ExplainSpeaking | Bidenomics: What is it? Has it worked? What is its significance?

Thanks to a deeply interconnected world, between them, these countries and their leaders would not only decide the course of their respective economies but also influence the shape of policymaking in other countries. From the global standpoint, however, the most important election within these could be the one in the US where, as things stand, President Joe Biden is likely to run for re-election.

However, with just about 12 months left, Biden is facing a stiff challenge from Donald Trump — the man he defeated in 2020. Most opinion polls suggest that President Biden’s approval ratings are at their lowest point.

Why Bidenomics matters

While electoral reversals are par for the course in any democracy, Biden’s loss could result in another policy shock — both to the US and the global order. That’s because of two reasons.

a) Many of Trump’s policies were radical departures from the established US positions or the global consensus. For instance, under Trump, the US walked out of the Paris agreement on climate change. Similarly, Trump saw US trade deficits as necessarily bad, especially when they were against countries such as China that are increasingly challenging the US economic domination. This, in turn, dealt a huge blow to continued globalisation.

B) When Biden took charge, he unveiled his own version of a radical shift in economic policies — Bidenomics — that have since attempted to turn the clock back half a century. A Trump victory could lead to several reversals yet again.

When it comes to Bidenomics, there are two main concerns.

One, whether it is working or not. Two, whether enough voters are convinced that Bidenomics is working. That the US electorate is arguably the most polarised it has been in many decades further complicates the reading of these issues.

But none of these factors take away from the significance of Bidenomics.

That’s because not only is there a genuine groundswell in its favour in the US — in fact, there are some who argue that Biden has not done enough — but even outside the US, Bidenomics is being seen as a blueprint for the kind of change that people want. For instance, in the UK, the Labour Party, which is widely expected to win in 2024, is reportedly taking notes on Biden’s more interventionist approach.

There are others who are worried that Bidenomics, with its focus on providing subsidies for domestic producers, could be unleashing a global subsidy race where each country does the same and, in the process, increases inefficiency and inequity.

So, what is Bidenomics? Has it worked? If it has, as the Biden Administration claims, why aren’t enough voters in agreement?

What is the rationale behind Bidenomics?

In May 2021, ExplainSpeaking had written about the broad contours of President Biden’s policy agenda and its significance. You can read that piece here.

In common parlance, Bidenomics is a term that is used to refer to any and every policy choice made by the Biden administration. But the term was not coined by Biden or his team even though they have adopted it over the years. That is not to say that Bidenomics doesn’t have a cogent idea behind it. It does, even though it is a reaction to the dominant way in which the US economy was structured, especially since 1981 when Republican President Ronald Reagan took office.

Under Reagan/ Reaganomics, the idea was to provide tax cuts to the businesses in a bid to incentivise economic activity even as the role of the government in the economy was reduced. The hope was that the resultant benefits of lower taxes and faster economic growth will trickle down to the broader economy. To some extent this happened. But broadly speaking, over the decades since, this top-down approach made the rich richer without necessarily bringing about as much widespread prosperity as its proponents had promised. The sharp rise in inequality — be it of income or wealth — in the ensuing decades is a damning indictment of this approach.

There were many who were not surprised by its failure. Noted economist, and a former US Ambassador to India, John Kenneth Galbraith had said the following for the trickle-down theory: it is “the less than elegant metaphor that if one feeds the horse enough oats, some will pass through to the road for the sparrows.”

A June statement by the Biden White House explained why Bidenomics was unveiled: “Even as they faced an immediate economic and public health crisis—with a raging pandemic, elevated unemployment, snarled supply chains, and hundreds of thousands of small businesses at risk of shuttering—the President and Vice President understood that it wouldn’t be enough to simply go back to the economy we had before the pandemic. That economy was saddled with longstanding challenges that held America back—including rising inequality and disinvestment from communities across the country. President Biden recognized that some of those challenges were rooted in a failed trickle-down theory that supported slashing taxes for the wealthy and big corporations, shrinking public investment in critical priorities like infrastructure and education, and failing to safeguard market competition.”

Biden bluntly stated: “trickle-down economics has never worked. It’s time to grow the economy from the bottom and the middle out.”

What is Bidenomics?

According to the White House, Biden’s economic vision is centred around three key pillars:

1. Making smart public investments in America
2. Empowering and educating workers to grow the middle class
3. Promoting competition to lower costs and help entrepreneurs and small businesses thrive

In other words, Bidenomics involves policies that improve US’s physical and digital infrastructure, reduce its trade dependence on rivals such as China, raise the living standards and opportunities available for the middle 40% and the bottom 50% of the US population and, in doing all these things, boost job creation within its borders.

To achieve these goals, the Biden administration has tweaked both the tax regime as well as its spending choices. On the one hand, it aimed to raise $737 billion via more and higher taxation, while on the other, it decided to make fresh spending worth $500 billion towards investments in clean energy and in reducing healthcare costs.

