And the new view is ...
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.
Capital Thinking · Issue #827 · View online
Ip on Bidenomics
John H. Cochrane | The Grumpy Economist:
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:
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’m 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.
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.
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