What a difference a year makes. In the spring of 2021, Joe Biden was seeking to further expand government spending with both direct aid to the population and long-term investment, aiming to have an impact in line with former presidents such as Franklin Roosevelt and Lyndon Johnson. He had de facto embraced the marked turn, that had emerged during Donald Trump’s presidency, away from the free market, limited government policies of the globalization era. This entailed a greater role for the state in the economy – accelerated in particular by the COVID-19 pandemic – and an incipient return of industrial policy. Growth was strong and there was an expectation that inflation would be transitory, as supply chain problems provoked by pandemic interruptions were gradually worked out.
Today, the scenario looks quite different. The Biden administration’s expansive agenda made it to the bipartisan hard infrastructure bill, but no further, coming up against opposition from both Republicans and a few centrist Democrats. Inflation has accelerated, contributing not only to a significant drop in the President’s approval rating, but also providing fodder for critics of the government’s recent spending spree. To top it all off, Russia’s invasion of Ukraine has introduced a new element of disruption that is likely to drag down global growth, and reinforce the sense of uncertainty regarding the future.
The question to be asked is: are we already seeing the end of the “post-global”[1] reaction provoked by the popular revolt against policies that weakened the middle class and the need to develop a more resilient production system? Is another paradigm shift underway, based on the effects of too much spending and the new strategic scenario generated by the war in Ukraine?
Let us start with the headline numbers for the US economy. Growth has been strong over the past year, although GDP actually fell slightly in the first quarter of 2022. As of now, the major issue is inflation. With a strong job market and continued supply chain issues, the hope that inflation would recede quickly has been disappointed, and the Fed is now raising rates, causing some economists[2] to worry that this is likely to cause a recession.
So, is the (short-lived) era of big spending over? Not quite. There are numerous investments that were approved in last year’s legislative packages that are still to be implemented. And the appetite among most Democrats remains for significantly upgrading the country’s social safety net, as seen in the fight for the child tax credit, which is said to have cut child poverty by about 30% while it lasted.
Yet the Democrats have only the smallest of Congressional majorities, and are unable to convince centrists in their own party to fully embrace their agenda. Moreover, the Republicans are likely to take back control of at least the House in the November mid-term elections, and perhaps the Senate as well.
Republicans accuse the Biden administration of provoking inflation with excessive spending. And while they have little trouble authorizing more funds for the military, when they come back to power it is more likely we will see attempts to cut social spending than increase it.
Yet the argument on inflation is disingenuous. The underlying reasons for most of the price rises continue to be more physical than financial: the shortage of materials and disruptions to supply chains have caused bottlenecks and scarcity (not to mention speculation) in numerous markets, affecting the availability of both intermediate and final goods, from computer chips, to energy, to food.
For those who have an ideological ax to grind, this just shows that the government gave out too much money. But in the European Union inflation is up to 7.8%, pretty close to the figure in the US, although EU countries did not spend the kind of money approved by Congress during the pandemic. The simple fact is that after a period of disruption and lack of investment, there was a spike in demand that the US economic system has been unable to handle. Just because you have money does not mean you can get what you want; you have to be able to produce it – and in today’s globalized world, ship it halfway around the globe as well.
Putting inflation in this perspective, though, does not mean it goes away. The problem is real, and the question is how to deal with it. One answer is to take money away. The Fed is raising rates, and plenty of politicians and economists are clamoring for cutting back on spending. Yet the current inflation flare-up is no ideological victory for deficit-hawks. Rather, it proves the need for quite the opposite of what the free-marketers have advocated for decades. To deal with supply chain and procurement problems even more is needed to upgrade the real economy, expanding production of the goods we need and improving the systems for delivering them. This will help not only to re-balance supply and demand, but also to improve living conditions and real economic efficiency.
The best way to achieve this is by accelerating what is now properly recognized as a return to “industrial policy”, i.e. government direction and incentives to ensure investment in key sectors. Obvious examples are healthcare and physical infrastructure – where more is needed beyond last year’s bipartisan bill, that closes only a small portion of the gap in the country. The government has begun to act in other areas as well, such as microchips and electric battery production; incentives should be increased to encourage more expansion of advanced manufacturing in the United States.
A lot more is required to speak of a wholesale abandonment of the laissez-faire, low-cost approach to economics that has been dominant for decades; an approach that weakened the US internally, and led to a drop in the West’s global standing as well.
The pressure to continue with the post-global shift is significant: supply chains need to be both reorganized and shortened to become more resilient, while domestically the Great Resignation and a renewed interest for unions are putting large companies on the defensive. The immediate positive effects for workers are dampened in part by inflation, but it would be a mistake to intentionally go backwards; rather than make people poorer we should bring the productive economy up to speed.
With the outbreak of the war in Ukraine, the key question is how strategic imperatives will affect economic policy in the coming years. The desire to counter China and Russia played a major role in the original push for global trade deals such as the Trans-Pacific Partnership and the Trans-Atlantic Trade and Investment Partnership in the 2010s. Yet those deals generated significant public opposition, as they were perceived as a continuation of the low-cost, globalized trade policies that damaged the middle class. At the time, a common view among policymakers was that the negative social effects of neoliberal policies should not be allowed to derail the overall strategic goal.[3]
This approach failed spectacularly, as it became clear that public opposition could be mobilized on both the left and right to upend the plans of the establishment. Today, a more realistic tack is needed, one that is also respectful of the needs of the majority of the population: industrial policy and greater investment in infrastructure and innovation to put our economy on a more solid footing. The added benefit of such targeted public spending would be to reduce dependence on consumer spending as a driver of growth, and of inflation as well.
The question is whether the now hot phase of the clash with Russia, and the danger of an acceleration of tensions with China, will facilitate the shift to more healthy economic policies, or instead lead Western elites to look backwards, sweeping problems such as inequality and the difficulties of the lower and middle classes under the rug once again.
Footnotes:
[1] The author’s most recent book is titled “Post-Global America”, on the shift away from the policies of globalization and foreign military intervention in recent years.
[2] Paul Krugman has argued that the Fed should not “allow itself to be bullied into slamming on the brakes”. https://www.nytimes.com/2022/03/14/opinion/biden-putin-gas-prices-inflation.html
[3] In February 2015, then-NATO Deputy Secretary General for Emerging Security Challenges Jamie Shea told this author that the defense of the Western liberal system was much more important than arguments over the details of major trade deals.