Economic policy for all Americans
A long overdue sea change in economic policy is underway. It started gaining momentum in the Great Recession, and since the Covid crisis began, it's gotten real.
The winds of economic policy are shifting for the better. While the human tragedy from the pandemic, the horrors of the war in Ukraine, and the hardships of high inflation have masked much of the progress, it’s undeniably here.
Swing for the fences and get ‘er done.
We needed a change.
Economic policy from Clinton to Obama did some good. We enjoyed decades of low inflation and, for a time in the 1990s, a surge in productivity. But looking back, we can also see the damage done: Welfare Reform, which threw million back into poverty; NAFTA, which hit manufacturing workers and their communities hard; financial market deregulation, which unleashed risky practices on Wall Street; and the American Recovery and Reinvestment Act, which fell far short in the Great Recession.
Policy under Biden is a dramatic shift, as Paul Rosenberg at Salon captures well in “How to end gridlock and ensure Democratic power with a bold, progressive agenda.”
Rosenberg first lays out the legislation passed under President Biden:
What the Biden administration has delivered, as White House press secretary Karine Jean-Pierre recently summarized: "The most significant economic recovery package since Roosevelt ... the largest infrastructure plan since Eisenhower ... the most sweeping gun reform bill since Clinton ... Landmark China competitiveness legislation that's already bringing manufacturing jobs back from overseas ... the largest climate change bill in history.
Note that much of the sea change in economic policy started under Trump and often has had bipartisan support. The two relief packages during the Trump Administration and a divided Congress were larger than Biden’s American Rescue Plan, which only Democrats supported in Congress. Economic relief in 2020 and 2021 was enormous and a win for Americans.
A job-full recovery is essential, and this time we got one.
In my interview with Rosenberg, I reiterated my early support of the American Rescue Plan. Yes, it could have been better, and it did contribute to some, but far from most, of the high inflation during the past few years. But unlike in the past, Congress and the White House swung for the fences for the American people:
The best economic policy in 40 years." [Claudia Sahm] wrote: "Yes, inflation's been higher and for longer than expected by proponents of more relief like myself," then adding further context: "If you look broadly at what's happening in the U.S. economy — inflation-adjusted consumer spending, jobs, business investment and household balance sheets — it's clear that Americans are winning," which was not the case after the Great Recession.
For some context, I started at the Federal Reserve in 2007 as one of the leads on consumer spending and worked on the staff forecast for a decade. The Great Recession and its painfully slow recovery caused permanent damage to countless families, small businesses, and communities. Democratic policymakers, when they had the chance in 2009, went small, and I will never forget or forgive them.
When the ARP was passed, the U.S. economy was "still in a bad place," Sahm told Salon. "We were just coming out of the omicron wave, the winter had been bad. There was no guarantee we were going to have the recovery or that it was going to be strong." But in fact, she said, "we've had the first job-full recovery in decades," in stark contrast to the "crushingly slow" comeback from the Great Recession of 2008.
After the Obama administration's inadequate response, Sahm said, "Republicans came in and did austerity" which suited their donors just fine. "Wealthy people came back quickly. The stock market came back quickly. House prices, for those who did not lose their homes, came back. But the jobs did not come back, and long-term unemployment has disastrous effects on people's careers — not just bad while you're out of work, but bad for years." If Biden's plan accomplished nothing else, she said, the "job-full recovery" was the best policy used to fight a recession in decades.
I pushed the Rescue Plan because data, research, and common sense backed me up. I was a vocal proponent of the $1,400 checks. I also argued for enhanced unemployment benefits and aid to state and local governments. Prominent macroeconomists from the Obama administration disagreed strongly. The professional consequences for me of our debates were not fun. But it was big, and it passed. That’s all that matters.
The best investment we can make is in our children.
The Rescue Plan helped deliver a job-full recovery and slashed child poverty with the new Child Tax Credit. I have written many times about the credit, such as here:
I urge Congress to center its efforts on children. It would be the ‘biggest bang for the buck,’ supporting families now and investing in our next generation. Done well, it would lift long-run economic growth, benefiting all Americans. It’s a moral imperative too. The richest country in the world should not have children living in poverty. Finally, it’s about dignity. Helping families is empowering them.
