As Vice President Kamala Harris draws attention to her economic proposals, comparisons with President Biden’s economic record are inevitable. Republican candidates want to tie Harris to the perceived weaknesses of Biden’s economic programs. Conservatives’ messages about Bidenomics don’t seem to fit what most economists are saying. By most objective measures, Biden’s investments have been paying off with strong job numbers, a revived manufacturing sector, new sources of revenues and innovations in green technologies to address climate change. It also appears that Biden’s policies helped our economy avoid a post-pandemic recession.
We decided to take a closer look at the policies that have been labelled “Bidenomics” to better understand what’s at stake for the economy during this election and beyond. Convergence Editorial Board member Sandra Hinson spoke with Eric Verhoogen, an economist at Columbia University. What follows is Part Two of that conversation. Part One focused on inflation.
Sandra Hinson: The benefits of Biden’s policies are starting to be acknowledged by more economists and business leaders. And yet, we don’t hear enough about it during this election season. What would you say to those who either ignore or dismiss Bidenomics?
Eric Verhoogen: These programs represent a return of industrial policy to the United States, a real departure from what we’ve seen over the past 45 years. The federal government is investing in key strategic industries, with an emphasis on greener technologies and practices. These are important investments in growth and innovation that will pay off for many years to come.
When it comes to investing in innovation and addressing climate change, people need to understand that markets will not solve the problems on their own. There are important market failures. The reality is firms are focused on their own individual bottom lines. In cases where there are what economists would call “externalities”—where the firms’ actions affect other firms and the broader economy, either positively through knowledge spillovers or negatively through pollution or carbon emissions—individual firms won’t take them into account and markets will not bring about the level of investment that is best for society as a whole. This idea is widely accepted among economists.
In such cases, there is a clear rationale for governments to step in and support investments in productivity growth and innovations in green technology. We’re not going to have enough productivity growth and innovations in green technology to combat climate change without significant public investments.
It was high time for the government to step in. We need to address climate change. The climate crisis is real. It’s upon us. What these legislative initiatives have done is make long-term investments that will raise productivity and also move us toward a greener economy.
SH: What about the argument that these investments distort markets while causing inflation to spike?
EV: First of all, I would say that markets are already distorted. Market failures are rife. What these investments are trying to do is correct those market failures, by bringing investments up to the level that is best for society. Second, I would note that investing in dynamic sectors of the economy not only creates new, better-paying jobs, but also more interesting jobs with better working conditions. In addition, they have contributed to low unemployment, which has led to rising real wages, especially at the low end of the wage distribution. In fact, wages at the 10th percentile have been rising faster than at the 50th percentile; low unemployment is especially good news for the lowest-wage workers.
Now, it’s true that big public investments can contribute to rising inflation. And it’s true that we had fairly high inflation until not so long ago. But as we discussed in Part One on inflation, I would argue that it was mainly due to the COVID shock and recovery and other world events, not to Biden’s public investments. And inflation is now very much under control, about 2.5% annually. The other thing to remember is that when we talk about inflation, we always need to compare it to changes in wages. Since public investment tends to increase employment and wages, it is generally a good thing for working- and middle-class people, even if there is some inflation that results.
SH: What are the prospects for Bidenomics long-term?
EV: There’s been a shift even among some Republicans about the need for more public investment in productive capacities. And I should say it doesn’t have to be manufacturing. It could be services—such as the increased support for care work. It could be healthcare. There are lots of areas where investments in innovation will make a difference. I think history will look kindly on Joe Biden, and I think it’s in part because the Biden Administration brought about this shift in thinking about long-term investment as opposed to just liberalizing markets or favoring the financial sector.
And when we go back to the conflict of interest around macroeconomic policy that we discussed in Part One on inflation, between people who earn a wage and people who make their fortunes by lending money to other people, we can note that there is a divergence of interests between financial capital and productive sectors in industry and services. Many productive sectors benefit from public investment. It makes them more innovative and more competitive. It helps them to grow. Even if it has a consequence of a little bit of inflation, a little bit of rising costs, on net they benefit. That’s different from the interests of the financial sector, which typically just wants to see low inflation.
So there’s a potentially broad coalition around the sorts of public investments that the Biden administration has brought about, between working-class, middle-class and business interests who want to favor the productive side of the economy over the financial sector. That coalition could be the basis for a progressive reorientation of economic policy for many years into the future.