I often learn more from people whose views partially overlap, than from those with whom I completely agree or completely disagree. Thus, I’ve learn a lot from reading Matt Yglesias’s Substack, even though he has a much more favorable view of the Biden administration than I do. In particular, he supports their early effort to pass major bills involving stimulus, and well as subsidies for things like infrastructure, clean energy, and technology.
But Yglesias also believes that the Biden administration went off course in 2022:
I published a piece on August 25, 2022 advising Biden to press pause on his flirtations with heterodoxy and congressional dealmaking and start listening to boring neoclassical economists. To my mind, that didn’t mean disavowing anything that he’d done in the first 18 months of his presidency. It just meant acknowledging that most of his pre-2021 policy agenda had been cooked up assuming depression-like conditions, and those conditions no longer applied. He’d taken big legislative swings, had some good hits, and now it was time to play defense.
But the pivot never really happened.
Yglesias is much smarter than most of the policy advisors that Biden relied upon over the past few years. Many of them don’t really understand neoclassical economics (aka supply side economics), and this led to a series of policy initiatives that made inflation even worse:
I would not expect any Democratic administration to weaken Davis-Bacon rules as an anti-inflationary measure, even though doing so would advance a number of Biden’s stated policy objectives. But did Biden need to re-write these rules to be tougher than they were under Obama or Bill Clinton? Similarly, every president likes to tout “Buy American” rules because they sound popular, but Biden’s lawyers genuinely wrote stricter rules than his predecessors. They adopted stricter energy efficiency rules that will drive up prices. They raised tariffs on Canadian lumber. They raised tariffs on solar panels from Southeast Asia. Repealing the Jones Act would be a heavy lift, but Biden made Jones Act rules stricter. A lot of this can be seen as special giveaways to union interests, which is not always ideal but is at least part of a rational political strategy. But beyond that, what I think you see at work in some of the regulatory agencies is a completely sincere, completely non-cynical worldview that promoting high nominal wages is a path to national prosperity. The moves to implement stricter rules on au pairs or create stricter rules for agricultural guest workers don’t have any particularly clear interest group angle. They’re just small moves that drive up the cost of child care and food.
To be clear, it is the Fed that determines inflation over the longer run. But if the Fed sets its policy tools at a position likely to generate 6% NGDP growth, then the enactment of new regulatory measures that raise costs will temporarily shift that nominal spending from output to prices. Yglesias believes that this policy mistake may ultimately cost Biden the election.
The Trump campaign is also advocating policies that could lead to higher costs, such as a 10% tariff on all imports and the expulsion of undocumented workers. Trump also opposes YIMBY policies to allow the construction of apartments in suburban areas. But voters tend to focus on the record of the President that is currently in office, not the campaign promises of the challenger. And Trump benefits from the fact that inflation was relatively low during his tenure.
Because I am less Keynesian than Yglesias, I am much more skeptical of Biden’s early policy initiatives. But I do understand the Keynesian model, and thus I can easily understand why Yglesias has become increasingly frustrated with Biden’s approach to policymaking. Keynes believed the free market worked reasonably well as long as there was adequate aggregate demand. By 2022, the economy had recovered from the Covid recession and inflation had become a major problem. In that sort of world the rules of classical economics apply—industrial policies have real opportunity costs. It was time to focus on efficiency. In November, we’ll find out if Biden must pay a price for ignoring the advice of one of the Democrats more insightful pundits.
PS. In my view, the classical rules always apply. It’s always a good time to focus on efficiency. Thus I believe the Biden administration went off course long before 2022. Yglesias pointed me to an Ezra Klein essay from April 2021:
Biden has less trust in economists, and so does everyone else. Obama’s constant frustration was that politicians didn’t understand economics. Biden’s constant frustration is that economists don’t understand politics.
Multiple economists, both inside and outside the Biden administration, told me that this is an administration in which economists and financiers are simply far less influential than they were in past administrations.
Obama was re-elected against a mainstream Republican. Biden is trailing in the polls against one of the most unpopular politicians in American history.
