Biden’s Big (Fiscal) Deal
It’s been easy to miss, but we could be in the middle of a major shift in economic policy thinking in the United States. With media attention focused on extremist violence at the Capitol, it’s no surprise that the details of fiscal policy have taken a backseat in the popular press. If we’re lucky, though, the impact of those economic changes will have a longer legacy than the suddenly visible coalition of conspiracy theorists.
Political, situational, and generational trends have raised the prospects of an ambitious and far-reaching federal spending program to alter the economy for the first time since the Great Recession of 2007–09. And it’s likely that this time, such a program will be more on-par with the Great Society of the 1960s than the more timid American Reinvestment and Recovery Act of 2009.
First, and most important in actually enacting such a program, are the political trends. With all three branches controlled by one party (as of noon today), the Biden administration can spend its first two years setting the agenda, starting with an additional $1.9 trillion in stimulus spending. Without an overwhelming majority in the Senate, centrist Democrats will wield outsized power. While that might have made New-Deal-style programs untenable in previous administrations, pandemic politics play by different rules, with larger stimulus checks supported even by some Republicans. The economic fallout from the pandemic has also widened gaps in the GOP’s fiscal hawkishness that had begun to crack during the Trump administration. Some conservative wonks have begun to question “market fundamentalism,” while social conservatives have increased calls for family support. Whether this will result in bipartisan support for broad spending bills, it’s too early to tell.
A lot will depend on swing votes from centrist Democrat Joe Manchin of West Virginia. While Manchin has signaled support for larger stimulus checks (after first opposing the increase), he objects to the $15/hr national minimum wage, which is likely to face additional objections from states with low costs of living. Manchin’s reluctance to support increased minimum wage doesn’t stem from an opposition to large spending. Instead, he has pushed for an increased focus on infrastructure projects, rattling off numbers as high as $4 trillion to “get people back to work.”
Second, public health and monetary situations also make large-scale change more possible. The urgency of rolling out a national vaccine program and mitigating future virus spread has allowed for spending on a scale once thought impossible. The United States has spent a larger percentage of its GDP on COVID relief than most other countries. Historically low interest rates, and the likelihood that they will remain low for the foreseeable future, have made the cost of borrowing to enact big programs much lower. Concerns over increases in the national debt are now less pressing.
“The smartest thing we can do is act big,” Treasury Secretary nominee Janet Yellen said in her Senate confirmation hearing this week. “In the long run, I believe the benefits will far outweigh the costs.”
Third, a generational shift among economists is changing the ideology of their policy proposals. It would be naive to think that laws are made purely on the evidence and after careful study. But most big ideas began on some professor or professional wonk’s desk. And, while the economics profession was traditionally entwined with “market fundamentalism,” economic researchers have become less and less focused on theory. As the chart below shows, theory-focused economic research peaked in the early 1980s. More than half of articles appearing in top journals in 1983 were theoretical. Since the exponential rise in computing power, making large data sets easier and easier to analyze, economics papers have become increasingly empirical, or data-based. (Noah Smith breaks down this change further in this post.)
As leading economists who earned PhDs in the 1980s reach retirement age and younger ones with more empirical backgrounds rise to top leadership positions, the market fundamentalist nature of economic policy proposals will continue to decline. This shift has already begun, most notably on debates over the minimum wage. In 1978, 90% of economists reported believing that a raise in the minimum wage would substantially lower employment. By 2015, only 26% reported believing the same thing about the $15 minimum wage hike proposal.
This isn’t to say that such a large percentage of economists would support a national minimum wage. The nuances of the data show that minimum wages more than 60% of local median wages can start to hamper employment, which may give some leaders in low-cost states pause. The point is, this shift in thinking followed a lot of empirical research, and much less market fundamentalist dogma.
Let’s hope these three trends can break us out of partisan paralysis and help us starting thinking big again.