For Biden, these departures are potentially welcome news. His administration’s economic policy is sorely needed after adjusting too slowly to a new reality that threatens both the health of the economy and the president’s re-election chances in 2024. When he took office, Biden and his team assumed they would deal with him. The same economic challenges that plagued recent predecessors, particularly unemployment, have plagued the recovery. (This happens when jobs growth is sluggish despite stronger gains in gross domestic product.)
This was part of a larger economic trend that some economists called secular stagnation. Savings rates around the world, but particularly in Asia, were rising, and so was risk aversion. The US A global gravitation of savings towards safe-haven assets such as Treasuries. Large inflows into dollar-denominated assets caused the currency to appreciate, making imports more affordable for American consumers. The result was an economy in which borrowing was cheap but productive investments that did not face the threat of low-cost foreign competition were hard to find. The solution was to print more dollars and increase US competitiveness through deficit-financing corporate tax cuts.
All this was before the pandemic. A fundamentally different economic reality has emerged in its wake. Massive deficit spending may have satisfied the global appetite for Treasuries and flushed US consumers with cash, but supply chain disruptions have increased demand for US-based investment and, apparently as a direct result of Covid-19, nearly 4 million workers have disappeared. have gone labor market. Therefore, policies that were appropriate before 2020 are now disastrous. Consumer demand seems almost indestructible as retail sales continue to rise despite the Federal Reserve’s best efforts to curb it through tighter monetary policy. Job security is strong, as employers are reluctant to lay off workers for fear of not being able to hire them back.
The Biden administration was famously slow to see all this coming, initially promising that the rising rate of inflation was the result of transitory factors rather than fundamentally strong consumer demand coupled with economy-wide labor shortages. It was understandable. The turning point is difficult to find in real time. Even now, the continued push for pre-pandemic-style policies is less forgivable. Only after the urging of Senator Joe Mnuchin of West Virginia did congressional Democrats settle on a slimmed-down Inflation Reduction Act, whose only major inflation-reducing component was a $300 billion deficit reduction. The White House, however, blew away those savings in a fiasco with its executive order on student debt relief.
It would be a mistake to interpret the moderate losses Democrats suffered in the midterm elections as a sign that voters are okay with the state of the economy. Instead, it was the public backlash against January 6 and the MAGA movement that saved Democrats from what would otherwise have been a midterm election defeat. Biden’s approval rating remains dismal and similar to where Donald Trump was at the same point in his first term.
If Republicans favor Biden to run Trump for president again, maybe Biden can win another term by continuing to do what he’s been doing. Otherwise, his administration needs to take the new economic climate seriously. That means policies that reduce government spending, shrink budget deficits, and increase tax revenues. Those kinds of policies would ease long-term inflationary pressures and give the Fed breathing room to stop raising interest rates.
Coming out of the pandemic, nations are rightly concerned about making supply chains more secure and less dependent on trading partners. However, the Biden administration has aggressively targeted the U.K. And expanded trade agreements should be made with US allies such as Japan, to maximize cost savings from free trade without leaving the country vulnerable to sudden shortages. Also, it should stabilize global energy markets in the long term by encouraging US natural gas production and exports by allowing reforms.
This set of policies will help reduce domestic demand, increase the supply of goods and services available to consumers, lower inflation, and show voters that the White House understands that times have changed. If the administration can’t do that, it may very well be the voters who will force through change in 2024.
More from Bloomberg Opinion:
• Democrats Tackle Debt Ceiling: Jonathan Bernstein
• Biden economy second in midterms: Matthew Winkler
• Republicans have no plan to fix the economy: Alison Schrager
This column does not reflect the opinion of the editorial board or Bloomberg LP and its owners.
Carl W. Smith is a Bloomberg Opinion columnist. Previously, he was vice president for federal policy at the Tax Foundation and assistant professor of economics at the University of North Carolina.
More stories like this one are available at bloomberg.com/opinion