READER COMMENTS
Thomas L Hutcheson
Jun 9 2024 at 9:43pm
Biden’s “stimulus” did not stimulate and neither his nor Trump’s deficits created inflation. The Fed stimulated a rapid recovery and the Fed created the inflation. The deficits just raised interest rates and reduced growth.
Scott Sumner
Jun 10 2024 at 11:48am
Perhaps it’s worth mentioning that Biden supported the Fed’s monetary stimulus (as did Trump), and indeed reappointed Powell because he believed Powell would continue the stimulus.
Richard W Fulmer
Jun 10 2024 at 9:29am
If consumers prefer dollars over goods, isn’t the market working? Presumably, consumers are responding to issues such as economic uncertainty, lack of investment opportunities, high personal or corporate debt levels, or an aging population. If so, then inadequate aggregate demand is a symptom, not a cause. Government spending might reduce some of the symptoms, but only temporarily if the underlying issues aren’t addressed:
Economic uncertainty – Inconsistent economic or regulatory policies, political instability, global stability issues.
Lack of investment opportunities – High corporate or capital gains taxes, complex tax codes, crowding out by high government spending, political or regulatory instability, excessive regulations, artificially high interest rates, restrictive trade barriers, rigid labor laws, weak or poorly structured IP laws.
Excessive Debt – Artificially low interest rates, tax deductions for interest payments, mortgage interest deductions, federal mortgage backing, relaxed lending standards, mortgage purchases by Freddie Mac and Fannie Mae, government stimulus programs, moral hazard caused by corporate bailouts and federal insurance programs, loose consumer credit policies.
Aging Population – High taxes, a tax code that penalizes marriage, high costs of education, restrictive immigration policies, policies encouraging early retirement, pension policies that reduce the perceived need for children, urban planning that ignores family-friendly amenities (parks, schools, playgrounds).
More often than not, the proper response is to reduce government intrusion rather than increase it. Of course, that’s not a message that most people in government want to hear.
Jose Pablo
Jun 10 2024 at 10:12am
Hear!, hear!
complex tax codes, to pick but one, it is just amazing how much time has to be devoted to making new business models tax-optimal. With no benefits for the quality or the appeal of the end product/service (quite the contrary).
Or the damage to optimal capital allocation by increasing the stickiness of capital.
And it is even more amazing the number of highly capable (and very expensive) professionals devoted to the task of optimizing other people’s taxes. This use of very capable resources (and their lavish offices) is just wasteful for the economy. One can only imagine what these people could get done if they were devoted to “honest” endeavors, instead of to looking for loopholes in the hundreds of pages of the tax code.
A one-page tax code could do wonders for the economy. Even collecting the same revenue.
Scott Sumner
Jun 10 2024 at 11:51am
“If consumers prefer dollars over goods, isn’t the market working?”
Not clear what you are saying. In the market for money, the Fed is the monopoly supplier. Are you saying that monetary policy can never cause problems?
If M*V are not at an appropriate level, in what sense is that the “market working”?
Richard W Fulmer
Jun 10 2024 at 12:27pm
Monetary policy can absolutely cause problems. What I’m saying is that the market (i.e., consumers and producers) decides M*V’s appropriate level. When consumers prefer to hold dollars, they’re expressing a preference, and they’re doing so for a reason. Why is their preference illegitimate? Why should the reason be ignored or discounted? Why should the Fed’s preference override the market’s, potentially causing the monetary problems you mention?
Moreover, why is a consumer preference to hold dollars considered to be a problem to be solved? Shouldn’t it more usefully be seen as a signal that something is wrong and needs to be addressed? We don’t cure a fever by adjusting the thermometer, or correct obesity by resetting the bathroom scales.
Scott Sumner
Jun 10 2024 at 3:35pm
What I’m saying is that the market (i.e., consumers and producers) decides M*V’s appropriate level.”
This is where we disagree. M*V is determined by the Fed.
Richard W Fulmer
Jun 10 2024 at 5:15pm
M is (currently) determined by the Fed, but V is determined by consumers. The Fed tries to offset the effects of rising or falling V by adjusting M. But, again, is that always, or even usually, the right response? Are they solving the “problem,” or are they just resetting the bathroom scales?
