Bidenomics - the antithesis of Reaganomics?

Does President Biden’s legislative success invite the question: has Joe Biden undone the Reagan legacy and created a modern vision of Alexander Hamilton’s economically active federal government?

President Biden has embraced direct comparison with President Reagan. Speaking in Chicago on 28 June 2023 the President took up the sobriquet Bidenomics, saying that ‘I came into office determined to change the economic direction of this country, to move from trickle-down economics to what everyone on Wall Street Journal, the Financial Times, began to call Bidenomics. I didn't come up with the name. I really didn't. I now claim it, but they're the ones that used it first.’ For President Biden his administration is offering for the first time in forty years, something different from President Reagan’s legacy. He is building the economy from the bottom up. 

President Biden’s Economic Growth Agenda

The Annual Economic Report of the President for 2023 has a chapter, emphasising the importance of economic growth, Pursuing Growth-Enhancing Policies in Today’s Changing World that focuses on the need to increase the ‘pie’ and goes on to assert that ‘The core of the Biden-Harris Administration’s economic agenda is building a foundation for steady, sustainable, and shared growth by increasing economic capacity.’ The administration has been successful in its own terms in passing legislation to accomplish its objectives.

How different is Biden from the Reagan administration?

Biden’s programme of industrial subsidies, trade protection, infrastructure and investment are enthusiastically trumpeted as the manifest repudiation of the Reagan administration’s legacy. For many progressive commentators the latest direction of policy could be framed as a Hegelian dialect, where the Reagan supply side thesis has finally provoked a progressive antithesis. Yet in many respects both the Biden and Reagan administrations have more in common than either the President or his progressive supporters would be comfortable with having drawn to their attention. 

The two big drivers of the Biden administration’s economic agenda have been fiscal stimulus based around tax cuts or credits passed in 2021 that further stimulated demand and a mercantilist ‘lets produce at home’ industrial strategy. This is not so different from the Reagan administration. The Economic Recovery Tax Act 1981 (ERTA) included tax cuts, increases in defence spending and no cuts to domestic mandatory or discretionary federal spending. The result was huge deficits that peaked at 6 per cent. The President’s radical supply side agenda was vividly described as ‘War Keynesianism’ in the New Republic magazine. 

Both administrations faced commodity and oil price pressures arising from foreign geopolitical crises – in the 1980s the middle east and in 2022 Russia and the Ukraine that aggravated inflation. Both administrations encountered the headwinds created by the Federal Reserve Board’s tightening of monetary conditions to disinflate the economy.

President Reagan was no model of free trade and open markets – ask Japan

While President Reagan talked about free enterprise and capitalism, as one member of his Council of Economic Advisers from 1981 to 1985, William Niskanen, has pointed out that during his administration there was ‘a substantial increase in import barriers. It ‘added more trade barriers than any administration since Hoover. The share of U.S. imports subject to some form of trade restraint increased from 12 percent in 1980 to 23 percent in 1988’. Moreover, the important deregulation legislation that liberalised US product markets was passed by President Carter not President Reagan. President Reagan was concerned about the competitive challenge posed by the Japanese electronics and car industries and took decisive trade measures to blunt their impact on vulnerable domestic American markets. The Plaza Accord in 1985 on foreign exchange management was principally directed at making Japanese goods less competitive by revaluing its exchange rate and probably laid much of the ground for Japan’s eventual protracted deflation.

Ad hominem similarities between the two presidents 

There are also several interesting personal similarities between President Reagan and President Biden. They entered office as the oldest men until then to take the oath of office. Neither would normally be accused of intellectual acuity. Both appear to become more visibly intellectually frail during their administrations. They publicly appear to lean on and be influenced by formidable wives - the late Mrs Nancy Reagan and now Dr Jill Biden. These first ladies are very different characters but equally concerned about their husbands, acting as powerful guardians of their spouse’s interests.

Picking talented teams of advisers 

They both constructed highly capable Cabinets and teams of advisers. President Reagan benefited from Don Regan and James Baker as Treasury Secretaries and George Schultz as Secretary of State. In the same manner President Biden has a strong Cabinet team with Janet Yellen at the Treasury, Anthony Blinken the Secretary of State and Jake Sullivan the National Security Adviser. President Biden has also secured the services of Lael Brainard, the former Vice-Chair of the Federal Reserve Board as director of the National Economic Council.