It has also taken several steps to contain the concentration of economic powers in the hands of the few and tried to empower labour unions to safeguard labour rights.

Did it work?

As things stand, if one looks at the macro indicators — GDP, unemployment and inflation — the Biden administration seems to have done quite well.

In terms of GDP growth, US has outperformed all the major developed countries. In fact, as CHART 1 shows, US economic growth level is just 1.4% below the pre-pandemic trend; in other words, its recovery has been so fast that it has almost caught up with where it would have been had it not been for the Covid pandemic. For perspective, according to RBI’s calculations, India would get back to the pre-pandemic trend level by 2035.

CHART 1: US economic growth level is calculated to be only 1.4% below the pre-pandemic trend.

The US economic recovery has been so robust that even a sharp and sudden increase in the interest rate by its central bank — in a bid to contain historically high inflation — has not caused a recession that many had predicted.

Same holds true for the unemployment rate, which has fallen sharply since Biden took charge and hit a historic low (CHART 2). The US economy continues to create millions of jobs at such a fast pace that there are two vacancies for every unemployed person in the economy.

CHART 2: Unemployment rate in the US has fallen sharply since Biden took charge and hit a historic low.

“We’ve also seen record lows in unemployment for workers who have often been left behind in previous recoveries: with record low unemployment rates achieved under this Administration for African Americans, Hispanic Americans, and people with disabilities —and a 70-year low for women,” states a White House statement.

The only, albeit substantial, downside is in terms of inflation (CHART 3), which spiked to its highest levels in four decades in 2022 in the wake of the Russia-Ukraine war. High energy prices and supply bottlenecks exacerbated the ill-effects of excess money that the government pumped into the economy (immediately after Covid) in a bid to revive it. Inflation has moderated considerably since then but still hasn’t reached the target level of 2%.

CHART 3: Inflation spiked to its highest levels in four decades in 2022 in the wake of the Russia-Ukraine war.

Then why are so many people unhappy with Bidenomics?

There are two broad reasons.

One has to do with the fact that Bidenomics has not had the kind of improvement in terms of income and wealth inequality that many may have expected. To be sure, it has been just two and a half years.

The second reason has to do with the ideological disagreement with Bidenomics.

Given its rationale and its components, the final goal of Bidenomics is to reduce existing inequalities in the economy. While many Americans seem to be benefiting on this count, almost an equal number are not.

One of the claims of the Biden Administration is that the strong labour market recovery has also led to better pay and working conditions.

“Inflation-adjusted income is up 3.5% since the President took office, and low-wage workers have seen the largest wage gains over the last year,” claims the Biden White House. It shares data from a website — realtimeinequality.org — based on the research of noted economists such as Emmanuel Saez , Gabriel Zucman and Thomas Blanchet.

CHART 4 shows that it is indeed true that real incomes have risen by 3.5% (broken white line). But the chart also shows the real income growth for the richest 10%, the middle 40% and the bottom 50% of the working population.

CHART 4: Real incomes have risen by 3.5%.

The noteworthy line is in blue colour, showing the real income growth for the middle 40%. It shows that not only is real income growth in the negative for the American middle class (as of March 2023) but also that this growth has remained in the negative territory for most of the Biden presidency.

To stick with Biden’s words, while America may be growing from the bottom up, it is not necessarily growing from the middle out.

At the ideological level, many argue that Bidenomics is regressing to many policy choices that will not only increase inefficiency and corruption within the country but also lead to a global subsidy war that will eventually hurt the poorest nations.

Here’s how.

In its bid to boost domestic manufacturing, Bidenomics is providing subsidies to domestic companies. Even if it is for clean energy, this policy will distort markets and essentially allow the government to pick winners, who may neither be the best innovators nor be the most efficient producers of clean energy.

Worse, as the richest economy of the world goes down this path, it is prompting other developed (such as the European nations) and developing countries (including India) to do the same. The poorest countries will lose out in this race.

The alternative is to provide direct consumer subsidies as well as providing some financial support to relatively poorer countries that may be more efficient in providing clean energy solutions. The US policymakers have, however, defended the move by arguing that countries like China do not follow these ground rules anyway.

Upshot

On the face of it, Bidenomics has its heart in the right place. It aims to address the widening economic inequalities in the wake of so-called neoliberal policies that started with the Reagan presidency. As a course correction, it is a valid move and should perhaps be given enough time to show results.

But Bidenomics is not just about pure economics. Its motivation is not limited to just reducing inequality. It also aims to achieve key geopolitical goals such as countering US’s global rivals such as China. It is also structured in a way that thwarts the political challenge within the US from Republican Donald Trump.

As a result, the US is opting for policies that may not only hurt its own poor — for example, it maintains high import tariff barriers in a bid to help its domestic producers and thwart China — but also the poorer nations — because it may keep them outside the ambit of the clean energy growth story.

Share your views and queries at udit.misra@expressindia.com

Until next time,

Udit