The scene is a familiar one: a Democratic president pushing through an economic stimulus in an attempt to counter a dramatic recession. Twelve years ago, during the financial crisis, it was Barack Obama’s $787bn bill (5.5 per cent of GDP) that was passed by the US Congress. Although the emergency fiscal support appeared prodigious at the time, Keynesian economists warned that it was inadequate to meet the scale of the challenge. And so it proved: the US economy endured its slowest recovery from a crisis since the Second World War and the Democrats subsequently lost control of Congress to the Republicans.
Joe Biden, who served as President Obama’s vice-president, is haunted by that experience – and has clearly learned from it. Faced with the economic crisis triggered by the pandemic, he proposed a stimulus almost twice as large as his predecessor’s: $1.9trn (9 per cent of GDP). The bill, which was passed by the Senate on 6 March, includes one-off payments of $1,400 for Americans earning up to $75,000, the extension of federal unemployment support ($300 a week), $350bn of financial aid to state and local governments, $130bn in schools funding and a more generous child tax credit of $3,000 a child.
The 78-year-old Mr Biden, who was spoken of as a “transitional president” when he won office, is proving to be a quiet radical. In this regard he enjoys the public’s support: a poll by Monmouth University, New Jersey, found that 62 per cent of Americans approve of the stimulus programme, including more than three in ten Republicans. “The dangers of undershooting our response are far greater than overshooting,” observed Chuck Schumer, the new Senate majority leader. US unemployment stands at 6.2 per cent or around 9 per cent once economic inactivity is accounted for. But Janet Yellen, the Treasury secretary, has suggested that, owing to the Biden stimulus, full employment could be achieved by 2022.
“The era of big government is over,” declared Bill Clinton, a liberal optimist, in his 1996 State of the Union Address. In the years that followed, this belief was accepted as an incontrovertible truth by most Western parties of both the centre left and centre right. It was implicitly endorsed by Britain’s New Labour under the leadership of Tony Blair.
However, as a succession of crises have shown, rumours of the death of big government have been much exaggerated. The 2008 financial crisis and now the pandemic have heralded the return of the state as a defining economic player.
Mr Biden’s stimulus reflects a shift in attitudes on the right as well as on the left. It was Donald Trump who exposed the illusion of limits on US government borrowing when he introduced tax cuts worth $2trn. He subsequently united with the Democrats last December in supporting proposed coronavirus stimulus payments of $2,000.
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Mr Trump is not alone in his disdain for fiscal conservatism. At this year’s Conservative Political Action Conference in Florida, few activists demanded a return to the Clintonite era of limited government and budget surpluses. A manifesto published in 2019 in the journal First Things, a bastion of the intellectual right, was emblematic: it called for “a political movement that heeds the cries of the working class as much as the demands of capital”.
In Britain, a Conservative chancellor, Rishi Sunak, has pledged to increase corporation tax from 19 per cent to 25 per cent, which would reverse most of the cuts made by George Osborne. In other respects, however, Mr Sunak has defaulted to fiscal orthodoxy. His £65bn stimulus amounts to only 3 per cent of GDP compared to Mr Biden’s 9 per cent. He has frozen public sector pay and pledged to impose £17bn of spending cuts, which the Institute for Fiscal Studies has warned cannot be achieved “without considerable pain”.
By embracing austerity, Mr Sunak has placed himself outside a new global consensus. His wager is that the UK economy will recover swiftly from the worst recession for 300 years. Should he be wrong, Mr Biden’s state activism will offer an alternative path.
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This article appears in the 10 Mar 2021 issue of the New Statesman, Grief nation