The passage of the Biden administration’s $1.9 trn stimulus bill marks a watershed in the global pandemic. The sheer scale of the intervention represents a decisive departure from the miserliness of the Clinton and Obama presidencies. Moreover, unlike deficit-busting Republican budgets since the 1980s, Joe Biden’s stimulus is heavily focused not on tax cuts for the richest but handouts for the lowest income groups, and is forecast to raise 13 million Americans out of poverty.
This is a sharply redistributive programme, comparable to Lyndon Johnson’s Great Society or Franklin D Roosevelt’s New Deal. It paves the way for a coalition of political support for macroeconomic policy which, instead of defaulting to government penny-pinching and monetary tightening, offers broad support to ordinary Americans.
The spare capacity of the US economy is huge, with around 10 million recorded to be looking for work. A major increase in government spending will pull those people back into jobs. Beyond that, consumers themselves have indicated a strong (and understandable) preference for holding on to whatever savings they have, fearful of an uncertain future. So while household savings have risen dramatically in the last year, this is unlikely to issue immediately in household spending. Far from stoking additional spending to inflationary excess, much of the government money is likely to substitute for weak household demand.
As a result, the howls about an inflationary spike from neoliberal holdouts like Bill Clinton’s former treasury secretary, Lawrence Summers, can be dismissed. Last year, Summers was among those arguing that Covid would have no long-term impacts: his belief that the fiscal stimulus risks “overheating” the economy is consistent with the conviction that it will rebound from the temporary (if unusual) shock of the virus.
In the short term, Summers is wrong. Yet like a stopped clock he may be pointing in the right direction. Inflation is a medium-term risk, but for reasons that are almost the exact opposite of those Summers has in mind. More than a shock to demand, Covid-19 represents a near-permanent constraint on supply. During the course of the pandemic, work in sectors across the economy either became impossible to perform safely, or could only be carried out with significantly increased costs: social distancing, for example, or additional protective equipment.
Vaccines will reduce, but not remove, those costs, at least over the period during which the virus becomes endemic. The implication is that all of our economies will be more constrained in the future: with lower long-run growth, and, in the medium-term, higher inflation, as the Covid price shock plays out.
Yet across the Western world, the central objective of economic policy has been supporting incomes as a means to support demand. This is why the focus in the US has been on the “stimulus”: the thinking is that as demand has drained away with the pandemic, with shops closed and most social life halted for at least part of the year, the government needs to step in to stoke it up again.
China, in stark contrast, has taken the opposite approach. Its own emergency coronavirus support has been substantial, but skewed heavily towards measures such as employee tax cuts for businesses and emergency loans for smaller companies. Investment in fixed assets, such as new buildings and machinery, is up, driven by public sector investment. China appears to have perceived the shock of coronavirus as a radical disruption not to demand, in the first instance, but to supply.
Interestingly, the Federal Reserve’s own projections tend towards long-term pessimism, with the central bank expecting long-run growth of just 1.8 per cent per year. But this could well prove to be optimistic: while some economists think the Covid shock will unleash a wave of innovation and investment in cost-cutting automation, the most likely impact will be large numbers of permanent job losses as companies seek to remove labour (now more expensive due to the virus) from production processes.
Management consulting firm McKinsey forecasts that 17 million American workers will have to change jobs before 2030 as the fallout from the pandemic interacts with the drive towards automation. This includes over 1 million office clerks, and 930,000 working in retail. Employment disruptions like this do not sit easily with projections of high growth.
In practice, this means that over the next year China’s restructuring and supply-side measures will have their demand-side complement in the US, with government expenditures there helping to prop up the market for Chinese exports, even if Chinese domestic demand remains relatively weak. This is the inverse of the situation in the years immediately after the 2008 crisis, when China’s spending was so large that it helped compensate for much of the developed world switching to austerity. Chinese demand meant that suppliers of raw materials and capital goods were kept busy across the rest of the globe.
The result, as economist Michael Pettis has pointed out, is for trade imbalances between China and the rest of the world to grow, with Chinese exports rising in parallel to imports elsewhere. Given that these imbalances have been at the centre of the recent “trade wars” between the US and China, and since China’s supply-side focus – including huge investment in research and development – is geared towards securing greater domestic technological capabilities, these geopolitical disputes are unlikely to fade any time soon, and could worsen. In effect, US government spending will help to pay for China’s supply-side reforms.
It is not clear that the Biden administration – committed, during the election, to a hard line on China and already following through on the promise, as its uncompromising position at the recent Alaska summit showed – will be entirely keen on this. The more the US domestic economy reflates, the greater this tension is likely to become. Leading economic historian Adam Tooze has hailed Biden’s stimulus package as the dawn of a “new economic era” but in geopolitical terms it is unlikely to completely break with the past, since the global tensions of the last decade will remain firmly in place. Those tensions will result in the coalition of support for deficit-financed redistribution of the kind that the stimulus package attempts may not hold together, given the US’s foreign-policy and longer-term economic objectives.
It took the Second World War to decisively end the Great Depression in the US: only what John Maynard Keynes called the “socialisation of investment” – taking major investment decisions out of private, profit-seeking hands – demanded by war production, and the alignment of this production with military objectives, enabled the US to sustain demand and overhaul its own productive capacity. In the absence of a major war, the Biden settlement could well be undone by its contradictions. The cost pressures of Covid-19 will eat away at domestic production, increasing, for example, the cost of employing workers across different sectors, while increased US government spending will fuel China’s advance.
The mechanism to resolve this tension peacefully is to insist on a domestic overhaul of the economy in two parts. First, creating new jobs centred on decarbonisation and care work, backed up by hefty taxes on the wealthy. Biden’s $3 trn investment plan to boost productivity, including by revamping the country’s infrastructure and enhancing domestic manufacturing, especially in high-tech industries, could be the basis for this.
Second, removing a greater part of the US’s productive potential from the market mechanism altogether. A rebalancing of the US economy should revolve around creating more non-work time and non-market consumption: more holidays; less time in work (with no loss of pay), increasing the efficiency of each hour worked without unleashing a rush of dollars into the world economy.
The US left, with its insistence on a “Green New Deal”, has led the developed world on the first part. Challenging the US’s long working days and short holidays would be an important step towards the second.