The economy moves to an arrhythmic beat, almost jazz-like. It works at a rhythm that is impossible to dance to: slow, slower, then pandemonium all of a sudden when a crisis arrives, and it always arrives. This zigzagging even finds its way into the field of ideas: all of the major economic policy movements are followed by currents running in the opposite direction, coup and counter-coup, advance and retreat, heresy and apostasy.
Newton’s third law – that every action is always met with a reaction – has an almost perfect correlation with economic policy over the last century. After the Great Depression came the Keynesian consensus, a passive revolution of capitalism to correct the excesses of laissez-faire that resulted in 30 glorious years. When that wave came to an end, with the grim economic infirmity of the 1970s that combined economic stagnation with high inflation, then-US president Ronald Reagan and British prime minister Margaret Thatcher came along with their conservative revolution, a form of neoliberalism that could practically have been laid out on the back of a cocktail napkin – the infamous Laffer Curve – and in a decalogue known as the Washington Consensus, a package of policies that can be diluted into deregulation, lower taxes, privatizations, globalization and, in short, the magnetic power of efficient markets above almost everything else.
Biden’s plan is probably too large, and the European plans probably too small, but maybe not that smallFrench economist Olivier Blanchard
The conservative revolution has held out among us wearing various guises: its most recent evolution is Trumpism, but it is also evident beforehand in social democracy, particularly in the charlatanism associated with the Third Way, or in the German ordo-liberalism of Angela Merkel and company. Then came the 2008 financial crisis and its lugubrious coda in the form of the Great Lockdown. All of the major crises lead to political shocks and the coronavirus pandemic is no exception: there is a wind of regime change blowing through global economic policy.
The author of this convulsion is an 78-year-old man who has turned the world on its head against all forecasts. Joe Biden, a US Democrat born in the fiscal paradise of Delaware, voted enthusiastically in favor of Reagan’s tax cuts in the 1980s and he was vice-president under the grandiloquent former US president Barack Obama, who could have been the architect of a paradigm shift a decade ago but was thwarted by ferocious opposition from Republicans and Wall Street and ended up leaving Trump as his legacy. Biden took up residence in the White House with a halo of being a political moderate, even a little boring, who tended to hire senior Goldman Sachs executives to do the talking. “Do I look like a radical socialist?” he asked during the election campaign, looking straight at a television camera. And yet there are no Goldman Sachs executives in his administration and Biden has surprised his own party, including the dormant left wing, and everybody else with a spectacular first 100 days in office that has led to a temptation to talk about a paradigm shift.
This paradigm shift first started to take shape in 2009 but has been accelerated by the coronavirus health crisis. In the acutest stage of the pandemic, governments the world over approved fiscal and monetary stimulus packages on a scale that had only been seen before during the two world wars. Biden doubled or tripled the stakes: the US, as well as rolling out a vast and swift vaccination program, approved a first stimulus package of almost $2 trillion (€1.7 trillion) to strengthen the economic rebound in the short term and included payments of $1,400 (€1,160) to US citizens, the equivalent of what economists often call “throwing money out of a helicopter.”
Hot on the heels of that relief bill came the announcement of a second, more structured package with an eye on the long-term, another $2 trillion over the next eight years with measures designed to address some of the problems the world’s largest economy has accumulated over the past few decades: inequality, poverty, education, health, climate change, infrastructure investment, the fight against the monopolies of tech giants, a return to multilateralism and – something that hasn’t been in seen in a couple of generations – a proposal to levy a global increase on corporate income tax, which was anathema until recently, as well as a nod in the direction of trade unionism, which is practically unheard of in North America. Added to what was already on the table, this is a package of the size of one of the US Navy’s Pacific aircraft carriers: some $5 trillion (€4.1 trillion), a quarter of the country’s gross domestic product (GDP). “It is a seismic shock to the system that seeks to provide immediate effects on the lives of US citizens,” says Professor Peter Praet.
The textbooks say with crystalline clarity that in response to a large-scale external shock, such as that caused by the coronavirus pandemic, it is necessary to deploy ultra-expansive fiscal policies with monetary policies to complement the stimulus. But nobody in history has ever been this audacious.
