After Neoliberalism

‘Bidenomics,’ explained
President Biden at a cabinet meeting, Washington D.C., November 2021 (CNS photo/Kevin Lamarque, Reuters)

A decade ago it was common to hear Republicans complaining about “Obamanomics,” but the term conveyed little meaning. “Bidenomics,” by contrast, does indeed describe a coherent set of economic policies that differ in substantial ways from what came before.

President Obama’s crowning economic achievement was the recovery from the global financial crisis—at the time the sharpest downturn since the Great Depression. But Obama relied far too heavily on the neoliberal playbook. He showed little appetite for challenging the dominance of market thinking or indeed the power and position of the financial sector. His solution was to shore up the large financial institutions that caused the crisis by making sure they had enough capital. He made no effort to bail out the ordinary homeowners who suffered immensely from the greed of Wall Street. As a result, more than 9 million families lost their homes. Unemployment stayed too high for too long. Peaking at 10 percent of the labor force at the end of 2009, it took until the latter half of 2015 to fall to 5 percent. And 95 percent of the income gains in the three years after the financial crisis went to the top 1 percent.

The extent of the problem was laid bare by economists Atif Mian and Amir Sufi in their book, House of Debt. They showed that the real problem was less financial fragility than excessive household debt, which held back spending and led to job losses. This, in their view, was what really caused the deep recession. The key point is that the architects of the Obama strategy misdiagnosed the problem as a lack of confidence in the financial sector, so they focused on protecting bankers and creditors rather than addressing deep-rooted problems in the real economy. A crisis that should have occasioned a radical reappraisal of neoliberal thinking instead led to its further entrenchment.

The doctrines of neoliberalism rose to prominence with the Reagan Revolution in the early 1980s. Simply put, neoliberalism taught that what matters most in an economy is efficiency and growth, and that those are best achieved by unlocking the dynamism of the private sector. All impediments to this dynamism need to be removed, especially where the state is involved. Accordingly, neoliberals pushed for low taxes, deregulation, privatization, a paring back of the welfare state, and an unshackled financial sector. As I argue in my book Cathonomics, neoliberalism largely failed even on its own terms: it did not deliver rising productivity and long-term economic growth. It also left massive inequality and major social and political upheaval in its wake. But its elegant simplicity seduced a lot of people. As the 1990s progressed, neoliberalism spread far and wide, across the world and across the aisle. In the United States, Presidents Clinton and Obama both failed to challenge its hegemony.

But things have begun to change. In his approach to economic policy, President Biden has broken with the neoliberal paradigm in substantial ways. A distinctive “Bidenonomics” can be recognized in five different areas: Keynesian demand management, pro-family social policy, infrastructure spending, industrial policy, and actions to push the energy transition.

 

Obama relied far too heavily on the neoliberal playbook. He showed little appetite for challenging the dominance of market thinking or indeed the power and position of the financial sector.

In the 1930s, John Maynard Keynes argued that governments could get the economy out of recession by replacing private with public demand. Since recessions were typically caused by a fall in private consumption and investment, the government could step in to temporarily take up the slack. This Keynesian demand management proved successful in the postwar era, managing to smooth out economic fluctuations and reduce the pain felt by ordinary people. But it fell out of fashion in the 1970s because of stagflation—the combination of high unemployment with high inflation.

With the Biden presidency, Keynesian demand management has come roaring back. Shortly after Biden’s election in 2021, Congress passed the American Rescue Plan Act. This injected $1.9 trillion of extra spending and lower taxes into the economy. It featured items like enhanced unemployment benefits and a child tax credit, but its signature policy involved sending $1,400 checks to qualifying households. Here was an attempt to directly protect ordinary people from the Covid recession and, in doing so, kick-start the economy. And in this it succeeded: employment growth has been spectacular, and unemployment is at a five-decade low of 3.5 percent. Contrast this with the much more tepid stimulus introduced by Obama in 2009. While it was probably all that could be done in the political climate of that time, the Obama stimulus—about $831 billion spread over ten years—proved insufficient to pull the economy out of recession quickly. Apart from its size, its composition was also a problem: it relied too much on tax cuts, which tend to deliver less effective stimulus.

