaries of legalized monopolies. They routinely profit from patents on innovative products derived from government-funded basic research, and regularly attempt to renew patents by simply tweaking the original compound.
But even these substantial legal subsidies apparently have not been enough for the industry. Big Pharma companies have engaged in further rent-seeking by driving up prices for prescription drugs and blocking the production or dissemination of generic and biosimilar drugs – even during the pandemic.
As for Big Tech, controlling customers and clients, and preemptively acquiring potential competitors, has become de rigueur. Dominant platforms portray themselves as pro-consumer even as they deny consumers any meaningful choice. For example, Amazon not only extracts hefty fees from retailers who effectively have nowhere else to go; it also directly competes with them.
Similarly, the major social-media companies have pushed many news outlets into bankruptcy by allowing their content to be featured without compensation. When Australia passed a law requiring digital platforms to compensate media companies, Facebook temporarily blocked Australian news links on its platform and threatened to leave the country altogether. (The company released its virtual chokehold only after reaching a deal with Rupert Murdoch’s NewsCorp, while smaller news outlets remained far from the bargaining table.)
But the ultimate prize for market distortion goes to employers. Across the board, big companies have used every trick in the book to dominate workers rather than compete for them. After decades of undermining unions and outsourcing jobs to suppress wages, employers have increasingly resorted to non-compete clauses to tie employees at all levels to the firm.
Such arrangements now apply to 28-48% of all employed people in the United States – everyone from restaurant workers to higher-level employees who have innovated and contributed substantial value to their employer’s bottom line (while being denied any claim to intellectual property they helped create). Those who try to leave are threatened with litigation, and US courts have long taken the side of employers, who remain free to fire employees at will.
These asymmetrical arrangements all smack of hierarchy, not of free markets that efficiently allocate resources, including human capital. Now that the Biden administration has set its sights on these neo-feudal practices, free-marketeers should be cheering the loudest.
The Antitrust War’s Opening Salvo
With a major new executive order calling for stronger enforcement of antitrust laws, Joe Biden has become the first president since Harry Truman to take a strong public anti-monopoly stand. And though his agenda will face insurmountable resistance in the courts, that does not mean it is futile.
CHICAGO – US President Joe Biden’s new executive order on “Promoting Competition in the American Economy” is more significant for what it says than for what it does. In fact, the order doesn’t actually order anything. Rather, it “encourages” federal agencies with authority over market competition to use their existing legal powers to do something about the growing problem of monopoly and cartelization in the United States. In some cases, the relevant agencies are asked merely to “consider” ramping up enforcement; in others, they are directed to issue regulations, but the content of those regulations remains largely up to them.
Nonetheless, it would be a mistake to dismiss the order’s tentative language as mere rhetoric. Antitrust is the main body of law governing market competition in the US, and it has been the object of sustained attack by business interests and conservative intellectuals for more than 50 years. Biden is the first president since Harry Truman to take a strong public anti-monopoly stand, and he has backed it up by appointing ardent anti-monopoly advocates to his government.
The executive order is ambitious in its scope and style. In strongly worded passages, it accuses businesses of monopolistic and unfair practices in major industries, including technology, agriculture, health care, and telecommunications. It laments the decline of government antitrust enforcement, and identifies numerous harms that have resulted – including economic stagnation and rising inequality.
The order also establishes a new bureaucratic organization in the White House to lead the anti-monopoly effort. Demanding a “whole-of-government” approach, it calls on the vast resources of numerous agencies, and not just the two that traditionally oversee antitrust (the Department of Justice and the Federal Trade Commission).
Still, the Biden administration’s antitrust agenda will face significant judicial obstacles. Over the past 40 years, an increasingly business-friendly Supreme Court has gutted antitrust law. In ruling after ruling, it has weakened the standards used to evaluate anti-competitive behavior; raised the burden of bringing an antitrust case; limited the types of antitrust victims who are allowed to bring cases; allowed businesses to use arbitration clauses to protect themselves from class action lawsuits; and much else.
