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To credit President Joe Biden, his policies have not caused many of the economic problems we face today. But they made her worse. Even more worrying is that his policies could reduce future growth and make the economy less equal and less resilient.
The president doesn’t usually have much influence over the current economy; It does not fix energy or asset prices. But this administration was particularly prolific when it came to shaping economic policies, and most of those policies were bad for the economy. A healthy economy is growing, has low, stable inflation, is resilient to shocks, is able to develop and adapt to new technologies, and enjoys a degree of equity among its members. Biden’s policies undermine all of these things.
Biden insists the economy is strong, and to a certain extent it is: Unemployment is low and household balance sheets are still in good shape. But inflation is high, GDP numbers are weak, a recession is looming, post-inflation wages are falling and so is the stock market. Biden didn’t create inflation — that was the result of pandemic supply constraints, loose monetary policy, and Trump-era stimulus packages. But then, just as the economy was beginning to recover, America’s 2021 bailout plan came along and exacerbated inflation even further.
Economists estimate it was far too high and may have added 2 to 4 percentage points to inflation. America’s bailout plan, which added to the previous administration’s trillions of dollars in aid spending, was overdone in part because it gave bounty to families who didn’t need it — middle- and upper-middle-class families who get six-figure-deserving checks. This may have been politically popular at the time, but the inflation it causes is heavier for low-income earners, who are more price-sensitive, and will suffer more damage during a recession caused by anti-inflation efforts.
Nor is Biden responsible for high energy prices, which started to rise as we emerged from the pandemic and then rose even higher because of the war in Ukraine. But his rhetoric against oil companies — suspending leases on public lands, promising to stop using fossil fuels and asking oil companies to pay more for capital — reduced their incentive to invest in new production. He also scrapped the Keystone XL pipeline from Canada, which was scheduled for completion in early 2023. All of this leads to fewer energy sources and less resilience to international price shocks.
Biden’s next, and reportedly best, legislative accomplishment was the 2021 $550 billion infrastructure bill. And there are aspects that are good for the economy: improvements to ports and roads, building resilience to climate change, and increasing access to high-speed internet are winners. But how the implementation of these goals will develop gives cause for great concern. For example, the bill ensures that as many jobs as possible go to union workers. There is nothing fundamentally wrong with hiring unionized workers. But when government projects give unions a monopoly, it drives up costs and lengthens deadlines by years. A more competitive bidding process for labor would increase the chances that projects will do well and not cost taxpayers extra money.
Overall, little, if any, attention has been paid to cost control. The bill also includes plenty of money for politically favored projects, such as his government’s infatuation with passenger rail and electric cars.
Investing in the economy can pay off, but like any investment, it must be well-targeted and not overly expensive, or else it will only increase the deficit without generating much growth. And more debt makes the economy less resilient, because higher interest rates mean there’s less room to spend in the future when we really need it.
This year’s $280 billion CHIPS bill suffers from many of the same problems as the infrastructure bill. The aim is to increase the production of business-critical American memory chips. Funding for scientific research is great, and in theory, the bill aims to make the economy more resilient by relocating production of an important commodity. But the US lacks the skilled labor force to make the chips it needs. Even more worrying is the instinct for industrial policies that tend to make domestic industries less competitive, deprive domestic producers of high-value foreign inputs, and make goods more expensive.
It also creates more distortions in the economy by spending on favored industries. Again, the bill favors more expensive unionized workers who don’t have a strong track record of adopting new technologies. Innovation and the ability to adapt to new technologies are critical to a healthy economy. Industrial policy is tempting because you can direct money where it seems promising for growth. But even if the process is never corrupted (which it often is), picking winners is extremely difficult without market discipline.
Additionally, Biden’s “Buy American” regulations and new trade sanctions aim to reduce trading. Yet trade has been one of the major deflationary forces over the past 30 years. Resilience does not come from domestic production but from diversification – as with many sources of computer chips from a globally competitive market.
The 2022 Anti-Inflation Act at least claimed to address inflation, although much of the bill is devoted to spending, which is bad for inflation. The hope is that it will reduce future inflation by reducing the deficit over the next decade. But within weeks of its passage, any potential deficit reduction was reversed by the executive order regressively forgiving student loans.
It gets worse. Biden’s Labor Department wants to make it harder to hire gig workers. These jobs are an important source of additional income and flexibility for many families. Biden also vowed to keep entitlements like Social Security on an unsustainable path, kept Trump-era tariffs and hasn’t made reducing immigration backlogs (a big part of labor shortages) a priority.
The best that can be said about Biden’s economic strategy is that Republicans don’t have much better ideas. Regardless of what happens in the midterm elections, we need policies that restore dynamism and growth to the economy, rather than pouring money into pet projects and politically favored voters.
Events in the UK show that advanced economies are spending constrained, especially in a high-inflation environment where there are fewer foreign buyers of our debt. Resilience and growth are what the economy needs to bring down inflation and bring more prosperity, and this requires a functioning market that can share risk and trade as freely as possible. Biden’s policies don’t do that, they just get in the way.
More from other authors at Bloomberg Opinion:
Why breaking QE addiction is such a struggle: Daniel Moss
The inflation dispute between Krugman and Summers explained: Karl W. Smith
Biden’s SPR policy fails: elements of David Fickling
This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.
Allison Schrager is a columnist for the Bloomberg Opinion on economics. She is a Senior Fellow at the Manhattan Institute and the author of An Economist Walks Into a Brothel: And Other Unexpected Places to Understand Risk.
For more stories like this, visit bloomberg.com/opinion
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