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Karl W. Smith is a Bloomberg Opinion columnist. Previously, he was vice president for federal policy at the Tax Foundation and assistant professor of economics at the University of North Carolina.
Presidential administrations never stay the same from beginning to end. Top personnel come and go for various reasons, and we seem to be seeing that now with the Joe Biden administration. Bloomberg News recently reported that the White House’s top economic adviser, Brian Deese, is expected to depart next year as director of the National Economic Council. There’s speculation that Cecilia Rouse, chair of the Council of Economic Advisers, will leave next year as well.
For Biden, these departures are potentially welcome news. His administration’s economic policy desperately needs an overhaul after adjusting too slowly to a new reality that threatens both the health of the economy and the president’s reelection chances in 2024. When he took office, Biden and his team assumed they would be dealing with the same economic challenges that plagued recent predecessors, especially a jobless recovery. (This happens when job growth is sluggish despite more robust gains in gross domestic product.)
This was part of a larger economic trend that some economists had dubbed secular stagnation. Savings rates around the world, but particularly in Asia, were on the rise, and so was risk aversion. The global glut of savings gravitated toward haven-like assets such as U.S. Treasuries. The large inflows into dollar-denominated assets drove up the value of the currency, which made imports more affordable for American consumers. The result was an economy in which it was cheap to borrow but difficult to find productive investments that did not face the threat of lower-cost foreign competition. The solution was to print more dollars and increase U.S. competitiveness via deficit-financed corporate tax cuts.
That was all before the pandemic. A fundamentally different economic reality has emerged in its wake. Massive deficit spending may have sated the global appetite for treasuries and left U.S. consumers flush with cash, but supply chain disruptions increased the demand for U.S.-based investment and, seemingly as a direct result of COVID-19, some 4 million workers vanished from the labor market. So, policies that were appropriate before 2020 are disastrous now. Consumer demand seems almost indestructible, with retail sales continuing to rise despite the Federal Reserve’s best efforts to rein it in through tighter monetary policy. Job security is strong, as employers are reluctant to shed workers out of fear that they will not be able to get them back.
The Biden administration was famously slow to see all this coming, promising early on that a rising rate of inflation was the result of transitory factors rather than fundamentally strong consumer demand combined with an economy-wide labor shortage. That was understandable. Turning points are difficult to detect in real time.
What’s less forgivable is the continued push for pre-pandemic-style policies even now. Only after the insistence of West Virginia Sen. Joe Manchin did congressional Democrats settle on the slimmed-down Inflation Reduction Act, whose only major inflation-reducing component was $300 billion in deficit reduction. The White House, however, blew those savings in one fail swoop with its executive order on relieving student debt.
It would be a mistake to interpret the modest losses the Democrats sustained in the midterm elections as indicating that voters are OK with the state of the economy. Rather, it was public backlash against Jan. 6 and the MAGA movement more generally that saved Democrats from what would have otherwise been a midterm election defeat. Biden’s approval rate remains dismal and on par with where Donald Trump was at the same point in his first term.
If the Republicans do Biden the favor of running Trump for president again, perhaps Biden can win a second term simply by continuing to do what he has been doing. Otherwise, his administration is going to need to take the new economic environment seriously. That means policies that reduce government spending, shrink the budget deficit and increase tax revenue. Those types of policies will ease longer-term inflationary pressures and give the Fed the breathing room to stop raising interest rates.
Coming out of the pandemic, nations are rightfully concerned about making supply chains more secure and less reliant on trade partners. Nonetheless, the Biden administration should aggressively seek expanded trade agreements with U.S. allies such as the United Kingdom and Japan, in order to maximize the cost savings from free trade without leaving the country vulnerable to sudden shortages. Also, it should stabilize global energy markets over the longer term by encouraging the production and export of U.S. natural gas through permitting reform.
This suite of policies would help reduce domestic demand, increase the supply of goods and services available to consumers, lower inflation, and show voters that the White House understands that times have changed. If the administration can’t do that, then it may very well be voters who force through change in 2024.