A capacity to reach out to opponents to pass legislation and shared anxiety about a threat from an intimidating foreign power

Both presidents proved themselves able to work with Congress and secured a degree of bipartisan legislative success. Both presidents identified an existential threat to US security requiring them to respond to a dangerous, threatening and unstable rival superpower. In President Reagan’s time it was the USSR and today it is China. Both administrations showed themselves alert to the limits of US military power. For President Reagan it was the lesson of Vietnam. While for President Biden it is the scars of Iraq and Afghanistan.

President Biden gives new life to industrial policy and state capitalism

President Biden’s programme is an attempt to breathe life into industrial policy and restore life to rust belt communities. It has used the necessity of national security to repatriate economic activity to the US and the need to decarbonise the economy to mitigate climate change as the basis of its ambitious measures. The Biden administration has brought new life to Alexander Hamilton’s inspiration for an active federal state.

The American Rescue Plan Act passed in March 2021, was $1.9 trillion fiscal stimulus package that included $1,400 payments per adult, an expanded child tax credit for a year with $250-300 monthly payment per child expected that was expected to significantly reduce child poverty, extended unemployment benefits, and an expansion eligibility for healthcare benefits. The main fiscal effect was expected to be in fiscal year 2021, with a diminishing impact in Fiscal 2022. Yet it is clearly part of the explanation for the continued strength of the labour market and economic activity, despite the Federal Reserve's higher interest rates.

President Bidden made further progress with the passage of the Infrastructure Investment and Jobs Act, passed with bi-partisan support that he signed into law in November 2021. This authorised infrastructure spending of $1 trillion over a decade on roads, bridges, airports, seaports, rail, broadband, water, and public transit, among others. The Congressional Budget Office estimated that in the long term it would raise the Federal deficit by $250 billion when they scored against previous expected spending on infrastructure when constructing a spending baseline for the comparison. 

The Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act passed in July 2022. Its purpose is to address the issue of America’s dependence on imports of advanced chips from China and Taiwan. In 1990 the US produced 37 per cent of the world's microchips, today it produces 12 per cent. Taiwan Semiconductor Manufacturing Company, TSMC produces 90 per cent of the world's main semiconductors critical for defence, cloud computing, fast communications networks and AI. Given the geopolitical threat that China poses to Taiwan the Biden administration identifies home production of semiconductors as a national security matter. Rhetorically the legislation has been compared to the 1960s Moon Shot. It is one of the largest federal programmes in decades. Act seeks to create two ‘clusters’ supported by a network of research and development facilities.

Ana Swanson in The New York Times described the Act as ‘A sprawling new program for the semiconductor industry is foremost about national security, but it will try to advance other priorities as well’, 28 February 2023. The legislation has been overlaid by wider policy dimensions to such a degree that the Financial Times in a leading article likened it to a Christmas tree: The US Chips Act becomes a Christmas tree. The White House is using a national security priority to tackle too many goals, 23 March 2023.

Many wider financial objectives and social policies have been attached to the legislation that are remote from chip production. For example, among the conditions for the receipt of subsidy are no expansion into China for ten years, restrictions on the use of funds for distribution to shareholders as dividends or share buybacks, sharing of unexpected profits with the federal government, trade union rates of pay and childcare for employees’ children. This could include building company childcare centres near construction sites or new plants, paying local childcare providers to expand capacity at affordable prices for local workers or the companies directly subsidising their employees’ childcare costs.

From the Commerce Secretary’s exposition of the CHIPS Act incentives, it is not clear whether the Act is a strategic attempt to return production to the US or federal programme of support for childcare more akin to Head Start. When the Act will achieve its purpose is not clear. The costs of the semiconductor plants are enormous. The US federal government is offering a subsidy that will only cover a fraction of the costs. The US enjoys a comparative advantage in relation to R&D and new semiconductor technologies, but it is at a cost disadvantage in terms of large-scale production facilities. Moreover, the complex processes involved in the manufacture of chips are spread throughout a highly specific international division of labour spread across the world from Japan to the Netherlands and Germany. 

