Janet Yellen explains Bidenomics

The case for modern supply-side economics

Back in 2018, Joe Biden’s economic policy ideas were focused on a sort of pro-worker growth agenda with a lot of emphasis on tax fairness and spreading economic opportunity across a broader geography. I wrote at the time that compared to his rivals in the primary field, he was less interested in transforming the United States into a European-style welfare state. And while Biden later embraced more aggressive welfare state expansion, that has mostly (with the important exceptions of some prescription drug price reforms and enhanced ACA subsidies) not panned out, despite other major legislative successes.

But as Treasury Secretary Janet Yellen emphasized in a Michigan speech yesterday, Biden has mostly delivered on his pro-worker growth agenda, with its emphasis on tax fairness and geographically broader economic opportunity.

I spoke with her in advance of the speech to get a better understanding of her account of Bidenomics, and it’s clear that this point on economic geography is something the administration thinks is important.

“We’ve had an economy in which most of the investment and growth has been concentrated on the coasts,” she told me, “and both the infrastructure bill and the climate legislation create a lot of good jobs and a lot of investment that’s going to be broadly distributed across the country.”

Michigan is the center of U.S. car manufacturing, an industry that’s been impacted by all the major legislation during the Biden years. That starts with the simple fact that demand for new cars has remained robust throughout the entire period with no collapse of demand. The Infrastructure Investment and Jobs Act invests in creating charging stations for EVs, the Inflation Reduction Act invests in American EV manufacturing, and the Chips Act tries to address a key supply-chain bottleneck that’s held back production. There’s more to Bidenomics than cars, but the auto industry is emblematic of the approach Yellen calls “modern supply-side economics” that aims to harness *all* the major factors of production and not just shower private financial capital with tax incentives.

The old supply side

In the speech, Yellen contrasted her view with the “traditional approach to supply-side economics” — basically tax cuts for businesses and investment income — which she said has “contributed to deepening income and wealth disparities.”

The traditional argument is that low taxes lead to an influx of financial capital, which generates an increase in tangible capital, which in turn raises productivity and eventually wages, generating a rising tide that lifts all boats.

I think an interesting question is to what extent this actually worked in the 1980s. The Reagan-era economy did actually grow a lot, but average wage performance was dismal. Liberals sometimes exaggerate the significance of that by ignoring the extent to which average wages were being dragged down by a huge increase in women’s labor force participation. But at the same time, I think conservatives often exaggerate how much the economic growth of the 1980s had to do with Reagan’s economic policy when growth was being pulled up by that same increase in women’s labor force participation. In other words, the dominant supply-side economic force of the Reagan years was feminism, which I don’t think he had very much to do with.

Flash forward to 2017, and Paul Ryan and Donald Trump are essentially making the same play: if we cut corporate income taxes, investment will boom and productivity and wages will surge. Nothing terrible happened as a result of the Tax Cuts and Jobs Act, but this boom just didn’t occur. Instead, the pre-existing growth trend just plodded along.

Yellen says this whole approach reflects an excessively limited focus and tells me that we need to look at all the factors of production.

“It’s not just physical capital, it’s also other forms of capital — particularly public capital which is critical and has been shortchanged for decades,” along with funding for basic and workforce development, all of which exist across multiple pieces of Biden-era legislation.

Yellen offered broadband as a particularly important example of a public capital investment that also ties into human capital development and geographic equity. The bet is that as with more traditional public infrastructure like ports, roads, bridges, and railroads, the social returns on connecting poor neighborhoods and rural areas to fast internet will be large, even if the private sector ROI is too low to make it worth corporate America’s while, no matter how many tax breaks they get.

A resilient economy

The Biden administration will probably be haunted for years by the charge that the American Rescue Plan was too large. And certainly, I think aspects of it were poorly designed and we ought to rely more on automatic stabilizers going forward rather than guesswork.

What the administration says now, to quote Yellen’s speech, is that “the tail risk of the pandemic’s impact on our economy was a downturn that could match the Great Depression” and a super-sized ARP eliminated that tail risk. I don’t think that fully answers the smarter criticisms of ARP by any means, but it does set up one of the larger themes of Bidenomics, which is prioritizing certain forms of resilience over a narrow sense of efficiency. That starts with a rapid and full labor market recovery to avoid scarring or the kind of falls in labor force participation that we saw in some recent business cycles. But it includes investments in both climate mitigation and adaptation, as well as the ongoing efforts to reconfigure America’s supply infrastructure in a way that better reflects geopolitical realities.

Kevin Drum made the point earlier this week that no matter what fuss you make about the details, at the end of the day, America has had the best economic performance in the world over the past few years.

Yellen notes in her speech that if you look at Gross Domestic Income (GDI), the economy has actually grown more than was predicted in pre-pandemic forecasts. GDI and GDP are equal by definition according to economics textbooks, but the statistics are assembled through different counting processes, so there’s always a small statistical discrepancy. Except this year it’s actually been a very large statistical discrepancy, so whether growth has been “faster than in other countries” (GDP) or “faster than pre-pandemic” (GDI) is something we won’t know for sure until after multiple rounds of revisions. But while I think the administration continues to want to show that they feel people’s pain in terms of commodity prices, the basic story is that the economy is strong, given the sizable shocks from the pandemic and the war in Ukraine.

Building Back Better

This chart offers an interesting view into how the American economy has evolved since the start of the pandemic, a transformation that looks to me mostly like change for the better.

If you look at charts like that, and if you look at the ongoing investment in manufacturing batteries and fiber optics and semiconductors, you can see the outlines of the kind of transformation Yellen and Biden are talking about.

You obviously can’t guarantee that the increased investment in public R&D will pay off, since if you knew for sure what R&D would accomplish you’d have accomplished it already. But science and innovation are the ultimate wellsprings of prosperity, and it’s long past time to re-invest in them.

But the administration has several pieces of unfinished business.

One is related to the question of how much more job growth the country can sustain now that we’ve recovered to the prime age employment-population ratio we had before the pandemic. When I asked her, Yellen declined to venture a precise estimate. But she did say, “my guess is we need policy changes to, for example, significantly boost women’s participation in the labor force” — alluding to the kind of investments in child care that Biden supports but that Congress so far hasn’t acted on. No administration accomplishes everything they set out to achieve, but that’s the big missing piece in terms of Yellen’s prescription for what a modern supply side agenda needs to offer.

In her speech, she also talked about the need to “coordinate permitting reform across the government,” which I think is clearly going to be the subject of a lot of near-term debate. She also alluded to the need to increase domestic production of critical minerals, which she vows will be done in an environmentally responsible way. But the regulatory regime needs to be permissible enough that we can get the materials needed for solar panels and batteries. And right at the end, she says, “it is a national imperative to increase the affordability of housing … we must continue advancing our coordinated government approach to expand the supply of housing,” which I obviously agree with.

All of this is perhaps a bit of a tougher intra-coalitional conversation for a Democratic administration, but they seem to be going in the right direction.