Of course, when you run the economy hot, as Biden has, the big risk is inflation. And inflation is indeed what we got. At 8.2 percent, it’s at a forty-year high. But we shouldn’t read too much into this. Much of the inflation reflects supply bottlenecks arising from the unusual shutdown of the global economy in the wake of the Covid pandemic. More recently, some of it reflects rising energy and food prices caused by Russia’s war in Ukraine. But the American Rescue Plan Act probably did contribute to inflation. The Federal Reserve Bank of San Francisco estimated that fiscal stimulus added 3 percentage points to price increases. That’s not a huge jump in the grand scheme of things. I would argue that it is an acceptable price to pay for an economy that works well for workers—ample jobs and rising wages. The lesson from the Obama era is clear: it is better to err on the side of too much stimulus than on the side of too little. And now that the economy is strong again, the Keynesian response would be to withdraw fiscal support—as the Inflation Reduction Act does by reducing the deficit.

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The second area of Bidenomics is pro-family social policy. Last year, President Biden proposed a $1.8 trillion American Families Plan—a key plank of his Build Back Better agenda. The centerpieces of this plan were subsidized childcare, universal pre-kindergarten, paid family leave, free community college, and a child tax credit. It would be fully paid for by raising taxes on the wealthy, so that it wouldn’t increase the deficit and add to the already-large fiscal stimulus. But this is the one area of Bidenomics that has failed—at least so far. Biden was unable to muster the entire Democratic caucus behind this expansive initiative—or to get a single Republican to vote for it. That’s a real shame. Such a pro-family agenda would mark a return to the poverty-fighting policies that have been in abeyance during the neoliberal era. The brief experiment with a child tax credit in the American Rescue Plan Act managed to reduce child poverty by 40 percent. More broadly, the American Families Plan would fill in major gaps in the welfare state and help people navigate the growing challenges of balancing work and family in the modern era. Unlike neoliberal anti-poverty programs, which rely heavily on paltry but stigma-inducing means-tested benefits and work requirements, these new benefits would be both more universal and less conditional, which would also likely make them more popular.

 

The third area of Bidenomics addresses infrastructure. In the original Build Back Better agenda, the “hard” infrastructure of building things would stand beside the “soft” infrastructure of protecting families. But while the American Families Plan went nowhere in Congress, the Infrastructure Investment and Jobs Act passed and was signed into law earlier this year. This $1.2 trillion package is centered on building and renovating roads, bridges, ports, railways, public transport, airports, power, broadband, clean-water infrastructure, and a network of chargers for electric vehicles. It shouldn’t be controversial for the government to build things that the private sector can’t or won’t. Such investments will pay off down the line as the productive capacity of the economy is strengthened. Yet while the United States made major investments in public infrastructure from the New Deal onwards, this too has been on hold in the neoliberal area—based on the belief that the public sector is sclerotic and inefficient, and because the zeal for ever-larger tax cuts starved the government of funds. The Infrastructure Investment and Jobs Act marks a new departure and should pay major dividends in the years ahead.

With the Biden presidency, Keynesian demand management has come roaring back.

That brings us to industrial policy, the fourth part of Bidenomics. Industrial policy refers to taxes, subsidies, or regulations designed to stimulate specific industries or sectors of the economy. This is a no-no for neoliberals, who assume that a government attempting to “pick winners” interferes with free-market efficiency. Yet industrial policy has a long and venerable history. The Department of Defense developed what became the internet, President Kennedy’s “moonshot” created the space industry and associated space science, and the Human Genome Project was a government-sponsored program to sequence the human genome (which proved essential in developing recent vaccines). More generally, as economist Mariana Mazzucato has noted, a lot of modern innovation—including the internet but also smartphone technology and new drugs—comes not from the magic of the market but from public-sector research. We can also see the success of industrial policy in other parts of the world—most notably East Asia, where a private sector aided and stimulated by government policies led to rapid development. This explains much of China’s recent economic success.