The Democrats are aware that they only have two years before the next election cycle to change things and prevent the revival of populismJames Galbraith, economist from the University of Texas
Economists and leaders of every persuasion, left and right, have for years taken their adoration (or fear) of the markets to extremes. Even so, whenever a crisis has struck everybody has had broad-strokes Keynesianism to pull out of their hat. But when the storm passes there has been an automatic reset to the same neoclassical standpoint: using interest rates and monetary policy to tame the economic cycles, while always keeping an eye on the deficit and trusting in the magic of the markets. But this magic started to lose its luster when Lehmann Brothers went under. “The whole intellectual edifice collapsed,” a crestfallen Alan Greenspan, the high priest of this economic faith, said at the time. He added that he was in a “state of complete incredulity and stupefaction” when the house of cards came tumbling down.
Obama was either unwilling or unable to carry out the coup he had promised then, and it was back to business as usual. But the seed had been sown and a combination of the scorched earth of the Trump years and the shock of the pandemic invite that economic peccadillo of thinking that this time things could be different. “Biden’s stimulus is the dawn of a new era,” economic historian Adam Tooze wrote. “It is the definitive break with neoliberalism,” according to the analysis of J. W. Mason of the Roosevelt Institute. “The pandemic is an opportunity to usher in change that restores protagonism to the state,” said Mariana Mazzucato of University College. The Spanish FAES think-tank suggested earlier in April that we are witnessing “the swansong of the supply siders [who are no friends of Keynesianism] who since the era of Reagan have dominated the debate.”
The cautionary adverb “maybe” often sits beautifully for journalistic purposes. Given history is always being written, it is always useful to remember an aphorism from Spanish writer Rafael Sánchez Ferlosio: “New era, old misadventure.” But the dozen-and-a-half economists consulted for this article do agree that something approaching a changing of the guard in non-risk averse economic policy is afoot.
Both love and revolutions, even economic ones, need the right person, in the right place at the right time. Life, though, hardly ever manages to align the three. Could Biden be the man to break the mold? “Old people who are in a hurry are a good thing,” says James Galbraith, an economist from the University of Texas and one of the few leftist academics with a powerful voice in the media. Biden is in the right place, a White House still reeling from the histrionic excesses of former president Donald Trump, in the middle of a crisis, which the right always likes to describe as an opportunity. “And with the Democrats aware that they only have two years before the next election cycle to change things and prevent the revival of populism,” says the son of the legendary John K. Galbraith. “The question is whether academia and politics, in part as a result of panic, give economic thinking the definitive push to bring an end to neoliberalism. But there is still a long way to go.”
Something is moving
This skepticism is the norm in a profession accustomed to new dawns that prove to be nothing more than Potemkin villages: glossy words and papier-mâché decorations. And even so, it is undeniable that something is moving. The former chief economist of the International Monetary Fund (IMF), Maurice Obstfeld, states that Biden’s plan “is much more ambitious than Obama’s proposals,” although he fell short of saying if it is the dawn of a promised new era or a Ferlosioan “old misadventure.” Simon Johnson, also formerly of the IMF, describes Biden’s package as a “brilliant effort to stimulate the economy in the short term to accelerate the post-covid rebound,” while at the same time “thinking about the American economy in the long term with audacious and ambitious measures.”
“I wouldn’t call these policies leftist or rightist, nor would I describe them as being of the old or new paradigm: they are simply the right path to reconstructing the economy where it has been most hard hit by the last two crises. And maybe it can serve as inspiration for other places,” Johnson adds.
This “inspiration” for “other places,” is a polite – even euphemistic – way of alluding to Europe, which has been considerably less battered than the US. But this allusion will be clarified a few paragraphs hence, because beyond the comparison with Europe, the fact is that Biden’s economic policy does come with risks, and it has been far from adopted by consensus. Larry Summers, Obama’s economic guru, Wall Street oracle and prima donna of North America’s supposed economistic progressivism, has been the person to most explicitly underline that the new US administration has gone too far, even if until a few days ago he was openly advocating for the stimulus packages to lift the global economy out of the trap of secular stagnation. The celebrated French economist Olivier Blanchard is hot on Summers’ heels: “Biden has gone too far; there are risks of overheating and inflation,” he says via email. “Many economists think like Summers and Blanchard: Biden is discounting science and substituting it for his political objectives and his popularity,” says influential George Mason University professor Tyler Cowen, author of The Great Stagnation.
