For the next two years, Biden needs to bring back the economists

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For the next two years, Biden needs to bring back the economists

Matthew Yglesias

10 - 12 minutes

Back in April of 2021, Ezra Klein wrote what I think is one of the most important columns of the Biden era explaining that economists and “thinking like an economist” had a reduced role in the Biden administration relative to the administrations of Barack Obama and Bill Clinton.

You can see that in a literal sense where the heads of the NEC and OMB don’t have degrees in economics. Or in a looser sense that economists Heather Boushey and Jared Bernstein on the Council of Economic Advisors are D.C. policy hands, not academic economists on loan to Washington. But you also see it in the policy approach. If you ask former Obama staffers with economics PhDs, they are very down on student loan cancellation. If you ask non-economists who work in Democratic Party politics, they’re way more enthusiastic. It’s not like there are no economists working for Biden or that Janet Yellen and Cecilia Rouse have no influence. But, as detailed in recent books by Elizabeth Popp Berman and Binyamin Appelbaum, there’s an economics style of reasoning that was very influential under Biden’s predecessors that has been less influential under Biden.

And I think that’s reflected in Biden’s major achievements.

He did a major climate bill that totally eschews carbon pricing in favor of industrial policy. There are problems in the economy, but a weak labor market is not one of them because the American Rescue Plan went all-out on stimulus. The Democratic Party is united rather than wracked by infighting over trade and teachers unions, yet Biden has still managed to do a lot of bipartisan legislating. It turns out that relaxing on the technocratic fastidiousness can improve both partisan solidarity and cross-aisle outreach because you’re simply doing politics in a more political way.

It’s not like any president ever governed as a pure technocrat — you can’t take the politics out of politics — but Obama leaned in the direction of technocracy, specifically toward the conventional wisdom of academic economists, while Biden has tended toward the opposite. Some of that is his personal biography, but some of it is a correction to some of the perceived problems with Obama’s approach. And I think the idea of zigging relative to Obama’s zag made sense. But for the next two years, regardless of what happens in the midterms, I think Biden needs to zag back.

Because my brain is mired in the economics style of thinking, my take on this is dominated by the idea of diminishing marginal returns.

In other words, there are real benefits to Biden’s economics-lite approach. But it’s often the case that you reap the largest benefits first, and the longer you continue with something, the smaller the upside.

On climate, for example, we’re obviously not going to get another gigantic spending-heavy, investment-led climate bill. And there isn’t some other issue of comparable importance where an industrial policy approach is going to help. It also seems very unlikely that Biden is going to be able to pass any additional significant tax increases. Doing that would require Democrats to expand their congressional majorities in the midterms, which would really defy history. So to the extent that Biden wants to spend any new money on anything, he’s probably going to need to look at the possibility of a bipartisan negotiation that involves offsetting spending cuts.

That’s the kind of thing economists love to talk about: opportunity costs. They’ll say, “why are we spending money on X when Y would be better?” Activists and political people hate that kind of optimization talk. They like to say, “look, there’s a chance to do X and X is good, so let’s do X.” And Biden got a lot of X done that way. But moving forward, I think we’re going to need more X vs. Y. Even if you think overall federal spending should be higher, I don’t think anyone thinks existing spending is perfectly optimized. There are ways to redirect funds from lower-value programs to higher-value ones and make the country better off. But it’s an economics-y conversation, especially in an economy where making the budget deficit smaller is desirable.

One of my biggest beefs with economists is that I think they underrate the value of full employment.

And even though I have my issues with the size and structure of ARP, I am fundamentally glad that Biden really went for true full employment. But the irony of populist critics of economists is that having achieved full employment, Biden is now the dog who caught the car. Because one of the things about full employment is once you’ve achieved it, the right policy approach is usually the one that you can infer from pretty simplistic supply-and-demand reasoning.

    At full employment, deficit spending pushes up interest rates, constrains investment, and reduces long-term growth.

    At full employment, inefficient regulations don’t “create jobs,” they reduce aggregate output. 

In short, at full employment, there’s no such thing as a free lunch.

