Does the American Rescue Plan Act (ARPA), both the bill itself and how it was passed and justified, represent a profound break with neoliberalism, one that truly might herald a new economic era? I have become increasingly sympathetic to this viewpoint, as I ponder both what has happened and how it has happened. The idea of an historic break no longer seems so fanciful.
Two arguments along these lines are well worth careful attention. One comes from Anusar Farooqui on his Policy Tensor substack (worth a subscription!), where he considers that we might be at the turning point of a Braudelian secular cycle (he had me at Braudel!).
"As I watched Powell give his speech yesterday, I had to keep pinching myself to check that I wasn’t dreaming. The technocrats who’ve run the world economy since the Volcker Coup finally seemed to get it. Could this really be happening? Could they really have kicked the old habits of mind and embraced the New Empiricism? Evidently, they could. I...argue that we are not only at an inflection point in the modern history of the world economy. We may, in fact, be at the turning point of the secular cycle. The present revolution in US political economy, I will argue, constitutes nothing less than a final break with neoliberalism.
Short-term and long-term movements are always superimposed, Braudel told us. But can they be disentangled? In his three-volume magnum opus published in 1979, Civilization and Capitalism, Braudel prophesied that the downturn in 1973-1974 was not a short-term conjuncture, but in fact a turning point in the secular cycle....
Braudel’s prophecy has obtained. In 1960-1973, US productivity, as measured by real output per hour, grew at 2.8 per cent per annum. Since 1974, productivity has grown at only 1.8 per cent. Real GDP per capita grew at 2.9 per cent in the former period, but only 1.6 per cent per annum in the latter period. But even this lower rate of growth was cornered by the upper classes.....
These large-scale economic patterns are rightly traced to the ideology and practices of neoliberalism. At the heart of this new ideology were three developments. The first and most important development was the capitulation of social democracy.....The second development was the rise of the idea that the large-scale coordination of economic activity was best left to self-regulating market forces...The third development was in the heads of the technocrats. The great lesson of the stagflation crisis of the 1970s was that the central bankers had to be extremely vigilant against inflation. Whatever the mandate set by Congress, the main job of the central bankers was to ensure price stability....
These three rigidities of the mind structured the Fed’s reaction function, in the logic of financial discipline to which all economic actors were subjected, and the possibility space contemplated by political authorities. This was the process of structuration that generated the secular downward cycle of the past fifty years. What has happened since the financial crisis is the process of destructuration whereby these intellectual rigidities have been abandoned one by one....
Even before the pandemic, the Powell Fed had been moving to an empirical stance — actually waiting for inflation to overshoot instead of relying on model predictions ultimately based on the defunct Phillips curve. With the shock of 2016, the technocrats began to pay more careful attention to how their policies affected the fortunes of the working-class. They realized that containing ‘the threat from below’ actually required making progress on broad-based growth — the objective that had been abandoned in 1979. As the evidence began to come in after 2016 that one could run very tight labor markets without inflation reappearing,....
The central bankers had come to realize that the only way to achieve broad-based growth was to run the economy really hot. Only when labor markets get very tight (unemployment below, say, 5 percent) do working-class wages and the wages of minorities start growing as fast as middle class salaries. This idea of running the economy hot to deliver broad-based growth could only work because, while inflation does not respond to excess demand in the way they had thought it would (the Phillips curve is dead), wages do (the Wage Curve is alive and kicking). That is, they could have their cake and eat it too: they realized that they could run the economy really hot and generate broad-based growth without unnecessarily running the risk of high inflation.
“The key to the whole thing,” as Chair Powell put it yesterday, is that almost no one believes that the Fed can't tame inflation if it were to reappear — inflation expectations are firmly anchored on target. So they can afford to be very generous in bad times because everyone knows the Fed won’t let inflation expectations get de-anchored ever again — the great lesson of the 1970s' stagflation crisis. In other words, they had come to realize that we live in the best of all possible worlds. And the systematic policy mistake of the past decade or decades was that they had been unnecessarily pessimistic and cautious.