Scott Sumner
Jun 11 2024 at 12:18pm
They are trying to accommodate changes in the public’s demand for money, which seems appropriate.
Richard W Fulmer
Jun 11 2024 at 1:28pm
When I save money, I’m not doing so because I like little pieces of green paper – I want to store the value that those pieces of paper represent. By printing more money, the Fed steals some of the value that I’ve stored. So, putting more money in circulation doesn’t meet my demand, it thwarts it.
Jose Pablo
Jun 12 2024 at 8:29pm
But Richard, The FED has to thwart your demand because your demand is mistaken.
Keynes mentioned the “adequate” aggregate demand which necessarily implies that there is an “adequate” level of demand independent of what you individually believe.
And, as Scott mentioned, the FED intervenes when M * V is not “at an appropriate level” (which basically implies the same).
Are we, pour souls, going to know better than Keynes and the FED?
Jeff
Jun 14 2024 at 6:17am
Perhaps what Mr. Fulmer is saying that the folk understanding of money is just not compatible with the idea that M can be arbitrarily increased. So, much of the demand for money is based on a misperception of what “money” in the present context actually is. A small minority of people can sort of understand and intellectually get board with the idea that M is adjusted in response to changes in V such that overall inflation hits some de minimis quantity like 2%, for example. But when something like Covid occurs and it is revealed that this target is in fact very nebulous, and that regardless of changes in inflation or interest rates actual government revenue increases apparently remain off the table politically….money has become a concept which, having already drifted rather far from its ancestral folk origins, now seems almost totally unmoored and unintelligible.
Richard W Fulmer
Jun 14 2024 at 9:03am
No, I’m saying something different. My argument is that when enough people reduce their spending to the point that V falls noticeably, there is probably a reason for it. Further, I’m suggesting that it might be wise to try to identify that reason and correct it rather than automatically raising M to offset falling V.
Nine times out of ten, only federal policy has the nationwide scope needed to cause a significant drop in V, and I listed a number of possibilities above such as taxes and regulations. So, a drop in consumer spending is most likely an intelligent response to something stupid the government did. The Fed, however, does not have a rolled-up newspaper with which to bop Congress or the President on the nose when they do something wrong. All it has is one big lever called M. Because it can’t correct stupid, it can only offset smart.
Jeff
Jun 14 2024 at 4:10pm
I think the big V swings happen because people are scared or find their own lived experience unintelligible. The swings can be down (as in the aftermath of 2008) or up (as in the aftermath of 2020). Perhaps this can happen, as you note, because of policies that are just unambiguously bad or which are disguised to support an interest group in non-obvious ways. But I think the main reason is that we have simply not figured out a good way to harness technological developments in a way that improves people’s lives and instead have wittingly or unwittingly embraced constant “disruption” as if it were somehow a positive force. Technology can magnify the effect of latent suboptimal policies and turn them into “cheat codes” that can subsequently be exploited at scale, and it is bewildering to people when policymakers who are supposed to represent them seem hapless and/or helpless to do much about these issues.
Andrew_FL
Jun 10 2024 at 11:43am
Good thing he’s running for President, not Governor or Mayor, then
David S
Jun 11 2024 at 6:51am
Will Biden suffer the same fate as Carter? Or will he by like Reagan in 1984? Given the momentum visible in the economy a grinding recession by November seems unlikely, which puts Biden in a slightly similar position to Reagan.
Somewhat off topic: I consider myself an average American–I want to contain China’s bellicose posturing, but I also eventually want the option to buy a high quality electric car from BYD. I consider my position to be more reasonable than that of the billionaires who are supporting Trump because he’s promising to cut their taxes again. The Economist noted that these billionaires are making a bad bargain by going all in on Trump. No rich person has done poorly in the past few years—why are they anti-Biden?
Scott Sumner
Jun 11 2024 at 12:21pm
I suspect some billionaires want tax cuts. But in fairness, plenty of billionaires support Biden.
Yes, the economy is similar to 1984 when Reagan won a landslide. But Reagan followed Carter, whereas Biden is following a president where the economy went well (until Covid.)