On top of that, the Supreme Court has disseminated throughout the judiciary a generalized suspicion of antitrust claims. Judges at all levels have absorbed an academic skepticism about antitrust law that is now 30 years out of date. Accordingly, business plaintiffs are usually seen as sore losers who have resorted to the law because they were beaten in the marketplace. Consumer cases are attributed to the machinations of trial lawyers. The pretexts businesses offer for their anti-competitive practices are swallowed whole.
So, while Biden is right that “federal government inaction” is partly to blame for the decline in antitrust enforcement, there is little that his (or any) administration can do unless it has the courts on its side. This probably accounts for the order’s careful language. Agencies like the DOJ and the FTC would surely like to enforce antitrust laws more vigorously than in the past, but they are not going to commit resources to bringing cases that will fail in court.
Still, there are grounds for optimism in the near term, because the executive order has broken new ground with what it says about labor. For the first time ever, a US president has declared that antitrust law should be brought to bear against employers.
Unlike the tech, agriculture, and health-care sectors, labor markets received virtually no attention from the federal government until just a few years ago, and only baby steps have been taken since then. But as Biden’s executive order acknowledges, “Consolidation has increased the power of corporate employers, making it harder for workers to bargain for higher wages and better work conditions.”
This new focus reflects the influence of recent economic research showing that countless labor markets have become dominated by a handful of employers. Such concentration is partly the result of mergers and partly the result of the natural growth of large businesses, which often locate plants and warehouses in thinly populated areas where there is little competition for workers. Under these conditions, employers have the upper hand, resulting not only in lower incomes for workers but also in less economic activity and output, higher prices, and greater inequality.
Employers have also entered into anti-competitive agreements with one another to fix wages or to refrain from poaching each other’s employees. Back in 2010, Apple, Google, and other major tech firms received a slap on the wrist when it was discovered that they had agreed not to recruit one another’s software engineers. But a spate of more recent cases, including several criminal indictments brought against employers, indicates that the 2010 case was no anomaly.
There is also important new research showing that non-compete clauses that block workers from securing employment with their employers’ competitors have become ubiquitous. Biden’s executive order rightly mentions these clauses, which prevent workers from credibly threatening to quit when bargaining for higher wages. While these agreements supposedly protect trade secrets, that justification beggars belief, given that they also cover unskilled workers who have no access to such information. Moreover, California is one of the few US states where non-compete clauses are illegal, and it hardly lacks for innovation.
Adam Smith called labor-market collusion “the natural state of things which nobody ever hears of.” Fortunately, US courts have acknowledged that antitrust law applies to employment practices, so the federal government has significant scope for enhanced involvement in attacking labor-market abuses. A vigorous federal response could make real progress in helping workers. It is here that Biden’s contribution to antitrust enforcement may have its most significant impact.
To Promote Competition, Deregulate
In a sweeping new executive order, US President Joe Biden has called on regulators to push for greater competition across a wide array of sectors and industries. But sometimes regulation itself is a big part of the problem.
WASHINGTON, DC – US President Joe Biden recently issued an executive order calling on regulators to “further competition” in the shipping and rail industries, among others, because high and rising freight costs and delivery delays constitute a drag on economic activity by preventing businesses from obtaining timely inputs. But regulatory interventions won’t ameliorate that problem; deregulation will.
For over a century, US maritime transport has been regulated under the Merchant Marine Act of 1920 (the “Jones Act”) and the Foreign Dredge Act of 1906, both of which greatly restrict competition and raise costs. The Jones Act requires all shipping between domestic ports to be on vessels that are American-built (made with a majority of American-made parts), American-owned, American-operated, and manned by a crew that is at least 75% American.
The Case Against the Jones Act, a collection of essays edited by Colin Grabow and Inu Manak, details the many problems with this rule. For starters, the law both ignores and contributes to the fact that coastal cargo ships built in the United States cost six to eight times more than similar vessels built elsewhere. Moreover, labor costs are substantially higher for US ships, both because wages are relatively higher in the US and because the legally required size of coastal ship crews has remained unchanged, even as automation has enabled foreign shipping companies to reduce crew size and lower their costs. Restrictions on US dredging further exacerbate the problem.
The paradox of this protectionist rule is that it has led to a sustained decline in US shipbuilding, an increase in land-based transportation, unnecessary highway congestion, greater environmental damage, and an aging, smaller fleet that employs far fewer people than it once did.