But change is rarely linear. Tragically, after one year, the credit expired:
The Child Tax Credit was allowed to lapse, Sahm said, because "Larry Summers convinced Joe Manchin that the child tax credit was inflationary," a view she calls "absolutely absurd." In an analysis last July, she explained: "Unlike stimulus checks that came out in a burst, accounting for 16% of disposable personal income in March 2021, the new Child Tax Credit was monthly to families and was 0.5% of income from July through December." In short, it wasn't a contributor to inflation, and was a crucial investment in the next generation.
Misguided claims about inflation were not the only reason the program was not renewed. The traditional criticism of such programs that do not have an income or a work requirement for the parents or guardians is that it will cause them to work less. Hello, it’s a benefit for children, not a workforce development program. Even so, I am open-minded and would consider other ways to eliminate child poverty. Crickets.
We have a long way to go to right past wrongs.
It’s abundantly clear that the U.S. economy does not work for most Americans. Their frustration with the establishment in Washington, D.C., is well-founded. Rosenburg also talked with Dean Baker, a prominent economist and co-founder of the Center for Economic and Policy Research. Baker explains the discontent well:
But there is a reason why [Trump’s agenda] suddenly has so much appeal," that being the basic reality of how badly the non-college-educated majority of Americans have fared over the last 50 years or so.
Consider this: If the minimum wage had kept pace with inflation since its peak real value in 1968, the national minimum wage would be over $12 an hour today, rather than $7.25. But if it had kept pace with productivity growth, as it did for three decades prior to 1968, it would be almost twice that, or $23 an hour. That would mean a couple working full-time minimum-wage jobs would earn about $92,000 a year — a very different world than the one we live in today.
Since only about 40% of adults have college degrees, Baker writes, "A large majority of the population has grounds to be unhappy about their economic circumstances in recent decades. Given this reality, suppose that the poor prospects for non-college-educated workers was the result of deliberate policies pushed by the people who control debates on economic policy, as in people with college and advanced degrees.
Regardless of how you feel about proposals to raise the minimum wage, the vast majority of Americans do not share in the prosperity of our country. The huge disparities in wealth are even more evidence of the problem: the top 1% of households have over 30 trillion dollars, seven times the wealth of the bottom 50%.
I fully agree with Baker on both his points here:
That analysis may be skewed, in that the prime movers weren't upper-middle-class professionals but a handful of extremely wealthy elites, and the neoliberal worldview they promoted was surrounded by so much propaganda that it was difficult to see what absolute nonsense it was. But still, as a class educated professionals did go along with it, accepting much of that nonsensical propaganda along the way. So what can be done to remedy that now?
In short, there are relatively straightforward things we can do, which in Democratic politics today are generally coded as "progressive." That's somewhat misleading, since their appeal would reach far across party lines. Baker certainly wouldn't guarantee that such measures could bring white working-class voters back to the Democrats, but it could be crucial for securing the allegiance of younger voters, the potential foundation for decades of Democratic dominance.
I find it disheartening when I am branded as a “progressive” in a derogatory way by some of my establishment peers. I support good policies for people, regardless of the party behind them. How does caring for people make me an outcast? Why does it make me stand out? People are why we do policy!
Finally, Rosenberg covers reproductive rights, criminal justice reform, and public health in the rest of his piece. I will stay in my macroeconomist lane and not comment on those parts, though I recommend you read it all.
The world of economic policy is changing. We are living through the efforts to put the American people first and to fight for those left behind for decades.
Change is hard, and it’s messy. If you wonder why macroeconomist debates look like a cage match now, which I can assure you they are, that’s why. The old guard does not go down without a fight. But, like it or not, they are going down.
Change is happening; it’s necessary. We know how to do it. Now it’s a matter of will.
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Don't let 'em beat you up. You help me and others think.
The "progressive" label is simultaneously a pejorative from the right and a red badge of courage from the rest of us. Wear it proudly. You are doing the right thing for most people.
Adding to your new macroeconomic structure, we, Fed included, should strive for a high-pressure economy all the time as it is the best economy for the broad population swath most of us live in; we need new tools to manage inflation, but those are conceptually easy.