In the face of the leaden theorists of the universe who subscribe to the intellectual glamor of pessimism, Simon Wren-Lewis says that Biden is “showing the path to follow.”
“The United Kingdom and Europe have been overly timid: the preoccupations with the deficit are misplaced. But inflationary risks can also be reduced,” he says from Oxford. Doing nothing, with the old demons waiting in the wings, was no longer an option. “This is not the end of neoliberalism, which goes beyond economic policy, but it is to be hoped that it is the beginning of the end of those who are overly concerned with the deficit – or inflation – in the middle of a depression, or of an economic trap of low growth and interest rates and zero inflation like the one in which we have become stuck.”
Every so often, something happens to economists that is similar to Napoleon in War and Peace: their capacity for deciding the best trajectory for the economy is limited. Armed with fantastical mathematical models and a grandiose battle plan whose objective is to simplify reality and which promises them almost guaranteed victory, social scientists’ “obsession with theorizing” has ended up being an “impediment to understanding,” as economist Albert Hirschman wrote.
Is it better to recover at full speed and risk the return of inflation? Or is something slower preferable to avoid these risks?Economic historian Barry Eichengreen
Harvard economist Dani Rodrik states that the profession has become too much in thrall in its “adoration for the markets and its faith in models.” The economy is a mirror and at the same time an expression of an era: the welfare state was the social democrat translation of the post-war script and the conservative revolution an answer to the petrol crisis, with a worrying stagnation and spiraling inflation. But today we face different problems: climate change, hyper-globalization, the excess weight of the financial sector in advanced economies and the impact of the technological revolution have not yet been incorporated as they should in the models. Neoliberalism has lost its sheen due to the last three lustrums of the technological monopolies, the follies of finance – Pottersville from Life is Beautiful made reality – rampant inequality and the litany of recent crises. “Unlike air accidents, financial crises have become more frequent, not less: the airplane is more dangerous,” says Mervyn King, former governor of the Bank of England.
Is the right response to this panorama the Biden Plan, the US president’s Bidenomics? Economic historian Barry Eichengreen, of Berkeley, says not everybody is on his side. “The US has responded to the new economic problems, those associated with Covid-19, and to the not-so-new ones that have built up in the west in general with a lot more ammunition than Europe. But now there is a rich debate over whether Washington has done too much, creating significant risks of inflation. Biden’s stimulus is several times the size of the production gap and there are more stimulus packages on the horizon. On the monetary side, the Federal Reserve has made it clear it will not alter its ultra-expansive policy at least until 2023. Is it better to recover at full speed and risk the return of inflation? Or is something slower preferable to avoid these risks? Biden is in favor of the first option; Europe, the second.”
The US overtook Europe in the right-hand lane after 2008. When things turned really ugly, Washington convened the largest banks in the country and obliged them to borrow money in spades (which they later returned with interest), and innovated with fiscal and monetary policy. Europe opted for austerity and things were on the verge of coming to an abrupt end. Now, Biden is overtaking the Europeans on the left: Europe has also opted for stimulus packages on this occasion but on a much smaller scale. “The euro zone, unlike the US, seems to have settled for an incomplete recovery,” says economist Ángel Ubide.
“Joe Biden has just started to arrest the decline of his country; European leaders seem willing to accelerate their own,” analyst Martin Sandbu wrote in the Financial Times. “The comparison is mistaken because in Europe we have automatic stabilizers, the anonymous heroes of modern economic policy,” counters Benedicta Marzinotto of the University of Udine. The IMF, on the other hand, believes that the European stimulus falls short: the fund believes Europe needs to inject an additional 3% of its GDP into its economy, around €400 billion in one fell swoop.
In short, it is Europe versus the US once again. Blanchard takes a measured view of the debate. “Biden’s plan is probably too large, and the European plans probably too small, but maybe not that small. This will depend on what happens with private demand: the optimism based on the vaccination programs and savings retained by businesses and families could cause a boom in Europe as well,” he says. Other experts point to the delays in vaccine rollouts and in the €750 billion European Recovery Plan approved in Brussels a year ago, but from which fresh funds will not start to flow until the end of 2021.
