Biden's Neo-Populist Economic
Doctrine
Aug 3, 2021
NOURIEL ROUBINI
Within the space of just half a year, US President Joe Biden
has completed a necessary economic-policy regime shift that started chaotically
under his predecessor. But while the Biden administration has a much better
handle on the issues, that doesn't mean the new dispensation will be without
risk.
NEW YORK – About half a year into Joe Biden’s presidency, it
is time to consider how his administration’s economic doctrine compares to that
of former President Donald Trump and previous Democratic and Republican administrations.
The paradox is that the “Biden doctrine” has more in common
with Trump’s policies than with those of Barack Obama’s administration, in
which the current president previously served. The neo-populist doctrine that
emerged under Trump is now taking full form under Biden, marking a sharp break
from the neoliberal creed followed by every president from Bill Clinton to
Obama.
Trump ran as a populist – commiserating with left-behind
white blue-collar workers – but governed more like a plutocrat, cutting
corporate taxes and further weakening the power of labor vis-à-vis capital.
Nonetheless, his agenda did contain some truly populist elements, particularly
when compared to the radically pro-Big Business approach that Republicans have
pursued for decades.
While the Clinton, George W. Bush, and Obama administrations
each differed in their own way, their basic position on key economic-policy
questions was the same. For example, they all advocated trade-liberalization
agreements and favored a strong dollar, seeing that as a way to reduce import
prices and support the working classes’ purchasing power in the face of rising
income and wealth inequality.
Each of these previous administrations also respected the US
Federal Reserve’s independence and supported its commitment to price stability.
Each pursued a moderate fiscal policy, resorting to stimulus (tax cuts and
spending increases) mostly as a response to economic downturns. Finally, the
Clinton, Bush, and Obama administrations were all relatively cozy with Big Tech,
Big Business, and Wall Street. Each presided over the deregulation of goods and
services sectors, creating the conditions for today’s concentration of
oligopolistic power in the corporate, technology, and financial sectors.
Together with trade liberalization and technological
advances, these policies boosted corporate profits and reduced labor’s share of
total income, thereby exacerbating inequality. US consumers benefited from the
fact that profit-rich businesses could pass along some of the gains reaped from
deregulation (through lower prices and low inflation), but that was about it.
The Clinton, Bush, and Obama economic doctrines were all
fundamentally neoliberal, reflecting an implicit belief in trickle-down
economics. But things started to move in a more neo-populist, nationalist
direction with Trump, and these changes have crystallized under Biden.2
While Trump was more heavy-handed with his protectionism,
Biden nonetheless is pursuing similar nationalist, inward-oriented trade
policies. He has maintained the Trump administration’s tariffs on China and
other countries, and introduced stricter “buy-American” procurement policies,
as well as industrial policies to re-shore key manufacturing sectors. Equally
important, the broader Sino-American decoupling and race for domination in
trade, technology, data, information, and the industries of the future has
continued.
Similarly, although Biden has not formally followed Trump in
demanding a weaker dollar and browbeating the Fed to finance the large budget
deficits created by his policies, his administration has also enacted measures
that require closer Fed cooperation. Indeed, the United States has moved into a
de facto, if not de jure, state of permanent debt monetization – a policy that
began under Trump and Fed Chair Jerome Powell.1
Under this arrangement, if inflation were to rise
moderately, the Fed would have to adopt a policy of benign neglect, because the
alternative – a tight anti-inflation monetary policy – would trigger a market
crash and a severe recession. This change in the Fed’s stance represents
another sharp break from the 1991-2016 era.
Furthermore, given America’s large twin deficits, the Biden
administration has given up on pursuing a strong-dollar policy. While it does
not favor a weaker greenback as openly as Trump did, it certainly would not
mind a currency shift that could restore US competitiveness and reduce the
country’s surging trade deficit.
To reverse income and wealth inequality, Biden favors large
direct transfers and lower taxes for workers, the unemployed, the partially
employed, and those left behind. Again, this is a policy that started under
Trump, with the $2 trillion Coronavirus Aid, Relief, and Economic Security
(CARES) Act and the $900 billion stimulus bill that passed in December 2020.
Under Biden, the US has passed another $1.9 trillion stimulus package and is
now considering $4 trillion of additional spending on infrastructure, broadly
defined.
While Biden is pushing for more progressive taxation than
Trump did, his administration’s ability to raise taxes is constrained. Hence,
as under Trump, large fiscal deficits will again be financed mostly with debt
that the Fed will be forced to monetize over time. Biden also will be
channeling a public backlash against Big Business and Big Tech that started
under Trump. His administration has already taken steps to curb corporate power
through antitrust enforcement, regulatory changes, and eventually legislation.
In each case, the goal is to reapportion some share of national income from
capital and profits to labor and wages.
Biden has thus come out of the gate with a neo-populist
economic agenda closer to Trump’s than to that of the Obama administration. But
this doctrinal shift is not surprising. Whenever inequality becomes excessive,
politicians – of both right and left – become more populist. The alternative is
to let unchecked inequality become a source of social strife or, in extreme
cases, civil war or revolution.
It was inevitable that the US economic-policy pendulum would
swing from neoliberal to neo-populist. But this shift, while necessary, will
bring risks of its own. Massive private and public debts mean that the Fed will
remain in a debt trap. Moreover, the economy will be vulnerable to negative
supply shocks from de-globalization, US-China decoupling, societal aging,
migration restrictions, the curbing of the corporate sector, cyber-attacks,
climate change, and the COVID-19 pandemic.
Loose fiscal and monetary policies may help to increase
labor’s share of income for now. But, over time, the same factors could trigger
higher inflation or even stagflation (if those sharp negative supply shocks
emerge). If policies to reduce inequality lead to unsustainable increases in
private and public debts, the stage could be set for the kind of stagflationary
debt crisis I warned about earlier this summer.
Nouriel Roubini, Chairman of Roubini Macro Associates, is a
former senior economist for international affairs in the White House’s Council
of Economic Advisers during the Clinton Administration. He has worked for the
International Monetary Fund, the US Federal Reserve, and the World Bank, and
was Professor of Economics at New York University's Stern School of Business.
His website is NourielRoubini.com, and he is the host of NourielToday.com.
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