Karl W. Smith: Biden’s economy is actually pretty good | Voice


NEW YORK — Americans are deeply disappointed with President Joe Biden’s economic performance. Nearly two-thirds of voters say the country is on the wrong track, almost half say the economy will deteriorate next year and, by a 29-point margin, more expect the inflation is getting worse rather than better.

I certainly had my criticisms of the Democrats’ economic policy. But it is important to note what they understood well and ask themselves what they could have and could have done better.

It’s important to review a bit of recent history: when the global financial crisis erupted in 2009, Washington moved quickly to stem the collapse and prevent a repeat of the Great Depression.

Then they largely dropped the ball. The recovery was slow, painful and led to millions of Americans being so discouraged that they left the workforce altogether.

Some economists argued at the time that this was the best that could be expected. Others of us argued that the solution was simple: the economy was suffering from a demand deficit, i.e. overall spending was not sufficient to create jobs for all. those who were willing to work. The goal of policy should have been to fill this gap.

In particular, nominal gross domestic product had fallen well below the trajectory it was on before the crisis. (Nominal GDP is a measure of a country’s output at current prices; real GDP is adjusted for inflation.) The Federal Reserve should have promised to keep interest rates low until she made up the difference.

The intuition is that people don’t adjust to inflation as they go about their day and plan their lives. They take out mortgages, accept salaries and start new businesses based on the actual amounts at stake. When suddenly they don’t have enough money, due to an economic crisis, their plans fall through.

The solution to this dilemma is to bring the total amount of nominal income circulating in the economy back to previous levels. Then hiring will pick up and the economy will enter a virtuous, self-perpetuating cycle.

Remarkably, this is almost exactly what has happened over the past year and a half. The US economy entered a brief recession due to COVID, but thanks to a combination of tax relief and monetary support, nominal GDP is now back on track. As expected, unemployment fell, reaching 4.2% last month, just 0.7 points higher than before the pandemic.

Yet this solution comes at a cost: above-average inflation during the pandemic itself. After all, if real GDP declines—and that’s what the recession was—for total spending to stay the same, prices have to rise to make up for the shortfall. In fact, that is also almost precisely what happened.

The economic theory here is that a short period of inflation is a price to pay for reducing unemployment. As a political strategy, however, it is a non-starter.

Part of that is surely due to miscommunication from the White House. For example, Biden could have been quicker to address supply chain slowdowns at ports and show more support for an oil and gas industry that worries not only about how COVID will change consumer behavior. , but also the administration’s climate policy.

More broadly, Biden should have been more outspoken about the choice facing the United States: between a lingering recession and a short burst of inflation. He could have argued that his administration was not going to repeat the mistakes of the early 2010s. If he had, perhaps Americans would have been more willing to accept higher prices.

Of course, it would be foolish to believe that all of this would have significantly changed the general sense of Americans’ economy. The restoration of nominal GDP to its pre-crisis trajectory is a real achievement, but it inevitably induced a period of rising prices. The public just doesn’t like inflation, no matter what economists or politicians say. And while economists — or columnists — don’t have to deal with voter wrath, presidents do.

Karl W. Smith is a Bloomberg Opinion columnist. He was previously vice president for federal policy at the Tax Foundation and assistant professor of economics at the University of North Carolina. He is also co-founder of the economics blog Modeled Behavior. © 2021 Bloomberg Opinion.

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