Tuesday, February 23, 2021

Morning Again in America? Political Implications of the Coming Boom

It's looking increasingly likely that the economy will break out in a big way this year. Current economic trends look favorable; given continued strong fiscal policy and accelerating vaccine distribution, a mountain of pent-up demand could well unleash a boom unlike any we've seen for a great long while. From the Post:
"Factories are humming and consumers are spending again, signs that the United States could emerge from the current health crisis with its strongest growth in decades. Goldman Sachs expects the economy to expand this year at an annual rate of 7 percent, the fastest pace since President Ronald Reagan proclaimed “morning again in America” in 1984."
From the Times:
"Forecasters have always expected the pandemic to be followed by a period of strong growth as businesses reopen and Americans resume their normal activities. But in recent weeks, economists have begun to talk of something stronger: a supercharged rebound that brings down unemployment, drives up wages and may foster years of stronger growth."
This will obviously be great news for the American people, who could use some good times and serious material advancement after a dreadful 2020. But less obvious is how huge this could be in political terms. And I don't just mean in terms of the 2022 election, though that will be part of the story.
First, this boom may lead to a decisive shift in macroeconomic policymaking--the very shift that did *not* take place after the Great Financial Crisis of 2008-09. Robert Skidelsky:
"Something extraordinary has happened to macroeconomic policymaking. Partly owing to the impact of COVID-19, the old orthodoxy has morphed into a new one – but without anyone acknowledging the implications of the shift, or indeed that there were any problems with previous convention.
In a recent interview, for example, former Bank of England (BOE) Deputy Governor Paul Tucker said that “monetary policy should now take a back seat to fiscal policy.” Other central bankers, finance ministry mandarins, and OECD and International Monetary Fund officials are saying much the same.
What our financial paladins never or only rarely acknowledge is how wrong they were in the past. The Financial Times came closest with its recent limping admission that the spending cuts it advocated in 2010 “may have had a bigger negative impact than expected.” That is about the nearest thing to a mea culpa as we can expect from this citadel of the financial establishment, and it does not come close to capturing the magnitude of the rupture with the theory of macroeconomic policy that prevailed only a few years ago.....
The case for fiscal policy is not only that it is a more powerful (because more targeted) macroeconomic stabilizer than monetary policy, but also that government is the only entity apart from the financial system capable of allocating capital. If we are not willing to allow investment in technology and infrastructure to be shaped by a purely financial logic, then the need for what Mariana Mazzucato calls a “mission-oriented” public investment strategy that includes taxation policy becomes inescapable."
This is, as President Biden, put it in a different context "a big fucking deal". A fundamental change in the assumptions and basic approach of macroeconomic policy makes so many other things possible, including almost everything dear to the hearts of progressives from massive public investment to expanded social welfare spending to a continuous full employment economy with steadily rising wages.
This in turn could mean not just a good 2021 but a longer era of economic good times. That could be a huge boon for the center-left. There is perhaps no basic political-economic fact so poorly understood by the left than the historically strong relationship between economic good times and social advance.
As shown by Benjamin Friedman in his magisterial work, The Moral Consequences of Economic Growth, the left has typically achieved much more success when times were good than when times were bad. Hard economic times and rising inequality, rather than generating broad support for more democracy and social justice, more typically generate pessimism about the future and fear of change. In contrast, when times are good, when the economy is expanding and living standards are steadily rising for most of the population, people see better opportunities for themselves and are more inclined toward social generosity, tolerance and collective advance.
To put a fine point on this, the center-left is rightfully worried about the continued influence of the populist right on American society and politics. But the key to decisively reducing the number of subscribers to this baleful political trend lies not in denouncing, in ever-more apocalyptic terms, the failure of large swatches of the country to embrace the views of enlightened coastal regions but rather in generating and sustaining an era of generalized economic advance. In fact, that's probably the only way the populist right will ever be truly defeated.
Of course, many things could go wrong here. The boom could fail to appear. It might not last very long. Republican obstruction could decisively stall the implementation the new macroeconomic paradigm. The pernicious influence of high levels of inequality could undercut the boom and its beneficial socio-political effects. .But the fact remains that a coming boom could be a life-saver for the country and for the left and its progressive dreams.

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