Citing high and rising costs, Biden’s executive order aims to enhance US competitiveness and economic growth, improve occupational conditions for American workers, reduce environmental damage, safeguard national security, strengthen US infrastructure, and increase the number of “good” jobs.
It is rare to find a policy instrument that can achieve so much for so little. But that is exactly what repealing America’s damaging shipping regulations would do. Hawaii, Alaska, and Puerto Rico, in particular, would benefit immensely, because maritime shipping between them and the US mainland costs significantly more than it would without the Jones Act (which has even resulted in cattle being transported by air from Hawaii.)
The benefits of repeal would be far-reaching, starting with the effect on competitiveness and growth. High shipping costs raise the prices of imports used in manufacturing, which in turn raises the prices charged to consumers, making US businesses less competitive in foreign countries where other producers bear no such costs. An inefficient and costly transportation sector reduces the entire economy’s overall growth rate.
By unnecessarily increasing the cost of ships, the Jones Act deters US shipping companies from buying new vessels. Not surprisingly, at least half the US coastal shipping fleet is more than 30 years old, even though the ships’ economic life expectancy is about 20 years. It is estimated that there are only 99 active Jones Act ships, supporting 3,380 jobs at most. With deregulation, the industry could add more ships and thus more jobs. And the newer ships would be better for the environment and less accident-prone, providing a healthier workplace for more crew.
The environmental benefits would not end there. Freight carried by ship causes greenhouse-gas emissions that are 70% lower per ton-mile than freight carried by rail, and over 80% lower than freight carried by trucks. By allowing for much more freight to be shipped by water (at significantly reduced cost), repealing the Jones Act would relieve traffic congestion and delays on major US trucking routes. This also would further Biden’s infrastructure goals, by freeing up resources that otherwise would go to maintain the country’s over-burdened highways.
Since the Jones Act was enacted, the number of shipyards and ships built in the US has diminished greatly, except in the case of barges and related small vessels. As former US Maritime Commissioner Rob Quartel concludes in his contribution to The Case Against the Jones Act, the law’s restrictions “have led to the demise of American ships and shipbuilding and the subsequent loss of military support capacity, to the detriment of our national security.”
He also notes that the Jones Act has been suspended “for national emergencies…on the grounds that it was an impediment to national security.” More broadly, the national-security argument for requiring ships to employ American citizens makes little sense: foreign-flagged and foreign-manned ships enter US ports from overseas every day, and the airline industry may employ anyone who is authorized to work in the US.
In sum, the Jones Act has not served any of the purposes that its defenders cite. It has been detrimental to workers, the environment, and the overall economy, while benefiting only a very small group of people.
Fortunately, the law could easily be phased out over time, with offsets for any reduction in wages to seamen already in the industry. During the phase-out period, waivers could allow shipping to Hawaii, Puerto Rico, and Alaska. These could also be granted in cases where Jones-eligible shipping is not available, or where the costs or delays of using it are unreasonably burdensome.
Not all regulation is bad, and not all regulation is good. There is no question about how to categorize the Jones Act. If the Biden administration is serious about promoting competition and economic growth, it should look at regulations that do far more harm than good.
Is Bidenomics More Than Catch-Up?
The Biden administration's promises to "think big" and rebuild the country seem like a major historical departure from decades of policy orthodoxy. And yet, insofar as its agenda will merely help the United States catch up to other advanced economies, its main components amount to necessary but insufficient reforms.
PARIS – “Let us think big,” exhorted US Secretary of the Treasury Janet Yellen in May. “Let’s build something that lasts for generations.”
Such is the transformative rhetoric behind President Joe Biden’s economic-policy agenda. But what, exactly, will be built, and how will America be transformed? The answer is bound to be as much political as economic, because Biden has set out to respond to the anger that led many workers to vote for his predecessor, Donald Trump.
In recent weeks, much of the US policy debate has focused on the size of the Biden administration’s $1.9 trillion American Rescue Plan, with critics arguing that it represents excessive stimulus in an economy already on the mend from the recession and whose pre-pandemic state was very close to full employment. The rescue plan, however, is merely the first plank of a three-part domestic agenda that includes the $2.3 trillion American Jobs Plan and the $1.8 trillion American Families Plan, both of which aim to bring about more comprehensive long-term change.
