The Biden administration is off to the races – the new President kicked off with a record 15 executive orders and two executive actions just on his first afternoon (none of his predecessors in modern history signed more than one) and had signed a total of 30 by the weekend. What should we expect for the next four years?
I find it useful to analyze future economic developments in three buckets: (1) things that Biden will do very differently from Trump, reflecting a very different ideological stance; (2) areas where Biden’s policies will remain very similar to Trump’s, reflecting the constraints of a changed world; and (3) key developments outside the policy arena, notably innovation and investment.
Regulations fall neatly into the first bucket. One of Biden’s first executive orders was to revoke a previous one by Trump that required government agencies to eliminate two existing regulations for every new one they wished to enact. The new Administration will likely launch a major regulatory effort across a number of areas. Taxes also fall into the first bucket. The Biden-Sanders joint economic plan envisions important increases in the corporate and personal income tax burden (including payroll taxes). Since taxes tend to be unpopular, and many economists today argue that governments should borrow more, Biden might go a bit easier on the personal income side, but overall the tax burden will increase significantly.
Higher taxes and more regulations, in my view, will come to the detriment of economic growth. Some regulations are sacrosanct, and some can be helpful; too many always end up causing distortions and slowing economic activity. The same holds for taxes. It might be worth it, depending on your goals – but this will be the price to pay.
Public spending and government debt straddle the first and second bucket. The Biden administration, now that it has secured a one-vote majority in the Senate, will spend more than Trump would have – but Trump had also been running a very loose fiscal policy. So more of the same, but a lot more of the same. What worries me here is that some prominent economists have espoused the view that governments should spend and borrow with abandon given low interest rates, at the same time as the pandemic seems to justify an unprecedented fiscal response. The problem is that when you think you don’t have a budget constraint, you don’t spend much time setting priorities and assessing what expenditures can be most effective – with unlimited resources, you can spend on everything, right? And governments are rarely a model of wise and efficient spending even at the best of times. Moreover, while a much higher debt stock is not much of a problem today, it might become a financial stability landmine in the future.
Trade policy falls mostly in the second bucket. Yes, Biden positions himself as a globalist against the nationalist Trump, and has immediately re-joined both the Paris accord on climate change and the World Health Organization. He will have a much less abrasive style in his approach to key trading partners. But the days of (almost) unfettered free trade are already over. There will be less bluster, less of a ‘tariff-by-Twitter’ confrontational stance; but the new Administration will most likely approach new bilateral and multilateral trade deals with a similar transactional approach, with an eye to safeguarding American jobs in specific sectors.
Relations with China will also remain tense. The strategic rivalry between the US and China has intensified, and over the past several years China’s leadership has shown it intends to maintain a tightly controlled political system, to be more assertive on geopolitical issues (see Hong Kong), and to pursue global primacy in key technologies. The shift in US leadership will not change this. And the EU’s investment deal with China at the end of last year suggests it might not be that easy for Biden to marshal a unified western front in trade relations with China. The economic and geopolitical competition between the US and China will remain the most fascinating show on the global scene; the US's polarized and confrontational political scene will be a major disadvantage.
Developments in the third bucket, on innovation and investment, will have a major impact on the US-China race as well as on long-term growth across the globe. Government policy can be a powerful engine of innovation – countless transformative technologies have been seeded by military research. The Biden administration will incentivize renewable energy and electric vehicles. But more important in my view will be the renewed momentum in innovation that we are likely to see in the broader manufacturing sector. I have focused on this in a previous piece, so let me just reiterate the main argument: The pandemic has shined a harsh cold light on the limitations of some highly hyped technologies; and it has made corporate leaders much more keenly cognizant of where innovation can be most helpful, and of how much more adaptable their companies need to become. Moreover, last year’s economic shock has created a desperate need to improve efficiency and productivity. This sets the stage for an innovation boom that could yield major long-term economic benefit. This innovation boom will be diffused, propelled by the experimentations and collaborations of many companies big and small. The US has a natural advantage on this front and could spearhead the next generation of digital-industrial technologies and business models.
This kind of innovation unfolds best in a business-friendly, lightly regulated environment with minimal distortions and nudges to the allocation of financial capital. If the Biden administration rushes enthusiastically into a brave new world of more regulations, higher taxes and more far-reaching government intervention, investment and innovation will suffer, and long-term growth will be lower. This in turn would make the higher debt level more dangerous and slow the improvement in living standards across the income distribution.
So let’s see what the new year and new Administration bring. I’ll keep my fingers crossed. For the short term, nothing matters more than the speed at which we can deploy the Covid-19 vaccines, ease business restrictions and remove the threat of further lockdowns. That’s for another blog.
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