I spent the decade from 2009-2019 trying to convince people there were more free lunches around than they realized. That’s because unemployment is the biggest inefficiency of all. Getting people into some kind of job where they are doing something is almost always better than having them do nothing, becoming depressed as their labor market skills waste away.

But those days are happily behind us.

Today, if scrapping the Jones Act costs some people their jobs, the great news is that plenty of companies are hiring. The Federal Railroad Administration is pushing a rule that would require freight trains to have two-person crews to operate. When the Obama administration tried to do this it was a bit of a giveaway to some pretty parochial unions. But unemployment was high, so I’m not sure it would have done any harm. But in the full-employment Biden economy, it’s bad. Requiring companies to employ wasteful labor simply generates waste. And in an economy that is supply constrained rather than demand constrained, that’s bad.

The problem with this stuff is that no particular rule has that big of an impact. It’s always easy to say, “this guy in my office cares a lot about this issue, and I can do what he wants or else I can make him angry in order to achieve a nearly imperceptible benefit for 300 million people… I’m going to stick with the guy who cares a lot.”

Economics-style thinking teaches you to say, “if I consistently prioritize efficiency, that generates meaningful gains for a large number of people and only angers relatively small groups.”

Both of those perspectives are true and both contain valid insight. And Biden has done pretty well for himself by following more politics-guided than economics-guided advice thus far.

But if he wants to see decent economic growth over the next two years (and I think he does), economics-style thinking is going to be the only way to achieve it. We got a huge spurt of growth in 2021 from demand-side stimulus — that was great. Then in the first half of 2022, we ran into a brick wall of high commodity prices and it was terrible. More recently, commodity prices have been coming down, and Biden’s fortunes have been looking better. But you can’t count on oil and food to just keep on getting cheaper and cheaper month after month for two years. And you absolutely can’t count on demand stimulus to get the job done.

Growth is going to come either from sheer good luck or else from supply-side reforms. And it’s not wise to count on running into good luck.

A line that tests well in focus groups and polls is that to address inflation, we need to “build more stuff in America.” And I have absolutely no problem with that framing.

But as used by Biden, John Fetterman, and other Democrats, it carries a double meaning. One is “we need to adopt protectionist measures to replace consumption of foreign-made goods with consumption of domestic substitutes.” The other is “we need to adopt reforms that increase the aggregate productive capacity of the American economy so there are more goods to consume.”

These are different ideas, and indeed they are often opposite ideas. If we opened the door to more imports of Canadian softwood lumber, for example, building houses would be cheaper and we would end up building more of them. Some of the Americans currently working in the lumber industry, meanwhile, would need to get jobs elsewhere making something else. So we would be “building more stuff in America” under this reform in the sense that we would have more houses plus whatever output the ex-loggers make. But that’s because we’d be outsourcing more of our logging to Canada. Freer trade, by letting us achieve a more efficient distribution of labor and capital, enables us to “build more stuff in America.” That’s the reverse of saying we need to maintain taxes on imported Korean appliances in order to ensure that we build more appliances in America. We build more of the specific protected commodity with protectionism, but less “stuff” overall.

What we need in the next two years is a spirit of “build more stuff in America” that means more aggregate stuff gets built. That doesn’t mean trade protection, but rather an all-out war on rent-seeking and anti-competitive rules.

The good news about this kind of agenda is it’s something that doesn’t require huge congressional majorities, spending money, or raising taxes. It’s also perfectly compatible with core progressive goals like maintaining full employment, increasing wages, and building a more egalitarian economy. But it does mean that you can’t use the regulatory state to pursue too many weird side quests — you need to exercise discipline from the top down to regulate in order to address legitimate externalities and information asymmetries, but rigorously avoid things where the costs exceed the benefits. That’s the kind of scrutiny that Cass Sunstein used to apply during the Obama years and that drove the left bananas. I think there’s something to the idea that Team Obama was a bit too bought-in on technocratic stuff given the nature of the economic situation at the time. But Biden has rocketed us into an inflationary, full-employment economy, and he needs to tap into that kind of energy to deliver sustained growth from here on out.