Government as a Pain Reliever: Go Big

Poor Joe Biden, cursed by his predecessor with an inheritance that makes his life difficult. That inheritance includes several successful vaccines and a distribution system that produced one million jabs per day before Biden moved into the Oval Office. And an economy that has such strong underpinnings that the Congressional Budget Office, hardly home to committed Trumpkins, is predicting that the economy will return to its pre-pandemic level by the middle of this year, and in the fourth quarter will top last year’s GDP by 3.7%, even if there is “no significant emergency funding or aid”, which is not exactly robust support for the President’s $1.9trn relief plan. Other forecasters are even more optimistic that the CBO.

All of which makes it difficult for the President to claim credit for the impending triumph over the pandemic and an economic recovery that has some observers talking about a 21st  century version of the 20th century post-World War I roaring 20’s. The 2020s, they say, will make the 1920s’ roar seem like a mere whisper.

But as it did during the primary season, Biden’s luck is holding. The behavior of Trump was so appalling that it obscured his policy achievements, positioning Biden, with the help of an adoring press unfazed by his inaccessibility, to claim them for his own. And Biden’s inheritance left much to be done, both now and in the longer term, work of the sort he has been preparing to do ever since he was elected to the senate almost fifty years ago.

One of the President’s endearing characteristics, completely beyond Trump’s understanding or grasp, is his capacity for empathy. And right now 10mn of the 22mn Americans who lost their jobs at the onset of the pandemic have yet to find work, while millions of others have taken pay cuts, are forced to work fewer hours or have dropped out of the work force. Little offsetting cheer from Friday’s jobs report: few (49,000) jobs were created last month, and revisions lowered job creation figures for November and December by 169,000. American workers need an empathetic President.

Biden’s much-touted empathy comes with its own dangers – a tendency to react to the misery of others with insufficient attention to the limits on the resources available to provide relief, and colleagues eager to free-ride on his empathy for their own more ideological purposes. When a surfeit of empathy and a shortage of fiscal prudence clash, empathy wins, even if prosperity is just around the corner.

Moreover, Biden’s concerns are not restricted to the U.S.: his “America is back” assurance to the world suggests that his eye is not only on the domestic sparrow and “the enormous pain in this country”, but on refugees, worldwide LGBTQI issues, and civilian deaths in Yemen.

Therein lies the clue to the long-run economic policy of the Biden administration, regardless of the ultimate scale of the President’s relief package. Start with this: the economic indicators that have in the past guided policy are so yesterday. Soaring share prices count for little, for two reasons. They were the metric used by Trump, and they affect only the lives of the mostly white, already-rich, to whom Biden’s empathy does not extend. The Pew Research Center reports that only 19% of households earning less than $35,000 own stocks, that the value of those holdings averages only $8,400. Comparable figures for households earning $100,000 or more are 88% and $139,000. Equally relevant to politicians, only 25% of Americans judge the economy’s performance by reference to how share prices are doing, while twice as many look to wages and job availability as their major indicators.

Another traditional indicator, GDP, might be worth a nod, but counts for little among this administration's policymakers. For one thing, it is close to holy writ among green analysts that GDP estimates do not reflect the environmental damage resulting from the creation of the goods and services that GDP measures. For another, they point out the even if the CBO growth projections are realized, the agency is anticipating that the unemployment rate will remain well above pre-pandemic levels for a decade. Reason enough to go big on borrowing and spending. Especially since many leading economists, among them Goldman Sachs’ Jan Hatzius, are advising that the burden of a national debt that exceeds GDP, once a canary in the fiscal coal mine, is “quite easily sustainable” so long as interest rates do not spike, which is not considered likely. Never mind that Bill Clinton’s former treasury secretary and an adviser to Barack Obama, Larry Summers, warns that a $1.9trn package is of such a magnitude as to be “a step into the unknown …” that could ignite inflationary pressures “of a kind we have not seen in a generation … [with] consequences for the dollar and financial stability.” Summers knows the difference between plain old spending and investment in the economy, favors the latter and says the Biden package “represents no increase in public investment…”. His zero popularity with the left wing of the party has dropped to levels more negative than real interest rates.

Traditionalists trying to figure out where Biden is taking the country are looking at metrics that might not even make their way to the President’s desk. Equally important, they might not be hearing the background music to which Biden’s empathetic ear is attuned. The first sound, when it comes to spending, is the “Go, Joe, Go” he hears in his left ear from a large faction of his party with visions of their Green New Deal dancing in their heads.

The second is the chant of the former Obama chorus that dominates the administration. They are convinced that the slow pace of the recovery from the 2008 financial collapse was due to their failure to do as treasury secretary Janet Yellen is recommending, “go big.” Finally, he hears the sound of an anvil chorus, noisily demanding that the President redistribute income. Raise taxes on corporations and “the rich” to fund increases in benefits and entitlements going to the less well-off. Transfer wealth from well-run states to debt-laden profligate states, or more vulgarly, from Republican to Democratic states. Replace the market as an allocator of resources with government regulations when the market produces results offensive to the empathetic.

There is a sense in which this is nothing new, merely Franklin Roosevelt’s New Deal Marque 2, reforming capitalism, and another sense in which, taken as a whole, it is indeed something new to America, a version of social democracy. FDR was sufficiently clever, wily and ruthless to keep his left at bay. Biden’s ability to do the same remains to be proven.