Thursday, April 8, 2021

Ip on Bidenomics

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: 


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. (I think Trumpism and the Republican Party can be described in more nuanced terms than "Rightward shift," but we can agree that the Democratic bases' loathing of Mr. Trump and Republicans was a driving force.) 

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. 



  1. Wokenomics is based more on fantasy than data. There is a long history of debt driven inflation crises to look at, but the woke don't bother with it.

    The woke views the role of government as to provide charity and equality. This will fail. The actual role of government is to enforce a law that encourages helpful behavior. When government fails to encourage good behavior, you're not going to get much of it.

  2. Is this a fair description of today's young economic scholars? Aren't the faculty teaching them when they were doctoral students not also the same group of students that experienced the 60s, 70s, 80s, and 90s...not just the zero lower bound regime?

    Economics in service of politics I would think disappears once you enter graduate school and the whole discipline becomes more of a mathematical and empirical exercise. That's when Economics really departs from politics and you study it purely from a scientific endeavor. Or maybe I am fully naive here.

    1. @James Carlyle My experience studying for a PhD has thus far been of the latter kind. Although you should regard economic models as incomplete and ultimately false description of the world, you can nonetheless get some sense of how well or poorly any given model manages to track key empirical features of relevant datasets.

      That process will not, in general, allow you to pin down a single best answer among all imaginable models, but it will allow you to considerably narrow down the set of admissible models. No matter how you try to approach labor market aggregated data, you'll find that (1) various measures of hours worked moved a lot with production growth, (2) productivity measures don't move as much and (3) real wages move less still. The same can be said about dozens of measures of interactions and delays in response, as well as more sophisticated statistics... A model should capture most of those things, at least broadly, before I take a model seriously.

      These people can try to sell me a salad dress with snake oil all day long, if you can't match key features and you can't rationalize at least some of the effects you have in mind a proper model, they might as well be measuring wind speed by licking your fingers.

  3. Economics? Science? No, there is an arithmetic problem: Budget constraints do not bind, for they do not exist.

    It is difficult to explain this attitude, except perhaps psychologically: Mommy and Daddy always gave me everything I wanted.

    This is not economic theory and it will die from a confrontation with arithmetic.

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  5. 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.---JC

    I do not think the Federal Reserve is responsible for low interest rates globally. Nor can the Fed force people to buy Treasuries at low rates, or German bonds or any other debt. Remember, we operate in globalized capital markets and money is a very fungible commodity.

    This suggests a new norm of capital gluts. Much of the developed world, including most of East Asia and Germany, engaged in forced savings, whether recognized or not.

    I disagree that the US must build up debts to keep the economy working full tilt. Money-finaced fiscal programs make a lot more sense to me. Why pursue debt peonage?

    However, if the Fed buys back sovereign debt then the US taxpayer is not truly leveraged. This solution also appears to work.

    Should we rely on only on the endogenous creation of money? That is, we must operate through a heavily leveraged fractional reserve commercial banking system, that borrows short to lend long. What could go wrong?

    Would anybody today, starting fresh, design a monetary system based upon clunky Federal Reserve and the clap-trap of our fragile fractional reserve commercial banking system?

    Why would you?

  6. Ip’s column should be read alongside Ezra Klein’s piece in today’s NY Times, where Klein tries to explain why Biden has embraced the radicalism of the left. Klein and Ip may disagree about whether Bidenomics is a good thing, but they seem to agree that the younger generation of economists have very different ideas than the older generation. That may or may not be true in some statistical sense—e.g., maybe a larger percentage of economists who earned their degree before 2000 oppose minimum wage—but I’ve got to believe that there’s still plenty of heterogeneity among the youngs.

    Politicians pick economists, not the other way around. And they don’t pick economists for their bold and bright new views. They pick economists who will muster evidence and arguments in support of the politicians views—which, if the guy is 78 years old and has spent his entire life in government, are unlikely to be either bold or bright..

    The poster child of this is Brian Deese who runs Biden’s NEC. He’s a lawyer who worked for Obama, left to work for Blackrock (where I’m sure his salary and bonus didn’t exactly reduce income inequality) and came back as a climate zealot—albeit one who isn’t much interested in nuclear power or carbon taxes.

    The point is that we can’t tell much about the state of economics by focusing on the people picked by Biden and fawned over by the usual fanboys in the media.

    With that said, though, I worry whether cancel culture will stifle dissenting voices in the profession. If a young Gary Becker were looking for tenure today, would he get it?