Majid Hosseini
Jun 12 2024 at 2:21pm
For whatever it is worth, I’d argue Biden fundamentally misunderstood why he was elected and that has been the source of his unpopularity from the very beginning. He was not elected to be a transformative president, but rather a placeholder, and someone who would bring back some stability to the government after 4 chaotic years of Trump’sBut he went the opposite way, and in his early days met with historians to understand LBJ’s presidency. He initiated spending that was not in his mandate. Worse, he couldn’t even tackle Covid, which was his most important job. Every step along the way was filled with mistakes that could have been avoided (even the former NIH director Francis Collins admitted as much recently). The damage to public trust in public health institutions has been very significant and will take a long time to repair. He also didn’t surround himself with a competent team and instead went with identity politics at the time of a major crisis. Both his secretaries of HHS and Transportation are cases in point, but the list is very long.
I understand that your point is more about his economic mistakes, but I believe he was generally unaware of his abilities and responsibilities. The fact that he’s running again, at such an old age and clearly unfit for the job, is a testament to that fact. He should have stepped aside and allowed younger, more competent people to come forward.
Kester Pembroke
Jun 12 2024 at 5:08pm
If government spending is higher for the same amount of taxes and thereby leaves a higher budget deficit, that will tend to decrease demand and drive the price level lower. It is deflationary!
Think about it from first principles. If Parliament allocates a budget to a department and they draw it down, then that is now ‘100% borrowed’. Let’s say that’s the health service and they are trying to hire nurses, but there aren’t any. So the budget remains unspent. That ‘new money’ can’t cause inflation.
Now let’s say another department is able to hire one person at the price they want to pay, which means 20% of that spend is recovered in tax (say). But that person is a hoarder and saves all they receive. We now have one extra transaction, and a whole bunch of saving which shows up as ‘government borrowing’. Yet the private sector has only been denied the output of one individual with no downstream transactions.Run that on to the next hop, and the individual hired spends what they receive but the next person down the chain is the hoarder. We’ve now recovered 36% of the original spend in tax, but redirected two transactions. The rest is ‘government borrowing’.And so on down the chain. As the money is respent further, and therefore more tax is raised, more transactions are induced. And its the transactions induced that are potentially inflationary if they can’t be matched by increased production.
Money works this way:
https://www.taxresearch.org.uk/Blog/2023/04/20/government-spend-precedes-tax-in-the-real-world-but-not-for-the-reasons-some-supporters-of-modern-monetary-theory-suggest/#comment-929480
T Boyle
Jun 12 2024 at 9:22pm
“To be clear, it is the Fed that determines inflation over the longer run.”
With the minimum wage so much in the spotlight – and moving so fast – lately, it’s worth questioning that statement. Unskilled (or minimally-skilled) labor is a commodity. When the minimum wage is binding, it prices that commodity. Conversely, it’s equally true to say that, when the minimum wage is binding, it prices the dollar in terms of a commodity. In this sense, we have replaced the gold standard with a minimally-skilled-labor standard. If we raise the minimum wage, we will devalue the dollar – just as was formerly the case when we repriced gold under the gold standard. Devaluing the dollar is another way to describe inflation. Note that the minimum wage directly drives inflation: all other prices in the economy have to re-adjust to come back into equilibrium with the price of minimally-skilled labor.
Unlike the gold standard, however, the dollar can be depressed by a minimally-skilled-labor standard, but not have its value increased by it. That’s because minimum wage is a “no less than” requirement, not an “equal to” requirement. If the market raises the value of low-skilled labor above the minimum wage, it stops being binding and does not affect the value of the dollar.
Bottom line: whenever minimum wage is binding, it directly drives inflation.
Warren Platts
Jun 13 2024 at 12:35am
I would think that promoting high REAL wages is the path to national prosperity. Mass production requires mass consumption.
Cyril Morong
Jun 13 2024 at 10:57am
The Ezra Klein quote where he says “Biden has less trust in economists” reminded me of this quote from the old “Economics USA” TV series
“deep in his heart, Roosevelt simply did not trust theories or the economists who invented them.”
https://test-learnermedia.pantheonsite.io/wp-content/uploads/2019/02/economics-usa-great-depression-keynesian-video-transcript.pdf
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