So far, President Biden’s forays into industrial policy have been halting and tentative. The most prominent example has been the CHIPS and Science Act, a $280 billion package that offers subsidies and tax credits to companies that make computer chips in the United States and sets aside funds for scientific research in areas such as artificial intelligence, robotics, and quantum computing. For political reasons, the package has been promoted as a matter of national security—allowing us to onshore vital computer components so that we won’t be so reliant on geopolitical rivals, especially China—but the industrial-policy dimension of the CHIPS and Science Act will be more important in the long run. It remains to be seen whether it will be expanded in the years ahead. All we can say for now is that an important precedent has been set.

The fifth component of Bidenomics is the effort to promote the transition from fossil fuels to renewable energy. This is the centerpiece of the Inflation Reduction Act—a $369 billion package of subsidies and tax credits designed to stimulate renewable energy infrastructure, electrification, more energy-efficient homes and businesses, and the sale of electric vehicles. All told, these provisions are expected to lower greenhouse-gas emissions by 40 percent by 2030 (from 2005 levels), which makes the Inflation Reduction Act the most ambitious set of climate policies in U.S. history. Needless to say, achieving net-zero carbon emissions by 2050—the target established by the Paris Agreement—is the most important policy goal over the next three decades. And the Inflation Reduction Act puts us well on our way.

This, too, is a marked departure from the neoliberal era, which did little to avert climate change. It was partly because of how neoliberals viewed carbon emissions—mainly as a pricing problem. The price of carbon just needed to be increased to account for its true social cost. That would automatically create the right incentives to spur clean-energy investment. But this carbon-pricing logic missed an important political calculation. All across the world, rising energy prices would frequently be met by public uprisings and political instability. Relying on carbon pricing was never going to work, but a blind devotion to this strategy stalled the climate agenda for decades. By getting past this neoliberal obsession with “correct pricing” and instead using industrial policy to promote renewable energy, the Inflation Reduction Act puts decarbonization on a more politically sustainable path.

 

I would argue that an up-to-date vision of social democracy would go even further than Bidenomics does.

Taken together, the different elements of Bidenomics mean a greater role for the state. Some of Bidenomics is about protecting more people from the vagaries of modern capitalism by filling out the welfare state. But much of it—infrastructure, industrial policy, and climate action—works on the supply side, seeking to build out the productive capacity of the economy to meet the challenges of the twenty-first century. Estimates suggest that these three supply-side initiatives could create 30 million jobs over the next ten years.

But Bidenomics, despite its considerable achievements, remains an unfinished agenda. It remains to be seen whether the president can ever muster enough support for his pro-family policies. Much will depend on whether the Democrats lose control of Congress in the midterms. We can see a thin sliver of light through the tiniest of cracks as some on the pro-life political Right are now rallying around the need to provide low-income women with adequate health care and support for their children. Meanwhile, many on the “New Right” are less averse to industrial policy than their forebears. But there is unfortunately little appetite for broader social-democratic protections within a Republican Party that remains in the grip of neoliberalism. Perhaps that will change one day, but probably not soon.

One final point: I would argue that an up-to-date vision of social democracy would go even further than Bidenomics does. It would push for stronger collective-bargaining protections and workplace democracy, as well as substantially more progressive taxation. But for this more radical agenda to gain traction, we would need to see a complete break with neoliberalism. For now, Bidenomics marks an important step in the right direction. It is likely to be this president’s defining legacy.

Published in the November 2022 issue: 

Anthony Annett is a Gabelli Fellow at Fordham University and a Senior Advisor at the Sustainable Development Solutions Network. 

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