Washington is experimenting with policies to completely overcome the crisis, while Europe is languishing under the weight of its specters and fearsVítor Constâncio, former president of the European Central Bank
“The Fed has purchased $2.6 trillion [€2.1 trillion] in assets since January 2020, the European Central Bank €320 billion [$380 billion], seven times less. And fiscal policy tells a different story: the European stimulus is more or less half of the US’s. We are not repeating the errors of the last crisis, at least on this occasion Europe is heading in the right direction, but in terms of volume we are making the same errors. We will emerge from the crisis later and with more difficulty,” says Paul De Grauwe, of the University of Leuven. “The difference between the neoliberal paradigm and what Biden has done will leave a fundamental change: governments are once again taking a central role in the fight against financial crises.”
Charles Wyplosz of the Graduate Institute concurs with this viewpoint and takes issue with those who are criticizing Biden’s ambition because of the inflationary risk. “I feel these reproaches are incredibly misplaced. For a decade we have complained about the adverse effects of a trap of low growth, negative interest rates and super-low inflation. If finally inflation increases and forces the central banks to act, at least we will have escaped from the curse of recent years. For the first time in decades, a government is trying to genuinely do something for those people who have ended up voting, through desperation, for populist options. Criticism over a step of this importance make me laugh.”
Vítor Constâncio, former president of the European Central Bank (ECB), also applauds the US show of courage: “Washington is experimenting with policies to completely overcome the crisis, while Europe is languishing under the weight of its specters and fears,” he wrote recently.
Golden eras are blank pages in the history books, but the Chinese proverb “may you live in interesting times” is a curse. When he became president in 1933, Franklin D. Roosevelt devalued the dollar, forced Americans to sell the gold they had been acquiring since the beginning of the crisis at a fixed rate and closed the banks for 28 days. With the New Deal – and the Second World War – the US started to cement a hegemony that has endured until today.
Biden has not achieved quite as much, but in fewer than 100 days in office he has announced a multi-billion-dollar injection into the economy and is pushing for a global rise in corporate income tax. In the background, the battle for global hegemony continues. The US president, in a full “Roosevelt moment,” has stated that his plan “puts us in a position to gain competitiveness with China.” Beyond this front, Washington has seen the dangers of populism: Biden’s gambit is an almost desperate attempt to stave off the return of Trumpism. And his haste also has a more prosaic explication. The Republican Party is punch-drunk from its latest defeat but Biden has only two years until the next Senate elections, which could bring an end to his narrow majority and frustrate the remainder of his mandate.
A crisis is not an event, but a process; a process that in certain, unfortunate places has not yet ended. The Anglo-American world needs another Charles Dickens to describe the scars in some areas of the US and the United Kingdom, but Victor Hugo could also rewrite Les Miserables in many parts of Europe. We will come out of this, because there is no virus or crisis that can last for 100 years, and we will do so sooner rather than later. But this will be the most dangerous moment: people do not revolt when things are not going well, but instead when they see their expectations are not being met. If Biden has hit the nail on the head and Europe is dragging its feet, it is likely that unrest will grow on this side of the Atlantic. If Washington has overextended itself, we could be on the cusp of the umpteenth phase of the conservative revolution and the changing of the guard will have been a mirage. We are faced with radical uncertainty through the telling of stories, constructing narratives. Biden is working on his own and, for now, Europe is waiting to see what happens.
“The dollar is the difference-maker”
“Washington’s answer to the crisis is very aggressive, in large part due to the window of political opportunity after the Republicans’ electoral defeat, but the exorbitant privilege of the dollar lends the United States a practically limitless amount of fiscal elbow-room. The dollar is a multipurpose tool and Biden has made good use of it,” says Gian Maria Milesi-Ferretti of the think tank Brookings. “Europe has done a lot but the dollar is the difference-maker and national governments could be more aggressive in light of the delays in the vaccine rollout and the European Recovery Plan. With so much uncertainty the role of fiscal policy needs to be more ambitious.”
English version by Rob Train.