The Inflation Reduction Act IRA passed in August 2022 is the third piece of legislation passed since late 2021 that seeks to improve US economic competitiveness, innovation, and industrial productivity. This was much more contentious and relied on Democrat votes to be carried. It is a hodge podge of spending and tax measures that bear little relationship to the headline title of the Act. Its purpose is to stimulate investment in American domestic manufacturing capacity, and support new research and investment in technologies that are necessary for the green transition, such as carbon-capture and clean hydrogen. It also includes tax raising measures, principally anti-avoidance measures to maintain the tax base and charges for prescription drugs that should lower household spending contributing to lower inflation. 

There is no doubt about the general bi partisan political support for the Chips Act, nor the attraction that Janet Yellen’s suggestion of ‘friend shoring’ holds for people. The interesting thing, however, will be the evaluation of each part of the programme’s legislation that will eventually be carried out by the General Accountability Office. What will be the return on capital on the various projects and to what extent will the value of the programme be vitiated by deadweight costs.

Best friend the unions have ever had in White House

President Biden regards himself as the best trade unions have ever had in White House. Trying to restore trade union collective bargaining to the status quo ex ante 1980 is going to be very difficult if not impossible. The world has changed. One strong union supporting economist Danny Blanchflower based in the US made an interesting observation at the Annual Conference of the British Society of Professional Economists in 2022. When asked about the return of US trade union bargaining power, he said that unions in recent years had found it increasingly difficult to agree binding contracts with employers because the health insurance component of the contracts was so expensive that the employers could not make binding agreements on compensation. 

Is the Biden agenda the programme that Clinton ran on but abandoned?

In many respects President Biden’s legislation mirrors the initial policy ambitions of the Clinton administration. President Clinton was elected on a platform that proposed to give effect to the policy implications of new economic growth theory pioneered by Paul Romer, Brad DeLong and Alicia Munnell. That was before caution at the Treasury Department where Brad DeLong and Alicia Munnell served and increasing concern about deficits on interest rates and the role that cost of capital had on investment. This concern about the potential adverse effect of deficits on private formation investment resulted in President Clinton’s Treasury secretaries emphasising deficit reduction, which eventually resulted in federal surpluses rather than spending on large scale social or investment programmes. The Biden administration however is very different to the Clinton administration in terms of trade. President Clinton’s cabinet and economic advisors welcomed trade, the international division of labour and the competition, challenge and contest that it implied for US domestic markets. President Biden in contrast has much more in common with his immediate predecessor President Trump, sharing his anxiety about China and his instinct to protect domestic producers from international competition. 

Is American economic growth on track to be transformed? 

Will President Biden’s ambitious programmes deliver the transformation he hopes for? Alas it appears that the answer is no.hhh This disruption of Covid and the recovery of output and employment from the partial closure of the economy makes comparison between different economic cycles and administrations difficult. The US economy has recovered relatively well which reflects both the aggressive use of fiscal policy as a source of economic stimulus and the Federal Reserve Board’s initial hesitancy to deal with what has become a general price inflation. The Biden administration has understandably drawn attention to both the recovery in employment and the recovery in output. On 28 June 2023 President Biden in a White House briefing note said the ‘economy has added more than 13 million jobs—including nearly 800,000 manufacturing jobs’. The US Treasury Department in a blog The U.S. Economic Recovery in International Context observed on 5 June 2023 that ‘Relative to pre-pandemic trends, economic output continues to fall short. However, the United States has performed better than other G7 economies (and the Euro area) with real GDP just 1.4 percent below trend’. It is this strength in both the US labour market and economic activity that continues to worry the Federal Reserve board in relation to its 2 per cent inflation target and may result in the Fed tightening monetary conditions further. So in terms of short term economic management the economy has done well, albeit with worries about inflation. The big and much more problematic questions relate to the medium and long term performance of the US economy.

The latest Congressional Budget Office long term economic forecast contained in The 2023 Long-Term Budget Outlook published on 28 June 2023 does not bode well. The CBO’s judgement is grim: ‘The United States faces a challenging fiscal outlook. If current laws generally remained unchanged, budget deficits and federal debt would grow in relation to gross domestic product (GDP) over the next three decades, according to the Congressional Budget Office’s projections. The figures below present highlights from those projections and the economic forecast underlying them’. It is a projection of slow growth, rising deficits, an accumulating stock of public debt and slowing economic growth.

