Bidenomics Part II: A net win or loss for the economy? (Gettysburg Times op-ed)

While the fiscal stimulus bills passed in 2020 and 2021 produced record growth in 2021, as we discussed in Part I, this growth came with a downside. The inflation rate, which had hovered around 2 percent for the previous decade, soared in 2021, reaching a peak of 9 percent in the twelve months ending in June, 2022. Some of this inflation was a result of the new spending laws. But much of it was beyond the Biden administration’s control. Oil prices soared because of OPEC’s production cutbacks and Russia’s invasion of Ukraine. Russia’s invasion of Ukraine also reduced global supplies of grains and fertilizer, leading to a spike in food prices. Shutdowns in China and other countries snarled global supply chains, and a shortage of workers drove wages and prices up further.

Both the Federal Reserve and the Biden administration were slow to combat the rise in inflation in 2021, believing that it would be short-lived. But the Fed began to raise interest rates in 2022 and 2023. Meanwhile oil prices fell and supply chain problems were resolved. The Biden administration probably played a small role in this by releasing oil from the Strategic Petroleum Reserve, encouraging more oil production by US producers, and forming a task force to help businesses restore supply chains. Inflation has fallen steadily since July 2022 to just over three percent by February 2024. Real wages began rising again. Mortgage rates have fallen a little and will likely fall further as the Fed plans to cut interest rates in 2024. But the persistence of high prices, especially for food and rent, remains a serious problem for American households.

So, we must place inflation in the loss column on our Bidenomics stats sheet. What goes in the win column? First, of course, is the strong recovery that has resulted in GDP and employment returning to their pre-Covid levels in record time, as discussed in Part I. Second, real wages have risen by over two percent since inflation started falling and are over 3 percent higher than they were before Covid. Most importantly, wage gains have been concentrated at the lower end of the distribution. Recent research by economists at MIT and the University of Massachusetts found that because of a tight labor market, by 2023 workers in the bottom ten percent of the wage distribution, people with less than a college education, and young workers had all experienced significant increases in their real wages. These gains were so strong that they reversed 40 percent of the widening inequality in wages that the U.S. has experienced since the 1980s.New spending initiatives by Congress and the Biden Administration should keep the economy humming in years to come. The Bipartisan Infrastructure Act of 2021, the CHIPS and Science Act of 2022, and the Inflation Reduction Act of 2022 authorized massive increases in spending on infrastructure projects, investments to help businesses move production facilities out of China and into the U.S., and subsidies to accelerate our transition to alternative sources of energy. We have not seen the economic benefits of these new programs yet, but they have helped trigger an explosion in construction of new manufacturing facilities. Since August 2022, construction spending in U.S. manufacturing has almost doubled after controlling for inflation. If all goes well, these new investments will spur a revival of manufacturing and manufacturing jobs for years to come. Ironically, given lack of Republican support for these bills, most of the new investment has occurred in red states.

It seems that the government’s aggressive response to the Covid recession and the Biden Administration’s investment initiatives have brought the era of secular stagnation to a close. The economy has remained at full employment for the last two years. As a result, wages are rising, major investments are underway, and productivity is rising as businesses struggle to economize on scarce labor. All these developments are good news. Inadvertently perhaps, the Biden administration has adopted the advice that the economist John Maynard Keynes gave almost 90 years ago: “The right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom.” The price of keeping the economy in a quasi-boom is the ever-present fear of a rise in inflation and higher interest rates. But these are better problems to have than the constant problem of quasi-slumps we experienced in the period of secular stagnation.

Charles Weise is a professor of economics at Gettysburg College. The opinions are his own.