Biden insists the economy is strong, and that is true to some extent: unemployment is low and family budgets are still in good shape. But inflation is high, GDP numbers are weak, a recession is looming, post-inflation wages are dropping and so is the stock market. Biden did not cause inflation – it was the result of supply constraints from the pandemic, loose monetary policy and stimulus papers from the Trump era. But then, once the economy started to recover, came the 2021 US bailout and made inflation worse.
Economists estimate that it was too large and may have added 2 to 4 percentage points to inflation. In addition to the trillions of dollars in relief spending by the previous administration, the US bailout was excessive, in part, because it gave generous benefits to families who didn’t need them — middle- and upper-class families who gave six-figure got their checks. This may have been politically popular at the time, but the inflation it caused was harder on lower-income earners who are more price-sensitive and would take more damage during any slump caused by anti-inflation efforts.
Nor is Biden responsible for the rise in energy prices, which started to rise as we emerged from the pandemic and then rose due to the war in Ukraine. But his rhetoric against oil companies — suspending leases on public lands, promising to eliminate fossil fuel use and asking oil companies to pay more for capital — dampened their incentive to invest in new production. It also canceled the Keystone XL pipeline from Canada, which was due to be completed in early 2023. This all adds up to fewer energy sources now and less resilience to international price shocks.
Biden’s next legislative achievement, presumably his best, was the 2021 infrastructure bill worth $550 billion. And there are aspects of it that are good for the economy: improvements to ports and roads, creating resilience to climate change, and expanding access to high-speed internet are all winning factors. But how these goals will be implemented is a major concern. For example, the bill ensures that as many jobs as possible go to union workers. In principle, there is nothing wrong with hiring unionized workers. But when government projects give unions a monopoly, they raise costs and extend timelines by years. A more competitive bidding process for labor would increase the odds of projects going well and would not cost taxpayers extra money.
In general, there has been little, if any, attention paid to cost control. The bill also contains plenty of money for politically favored projects, such as his administration’s fascination with passenger railroads and electric cars.
Investments in the economy can pay off, but like any investment they must be well-targeted and not too costly, or else they only increase the deficit without generating much growth. And more debt makes the economy less resilient because higher interest rates mean there will be less room to spend in the future when we really need it.
This year’s $280 billion CHIPS bill has many of the same problems as the infrastructure bill. It aims to increase production of US memory chips that are critical to the economy. Funding scientific research is great, and in theory, the bill aims to make the economy more resilient by reproducing the production of an important good. But the United States lacks the skilled workforce to make the chips it needs. Even more worrisome is the instinct of industrial policy-making which tends to make domestic industry less competitive, depriving domestic producers of high-quality inputs from abroad and making goods more expensive.
It also creates more distortions in the economy by spending on favored industries. Once again, the bill favors more expensive union workers, who do not have a track record of embracing the new technology. Innovation and the ability to adapt to new technology is critical to a healthy economy. Industrial policy is tempting because you can direct money to places that seem to show the promise of growth. But even if the process never fails (which it often does), picking winners is very difficult without market discipline.
Moreover, Biden’s “Buy American Products” provisions and new trade sanctions are intended to curtail trade. However, trade has been one of the biggest deflationary forces of the past 30 years. Flexibility does not come from domestic production, but rather from diversification – as in many computer chips sourcing from a globally competitive market.
At least the Inflation Reduction Act of 2022 claimed to address inflation, although much of the bill is for spending, which is bad for inflation. The hope is that it will reduce future inflation by cutting the deficit over the next decade. But within weeks of its passage, any potential deficit reduction was reversed through the Student Loan Forgiveness Regressive Executive Order.
It gets worse. The Biden Department of Labor is seeking to make it more difficult to hire temporary workers. These jobs are an important source of additional income and flexibility for many families. Biden also promised to keep benefits like Social Security on an unsustainable trajectory, kept tariffs in the Trump era and didn’t make easing the immigration backlog (a large part of the labor shortage) a priority.
The best that can be said about Biden’s economic strategy is that Republicans don’t have much better ideas. No matter what happens in the midterm elections, we need policies that restore dynamism and growth to the economy rather than shovel money into pet projects and politically favored voters.
Events in the UK show that advanced economies have constraints on what they can spend, especially in a high inflation environment where there are fewer foreign buyers of our debt. Flexibility and growth are what the economy needs to reduce inflation and bring more prosperity, and this requires a working market that can allocate risk and trade as freely as possible. Biden’s policies don’t make it happen, they just stand in their way.
More other writers at Bloomberg Opinion:
Why breaking the quantitative easing addiction is such a struggle: Daniel Moss
Explaining the Krugman Summers Inflation Dispute: Carl W. Smith
Biden’s Strategic Reserve Policy Fails: Elements By David Fickling
This column does not necessarily reflect the opinion of the editorial staff or Bloomberg LP and its owners.
Alison Schrager is a columnist for Bloomberg Opinion covering economics. Senior Fellow at the Manhattan Institute, she is the author of “An Economist Walks in a Brothel: And Other Unexpected Places to Understand the Risks.”
More stories like this are available at bloomberg.com/opinion