So when Summers and Blanchard reached for the old ways of thinking, something entirely unexpected happened. Where there should’ve been a loud debate structured by the idea of fiscal discipline, there was one big yawn. The doyens were largely ignored or dismissed by both the technocrats and the politicians. This surprising development revealed that the intellectual revolution among elites, triggered by the Polanyian counter-movement from below that Trump rode to power, had been consummated. Yesterday’s press conference confirmed that the process of intellectual conversion of the technocrats is now complete.
Such were the makings of the perfect storm. With fiscal policy not only revived but virtually on steroids and with monetary policy accommodative for the foreseeable future, we’re now looking at the greatest economic boom in living memory. The Fed now reckons that the US economy will grow at 6.5 percent in 2021. Goldman is more bullish. The 38th floor at 200 West believes that the US economy will grow at 8 percent instead. The strategists are probably closer to the mark."
OK then! Sounds pretty good right? This excellent post from JW Mason on his blog further elucidates the ways in the macroeconomic conventional wisdom is shifting in ten--count 'em, 10!--ways. I'll pick out just a couple below.
"Some people are frustrated about the surrender on the minimum wage [in the ARPA] , the scaled-back unemployment insurance, the child tax credit that should have been a universal child allowance, the fact that most of the good things phase out over the next year or two.
On the other side are those who see it as a decisive break with neoliberalism. Both the Clinton and Obama administrations entered office with ambitious spending plans, only to abandon or sharply curtail them (respectively), and instead embrace a politics of austerity and deficit reduction. From this point of view, the fact that the Biden administration not only managed to push through an increase in public spending of close to 10 percent of GDP, but did so without any promises of longer-term deficit reduction, suggests a fundamental shift.
Personally, I share this second perspective. I am less surprised by the ways in which the bill was trimmed back, than by the extent that it breaks with the Clinton-Obama model. The fact that people like Lawrence Summers have been ignored in favor of progressives like Heather Boushey and Jared Bernstein, and deficit hawks like the Committee for a Responsible Federal Budget have been left screeching irrelevantly from the sidelines, isn’t just gratifying as spectacle. It suggests a big move in the center of gravity of economic policy debates.....
4. A full employment or high pressure economy has benefits that go well beyond the direct benefits of higher incomes and output. Hysteresis is part of this — full employment is a spur to innovation and faster productivity growth. But there are also major implications for the distribution of income. Those who are most disadvantaged in the labor market, are the ones who benefit most from very low unemployment. The World War II experience, and the subsequent evolution of the racial wage gap, suggests that historically, sustained tight labor markets have been the most powerful force for closing the gap between black and white wages.
I’m not sure how much people in the administration and Congress were actually making arguments like these in framing the bill. But even if they weren’t explicitly argued for, some mix of them logically follows from the willingness to pass something so much larger than the conventional estimates of the output gap would imply. Some mix of them also must underly the repeated statements that we can’t do too much, only too little, and from the recognition that the costs of an inadequate stimulus in 2009 were not just lower output for a year or two, but an extended period of slow growth and stagnant wages. When Schumer says that in 2009, “we cut back on the stimulus dramatically and we stayed in recession for five years,” he is espousing a model of hysteresis, even if he doesn’t use the word.....
5. Public debt doesn’t matter. Maybe I missed it, but as far as I can tell, in the push for the Rescue Plan neither the administration nor the Congressional leadership made even a gesture toward deficit reduction, not even a pro forma comment that it might be desirable in principle or in the indefinite long run. The word “deficit” does not seem to have occurred in any official statement from the president since early February — and even then it was in the form of “it’s a mistake to worry about the deficit.” Your guide to being a savvy political insider suggests appropriate “yes, buts” to the Rescue Plan — too much demand will cause inflation, or alternatively that demand will collapse once the spending ends. Nothing about the debt."
There's a lot to mull over here. But I am persuaded that we may be living through economic changes whose profundity is difficult to fully comprehend in real time. We should be trying though. It really could change everything, not least the political opportunities that lie before us.
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