The heart of the problem is a mismatch between rising recurrent spending on Social Security – essentially old age pensions, on health care for elderly people through Medicare, low income people through Medicaid and tax expenditures to support expensive private health care insurance for people with employer provided health care. 

The US federal deficit is the product of revenues not remotely approximating to spending outlays. This has little or nothing to do with the state of the economic cycle but instead a growing structural budget deficit. The result is a rising ratio of national debt to GDP.

There are three dynamics: an adverse demography of an ageing population, an inefficient health care system that yields consistent increase in health spending and an incomplete tax system that has no comprehensive economically neutral federal expenditure tax. Instead, the tax system relies on income, payroll, social security tax and corporation and capital taxes that exhibit aggravated deadweight costs and involve the double taxation of savings income, lowering saving and investment. This awkward fiscal mix is reflected in three things: high deficits that represent a public expenditure problem, a rising stock of public debt and a disappointing and slowing rate of growth of national income. There is no evidence here of any success in building the economy from the bottom up. Instead, it is a further iteration of the secular fall in the rate of economic growth.

President Reagan’s cut in top marginal tax rate pretty much remains in place

President Reagan’s lasting fiscal legacy was to engineer a large cut in the top marginal income tax rate in the federal income tax. During the Reagan administration the top rate of tax was reduced from 70 per cent to 28 per cent. Other administrations have put it up, such as the Obama administration, but it has never reached 40 per cent. The present top rate is 37 per cent the threshold for paying this as an individual is over $500,000. In the various measures that President Biden has passed there has been no return to the high marginal income tax rates President Reagan inherited. The Inflation Reduction Act includes various revenue raising measures to protect the income taxbase. In the White House Fact Sheet to explain the Act the President goes out of his way to explain that this will only touch the very top. ‘The Inflation Reduction Act will make our tax code fairer by cracking down on millionaires, billionaires, and corporations that evade their obligations, and making sure the largest corporations pay their fair share.  No family making less than $400,000 per year will see their taxes go up by a single cent’. The federal tax code may still represent a Manhattan Skyline of high and erratic marginal rates that phase in and out of the earnings distribution, but its top marginal rate remains competitive. It is not clear that President Biden has changed the fundamentals of the political weather by a huge amount. 

President Biden’s rhetoric of nostalgia rooted in pessimism

The striking thing about President Biden’s exposition of his policy agenda is its lack of coherence, the folksy, nostalgic rhetoric and the framing of it around a defensive pessimism rooted in the past. Its emphasis is transformation in the rate of economic growth through the restoration of a manufacturing economy that has gone. It was largely dismantled forty and fifty years ago. Manufacturing now accounts for around 12 per cent of US output. It is not surprising that the Congressional Budget Office cannot identify a turnaround in the long-term prospects of the US economy.

There is one big difference between President Biden and President Reagan. President Biden has not been able to articulate his agenda with the flair and elan that President Reagan brought to the Oval office. Where Reagan was infectiously optimistic, President Biden is dour. Where Reagan found it easy to be politically gracious, President Biden can appear sour. Reagan embraced the future, President Biden reverts to a pessimistic nostalgia. 

In California the Nixon and Reagan presidential libraries are within easy driving distance outside Los Angeles. The Nixon library conveys a profound gloom. In contrast the Reagan library is an exciting, infectious exercise in DisneyLand for political junkies. In many respects it offers a complete repudiation of the Nixon administration’s détente, the management of the Soviet threat and President Nixon’s management of the economy and his failed price controls. It will be interesting to see the kind of library that President Biden plans. The fact that he has a legislative record that warrants interrogation and invites the question of whether, after forty years, the Reagan dragon, from his point of view, has been slain, is a compliment to him as a politician.

Warwick Lightfoot

15 July 2023

Warwick Lightfoot is an economist and was Special Adviser to the Chancellor of the Exchequer from 1989 to 1992. His book American’s Exceptional Economic Problem was published in 2017.