But for all of its headline-generating spending figures, the Biden administration is largely playing catch-up. After all, the jobs plan is designed to make up for years of neglect by repairing some 10,000 small bridges and ensuring clean drinking water for all Americans. Such investments are indispensable, but they are not the kinds of things that elicit envy in other advanced economies. Likewise, 70.8% of US households have fixed broadband access, compared to 83% in France, so policies to expand internet access, while commendable, are not exactly pathbreaking.
The same applies to the families plan. Even if enacted in full, it will merely tackle glaring gaps in the US social model, by introducing or modestly expanding programs that Europeans have already had for decades. These include paid parental leave, affordable childcare, free preschool, and universal tuition-free post-secondary education for two years (though not at elite universities). And while the planned increase in the US federal minimum wage will certainly help workers, its current level is 40% below the German level.
Evidently, the US is also catching up on climate policies. The Biden administration’s recent commitment to achieve carbon neutrality by 2050 matches that of the European Union, and its 2030 decarbonization target is somewhat less ambitious than what is now under discussion in Europe.
Moreover, such reforms are unlikely to suffice to address the Democrats’ political problem. Their challenge is that white voters without a college degree – who formed the backbone of Trump’s support – still make up 41% of the electorate. Even assuming that new voting laws in many Republican-led states do not overly suppress black turnout, the Democratic coalition of black voters and educated elites remains at the mercy of a shift in public sentiment, leaving the party without a strong enough majority in the right places to guarantee victory in the Electoral College in 2024.
The Democrats’ imperative is to recapture the white working-class voters who backed Trump in 2016 and 2020. But since Bill Clinton’s presidency in the 1990s, the party has offered left-behind workers only two solutions: education and social benefits. As The Atlantic’s Ronald Brownstein recounts, Clinton’s mantra was that, “What you learn is what you earn.” He and Barack Obama strongly believed that more and better education was the best way to deal with the labor-market upheavals brought about by digitalization and globalization. (Europeans mostly shared this philosophy, though they placed a greater emphasis on social transfers.)
But workers do not agree. They do not want to live on welfare, but nor do they want to be sent back to school. Rather, they want to keep the good jobs that have long provided them with incomes and a sense of pride. Trump won in 2016 because he understood this sentiment and exploited it to win the working-class vote in key swing states.
And it’s not just America. Everywhere one looks, the left has lost the working-class vote. In the United Kingdom, Prime Minister Boris Johnson has conquered Labour’s “Red Wall”; in France, far-right leader Marine Le Pen has emerged as the candidate of choice for a growing share of workers; and in Germany, the Social Democrats seem likely to be crushed in the September elections. As Amory Gethin, Clara Martínez-Toledano, and Thomas Piketty show in a fascinating comparative paper, the traditional cleavages that structured postwar politics have collapsed across Western democracies.
Biden clearly understands this political shift. Last month, in his first address to a joint session of Congress, he made a point of noting that nearly 90% of the jobs created by his infrastructure plan will not require a college degree. But how can his administration actually deliver good jobs?
A first step is to keep the economy in a high-pressure state, as Trump did. There is ample evidence to show that this overwhelmingly benefits those on the margin of the labor market. Discouraged unemployed workers can find a job, and wage gains accrue disproportionately to those at the bottom. This is why the Biden administration is seeking to engineer an excess of demand, despite the risk of reviving inflation.
Investments in infrastructure and the green transition could also prove effective for winning back workers. The task of repairing bridges and insulating buildings can provide jobs to many manual laborers, at least in the coming years.
The Biden administration will likely call trade and industrial policies to the rescue. While publicizing its many sharp breaks with the Trump administration in most policy areas, it has been notably quiet on this issue. Most of Trump’s tariffs remain in place. Biden visibly wants to avoid accusations that he is sacrificing US manufacturing jobs in the name of globalization or economic openness.
Will Biden’s initiatives be enough? They might be sufficient to win the midterms and the next presidential election. But his administration is not offering yet a structural response to technological disruptions and the erosion of the advanced economies’ comparative advantage. To “build something that lasts for generations,” Team Biden will need to come up with more.