President Joe Biden dismisses orthodox thinking to promote more just and equitable growth, but his waking agenda could all end in tears.
From Jimmy Carter to Bill Clinton, presidents may have disagreed over borders, but free trade, controlling government deficits, and trusting markets were enduring ideologies.
This “Washington consensus” was not official policy, but it provided safeguards on national and international economic policy. And on the prescriptions that the United States offered allies and imposed on developing countries looking for help when they hit a debt crisis.
The free trade movement began with the Reciprocal Trade Agreements Act of 1934 and the General Agreement on Tariffs and Trade of 1948, but was derailed when President Donald Trump withdrew from the Trans-Pacific Partnership and imposed tariffs on aluminum and steel. Biden shows little interest in the new trade deals.
Carter started the Reagan Revolution by deregulating the airline, railroad, trucking and petroleum industries. Clinton capped it by effectively repealing Glass-Steagall.
Carter appointed Fed Chairman Paul Volcker, who wiped out inflation through tight monetary policy. This kept the federal government from borrowing too much for fear of accumulating interest carry charges, but the scarcity of money ended with the 2008 financial crisis.
President Ronald Reagan wanted less domestic spending to pay for his tax cuts, Carter and Clinton sought higher taxes to pay for their spending priorities, and the Carter-Clinton era ended with 1998 federal surpluses to 2001.
President George W. Bush, having lost the popular vote and dealing with a Democratic House and a tightly divided Senate, spent on prescription drug insurance, a big farm bill and the like, and bequeathed to President Barack Obama has a structural deficit of half a trillion dollars. .
The financial crisis has opened up a new path. Obama signed Dodd-Frank and posted a record number of pages of regulations in the Federal Register. Fed chairmen Ben Bernanke and Janet Yellen were never able to end the low interest rates and quantitative easing of the day – large Fed purchases of federal and mortgage securities.
With the Fed printing money to buy bonds, the pressure of interest carry charges eased and deficits exceeded $ 1 trillion even before COVID-19 hit. Biden’s expansive programs appear likely to push federal borrowing even further.
Now, Biden wants to reprogram American capitalism and culture to fight sexism, structural racism, and climate change.
The Federal Reserve is under pressure to develop policy to serve this agenda, and the Securities and Exchange Commission will support progressive groups to pressure private lenders in the same way. Biden’s infrastructure proposals would impose his social goals on business decisions.
Social efficiency is subjective. What criteria should central banks and private lenders use to assess a gender neutral or transgender-friendly workplace? Do we impose an ideological aristocracy of the awakened?
All of this can lead to poor investment choices from the perspective of promoting innovation, improving productivity, creating better paid jobs, etc.
Biden promises to halve CO2 emissions by 2030, but he cannot, for example, do much to accelerate the development of electric battery technology and allow private investors to build standardized charging stations to support the long distance commerce and travel.
Automakers are engaged in the transition to electric vehicles. They can better calibrate the pace to accommodate the limits imposed by charging times and the cost of battery capacity to avoid putting more vehicles on the road than changing charging infrastructure can. endure it. By pushing the process too quickly, through overly stringent emissions requirements and other mandates, federal policy would risk significantly crippling domestic transportation – not enough electricity where motorists and truckers need it and sometimes not. electricity at all.
Forcing homeowners to convert to electric heating would increase annual household costs by over $ 4,000 per year in the Northeast. With a median family income of around $ 60,000 in Maine, there wouldn’t be much left for discretionary spending after mortgages and rent, taxes and bare necessities.
The Fed’s bond purchase removes interest rates and makes federal debt cheap, but can also create zombie companies. Low-interest bond financing supports businesses that are unlikely to make a profit over the business cycle, but mobilizes capital and skilled labor that could flow into new businesses that are better equipped for the job. economic growth and employment.
In times of crisis, massive stimulus spending can create a Keynesian boom, but so many resources geared toward less than optimal goals have a way to catch up. This has been happening in Europe and Japan since the 1990s.
Growth will stagnate and Americans will fight for a smaller pie. It is not an attractive future.
Peter Morici is an economist and professor emeritus of commerce at the University of Maryland and a national columnist.