    Here's link to Klein's column (hope it works)

  7. Like a three year olds birthday party, it will all end in tears.

  8. Your comments reek of ideological/political dogma. We've already had a policy of constant stimulus for 20 years. Haven't we been running deficits? Haven't we been making a bee line for zero rates? Did Bidenomics drive massive stimulus spending in 2020? Did Bidenomics increase money supply by 20% in one year? If anything, Bidenomics should stop the debasement with plans to fund the next era of stimulus with raised tax revenues, instead of deficits! We've been doing the same thing for 20-30 years and it is not working well, maybe it's time to do something different? -Pragma

  9. "Economics is about incentives. Politics is about redistribution." Incentives mean I can take risks, fail or succeed because I have property and dominion in my person and what I produce. Redistribution is morally presumptuous as politicians believe the state has dominion and authority over me and my wealth. As an assertive libertarian, I am not the states were or coerced servant. As such, I am NOT duty bound to provide for others. Rather, I can freely choose to be charitable. Therein lies virtue. There is no virtue in forced redistribution of my wealth.

  10. Meant ward not were.

  11. Economists respond to incentives too. In ‘the old days,’ the ostensible goal of economics was to better understand real-world economic phenomena — ie, to make better predictions. In our post-modern world, the goal of economics is to justify policies that promote social justice and equity. Young economists can see that professional success these days is more likely when pursuing this post-modern goal.

    1. Or it could be that they see their policies as working on a better representation of real-world phenomena. You only notice it as ideologically partisan now because it runs contrary to your understanding.

    2. @Anonymous Mainstream economic theory has an extensive history of producing empirically falsifiable claims and hosting debates surrounding which models best fit what sets of facts -- all based on actual data and explicitly spelled out models you can simulate. DSGE models today are built around a core of the first of its kind put forth by Kydland and Prescott in 1982, but they are very, very different in the mechanisms they highlight -- we responded and continue to evidence of unsatisfactory performance.

      If you want to claim that the attitude of people pushing other points of views is rooted in empirically motivated analysis, the burden of that proof is on you.

      My experience reading so-called 'heterodox' literature (and I have read a lot of it as someone with degrees exclusively in economics) is that they make extraordinary scathing claims they cannot and do not properly substantiate before advancing laughably simplistic explanations and fail to propose viable alternatives to existing tools... It **sounds** fancy to point out problems with economic theory we have known since the 1950s, or hash out 150 years old debates, but it's really not -- and to present those critiques as an alternative as opposed to a complement speaks volume about their intentions.

      Austrian, Marxian, MMT, etc. Make the list you wish. The story is always the same. The only exception that comes to mind is behavioral economics and it happens to have done what I am saying others should wish to do: it goes "here's a convenient way to contrast and complement existing tools to make them work better."

      So, yes, I do think they are ideologically motivated. The entire point of MMT and Post-Keynesian proponents is to explain why the government needs to be more involved. If they have a sensible model of macroeconomics that can better reproduce cross-correlations and IRF estimates than, say, the NK model in Ascari, Sims and Phaneuf (2019), I'm waiting... Short answer is: they don't.

  12. Most of what appears under the 'new view' was discredited and disproved generations ago, so it's certainly not 'new'. And it barely constitutes a 'view', given that it ignores and/or forgets a massive body of knowledge and history. It's as if astronomy had been taken over by astrologers.

    In short, it would seem that Bidenomics is nothing more than...economics denial.

  13. "Bidenomics" and "Wokenomics" are both oxymorons: Neither are about economics.

    Although they DO offer incentives: incentives to vote for the party that offers equality of outcomes - rather than equality of opportunity - even for those who choose not not to take advantage of the opportunities.

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  15. An unusual post from John Cochrane. The tone is more circumspect, less self-certain. A more humble piece.

    What's happened to the eternal scientific verities? Newton's second law is proffered as an intuition pump.

    And here, finally we get to the root of the rhetorical problem. Economics studies complex systems, not simple ones. Biology, not Physics, is the correct hard sciences metaphor.

  16. There’s a middle path between the new view and the old view. Keynesian economics makes sense when interest rates hit zero in a recession. Higher government spending is required when people are not allowed to work in restaurants because of Covid.

    The Great Depression was a terrible thing. Getting out required changing the price of gold to increase the money supply and increasing government spending to jump start the economy.

    If the Fed could just lower interest rates and people would borrow and spend then the new view, which is actually the old view from Keynes, would not be needed and the old view would work fine.

    There is a time for Keynes and a time to worry about inflation. We can’t seem to generate inflation now. The economy has run well below capacity since 2008.

  17. I think that the economics of the situation are markers of a cultural problem. The reason the debt is so massive and the reason we're having to print the money in the first place is that we've debased our culture. Having isn't connected to earning. Success is not connected to work, it's connected to "equity," whatever that is.

    I blogged a much longer response here:

  18. "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."

    Say what you will about "Bidenomics" as a whole, this one does have a lot of intuitive appeal to non-economists (even those on the political right). In fact I'd suggest this has been the majority view for a very long time, and the sole reason it took so long to get here is that the parties could never agree on the exact mechanism for the stimulus everyone wants.

    Not saying that's the CORRECT answer, just that I'm not sure this one fairly portrays "new view" vs. "old view." I think it's more of a "PHD Economist" view vs. an "everyone else" view.


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