For Biden, these departures could be good news. His administration’s economic policy is in desperate need of an overhaul as it adjusts too slowly to a new reality that threatens both the health of the economy and the president’s chances of re-election in 2024. When he took office, Biden and his team thought they would tackle the same economic challenges that plagued their predecessors, notably a jobless recovery. (This happened amid sluggish job growth despite strong gross domestic product growth.)
It’s part of a larger economic trend that some economists call secular stagnation. Savings rates are rising around the world, especially in Asia, as is risk aversion. The global glut of savings has been sucked into safe-haven assets like U.S. Treasuries. A flood of inflows into dollar-denominated assets has pushed up the value of the currency, making imports more affordable for U.S. consumers. The result is an economy where borrowing is cheap but it is difficult to find productive investment that does not face the threat of low-cost foreign competition. The solution is to print more dollars and improve US competitiveness through deficit-financed corporate tax cuts.
That was everything before the pandemic. With that comes a fundamentally different economic reality. Large deficit spending may have fed global demand for national debt and kept U.S. consumers afloat, but supply chain disruptions have increased demand for U.S. investment and appear to be a direct result of Covid-19, with some 4 million workers disappearing from the U.S. labour market. So policies that were in place before 2020 are now disastrous. Consumer demand appears to be all but indestructible, with retail sales continuing to grow despite the Federal Reserve’s best efforts to rein it in by tightening monetary policy. Job security is strong because employers are reluctant to fire workers for fear they won’t be able to get them back.
The Biden administration has been notoriously slow to react to all this coming, promising earlier that rising inflation was the result of transitory factors rather than fundamentally strong consumer demand coupled with labor shortages across the economy. This is understandable. Turning points are difficult to detect in real time. Even more inexcusable is the continuation of pre-pandemic-style policies even now. Only at the insistence of West Virginia Senator Joe Manchin did congressional Democrats pass a stripped-down version of the Lower Inflation Act, whose only major inflation-reducing component was a $300 billion deficit cut. However, the White House depleted those savings in one fell swoop through its executive order to ease student debt.
It would be a mistake to interpret Democrats’ modest losses in the midterms as a sign that voters have no problem with the state of the economy. Instead, it was the public backlash against Jan. 6 and the MAGA movement more generally that saved the Democrats from midterm defeat. Biden’s approval ratings remain subdued, on par with Donald Trump during the same period of his first term.
If Republicans help Biden get Trump to run again, maybe Biden can win a second term just by continuing to do what he’s been doing. Otherwise, his government will need to get serious about the new economic environment. That means policies that reduce government spending, narrow budget deficits, and raise taxes. These types of policies would ease longer-term inflationary pressures and give the Fed breathing room to stop raising rates.
Emerging from the pandemic, countries are rightfully focused on making supply chains safer and less dependent on trading partners. Still, a Biden administration should aggressively seek to expand trade agreements with U.S. allies such as the U.K. and Japan in order to maximize cost savings from free trade without leaving the country vulnerable to sudden shortages. In addition, it should stabilize global energy markets in the long run by allowing reforms to encourage the production and export of U.S. natural gas.
This set of policies will help reduce domestic demand, increase the supply of goods and services available to consumers, lower inflation and show voters that the White House understands that times have changed. If the government fails to do so, it is likely that voters will force a change in 2024.
More views from Bloomberg:
• Democrats are screwing over debt ceiling: Jonathan Bernstein
• Biden economy second in midterms: Matthew Winkler
• Republicans have no plan to fix economy: Allison Schrager
This column does not necessarily reflect the views of the editorial board or Bloomberg LP and its owners.
Karl W. Smith is a Bloomberg Opinion columnist. Previously, he was vice president for federal policy at the Tax Foundation and an assistant professor of economics at the University of North Carolina.
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