I tend to learn more from people whose opinions overlap slightly, than from those with whom I completely or completely disagree. So I learned a lot from reading Substack by Matt Yglesias, even though he has a much better view of the Biden administration than I do. In particular, he supports their early effort to pass major stimulus bills, as well as funding for things like infrastructure, clean energy, and technology.
But Yglesias also believes the Biden administration he went on the road in 2022:
I published a piece on August 25, 2022 advising Biden to press for a pause in his romance with heterodoxy and congressional dealmaking and start listening to boring neoclassical economists. In my mind, that did not mean abandoning anything he had done in the first 18 months of his presidency. It meant admitting that much of his pre-2021 policy had been prepared with stress-like conditions in mind, and that those conditions no longer apply. He took some big legal changes, had some good hits, and now it was time to play defense.
But the pivot never really happened.
Yglesias is smarter than many of the policy advisers Biden has relied on over the past few years. Many of them don’t really understand neoclassical economics (aka supply side economics), and this has led to a series of policy initiatives that have made inflation worse:
I wouldn’t expect any Democratic administration to weaken the Davis-Bacon rules as an anti-inflation measure, or to do so would advance a number of Biden’s stated policy goals. But did Biden need to rewrite these laws to make them stronger than they were under Obama or Bill Clinton? Similarly, every president likes to push “Buy American” laws because it sounds popular, but Biden’s lawyers have written tougher laws than his predecessors. They have adopted stricter energy consumption regulations that will increase prices. They raised the prices of Canadian drugs. They raised tariffs on solar panels from Southeast Asia. Repealing the Jones Act would be a daunting task, but Biden made the Jones Act tougher. Much of this can be seen as special giving to union interests, which is not always good but is part of sound political strategy. But beyond that, what I think you’re seeing at work in some regulatory agencies is a completely honest, completely uncritical world view that promoting higher wages is the path to national prosperity. Measures to impose stricter rules on au pairs or create stricter rules for agricultural visitor workers do not have a clear party angle. It’s just small steps that increase the cost of childcare and food.
To be clear, it is the Fed that determines inflation over time. But if the Fed sets its policy tools in a position that is likely to produce 6% NGDP growth, then the imposition of new cost-raising measures will temporarily shift that spending from output to prices. Yglesias believes this policy mistake could end up costing Biden the election.
The Trump campaign is also promoting policies that would lead to higher costs, such as a 10% tax on all imports and deportations of undocumented workers. Trump also opposes YIMBY’s policies to allow the construction of apartments in the suburbs. But voters tend to focus on the history of the current president, not the campaign promises of the opponent. And Trump is benefiting from the fact that inflation was very low during his administration.
Because I am no less a Keynesian than Yglesias, I am very skeptical of Biden’s initial policy efforts. But I understand the Keynesian model, and because of that I can easily understand why Yglesias is so frustrated with Biden’s approach to policy. Keynes believed that a free market works well as long as there is sufficient demand. By 2022, the economy had recovered from the Covid recession and inflation was a major problem. In that kind of world the old laws of economics apply—industrial policies have real opportunity costs. It was time to focus on efficiency. In November, we will find out if Biden has to pay the price for ignoring the advice of one of the wisest Democrats.
PS. In my opinion, the classical rules always apply. That’s right always it’s a good time to focus on efficiency. So I believe the Biden administration is gone long before 2022. Yglesias pointed me to Ezra Klein story from April 2021:
Biden has little faith in economists, and so does everyone else. Obama was always frustrated that politicians don’t understand economics. Biden’s constant frustration is that economists don’t understand politics.
Many economists, both inside and outside the Biden administration, have told me that this is an administration where economists and financiers have far less influence than they have in previous administrations.
Obama was re-elected against the mainstream Republican Party. Biden is trailing in the polls against one of the most unpopular politicians in American history.
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