Just how good is the economics in Bidenomics? US President Joe Biden’s administration is in full PR mode, crisscrossing the country to promote the president’s economic policies. These include the Infrastructure Act of 2021, the Chips and Science Act and the Inflation Reduction Act of 2022, all of which provide incentives for companies to invest in physical infrastructure. It would take years to gauge their impact on the economy.
A simple comparison between the slow recovery from the financial crisis during the administration of former US president Barack Obama and the rapid one under Biden clearly suggests that the latter’s approach of prioritizing people — the child tax credit in 2021, the stimulus checks and the added unemployment benefits — has paid off in terms of juicing growth.
However, instead of asking whether the policies are paying dividends right now, let us ask whether they strike the right balance between efficiency and resilience.
For decades, efficiency, which means producing the greatest output at the lowest cost, was the key criterion economists considered when advising policymakers. Efficiency-minded economists emphasized the importance of expanding international trade, which brought the US cheaper consumer goods. The COVID-19 era, though, has shown that efficiency comes at a cost in the form of an economy that can be slow to adjust to unforeseen crises.
Resilience, in contrast, aims to create systems that can help the economy recover quickly if a crisis hits. One example is unemployment insurance. When it works well, it helps maintain spending when many people lose their jobs and earnings fall, especially in a recession. That helps people make ends meet and prevents further unemployment, helping buffer the next recession. Although unemployment insurance makes the economy more resilient, it comes with an efficiency cost, including hiring during a labor shortage that adds to employers’ costs.
The Chips Act offers a chance to see the two sides duke it out. It aims to promote domestic production of computer chips so that we are not stuck with crippling shortages of these vital goods when trade is disrupted, as happened during the COVID-19 pandemic. Avoiding those shortages has obvious benefits, but subsidizing domestic production goes against the usual efficiency paradigm of having goods produced wherever it is cheapest.
Unsurprisingly, efficiency economists are critical of the program, particularly the subsidies to chip manufacturers. They estimate that just with the Chips Act alone, tens of billions of dollars are to go to companies that may already have planned to expand. With a labor shortage, the requirement to push for diversified employment might be difficult for companies to achieve and cause inflation.
In short, the efficiency economist would not like attaching “strings” to the subsidies.
However, economists are generally slow to learn that “just in case” (resilience) as opposed “just in time” (efficiency) should also be a focus of government fiscal policy, said Markus Brunnermeier, an economics professor at Princeton University who wrote the book Resilient Society.
“We must prioritize resilience, which turns redundancies into a virtue,” Brunnermeier wrote.
Bidenomics is heavy on resiliencies.
It is not an either/or debate. Neither efficiency nor resiliency should always be the goal, and balanced thinking is beneficial in bolstering the economy ahead of the next recession. Yes, building resilience in the economy involves a cost, but the hardship from our lack of resilience — broken supply chains, a severe semiconductor shortage, a labor shortage — itself imposes a heavy cost that cannot be ignored, as we have just learned.
Here is how White House National Economic Council director and former Federal Reserve governor Lael Brainard recently put it: “Most recently, the waves of the global [COVID-19] pandemic followed by Russia’s war on Ukraine revealed fragilities in the supply side of our economy that contributed to severe shortages and a surge in inflation. Our economy faced acute constraints on shipping and on the supply of non-substitutable intermediate inputs like semiconductors. This experience highlights the importance of investing in the supply side of our economy to make it more resilient. Efficiency resource use remains an important goal, but we now know that resilience is also needed to prevent and mitigate damaging supply-side breakdowns.”
Physical investment is critical, but so is investment in people. When economic policy shoots for both resilience and efficiency, that is when everyone benefits.
Claudia Sahm is the founder of Sahm Consulting and a former US Federal Reserve economist. She is the creator of the recession indicator Sahm rule. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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