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Analysis | Biden’s economic agenda needs an overhaul

Remark

Presidential administrations never stay the same from start to finish. Top personnel come and go for a variety of reasons, and we seem to be seeing that now with the Joe Biden administration. Bloomberg News recently reported that White House senior economic adviser Brian Deese is expected to leave as director of the National Economic Council next year. It is speculated that Cecilia Rouse, chairman of the Council of Economic Advisers, will also leave next year.

For Biden, these departures may be welcome news. His administration’s economic policies are in desperate need of an overhaul after adjusting too slowly to a new reality that threatens both the health of the economy and the president’s 2024 re-election chances. When he took office, Biden and his team assumed they would face the same economic challenges that plagued recent predecessors, especially a jobless recovery. (This happens when job growth is sluggish despite more robust gross domestic product gains.)

This was part of a larger economic trend that some economists had called secular stagnation. Savings rates around the world, but especially in Asia, rose, as did risk aversion. The global excess of savings has moved into safe assets such as US Treasuries. Large inflows in dollar-denominated assets pushed up the value of the currency, making imports more affordable for US consumers. The result was an economy in which it was cheap to borrow but difficult to find productive investment that did not face the threat of cheaper foreign competition. The solution was to print more dollars and boost US competitiveness through deficit-funded corporate tax cuts.

That was all before the pandemic. In its wake, a fundamentally different economic reality has emerged. Massive deficit spending may have satisfied global appetites for government bonds and flooded US consumers with cash, but supply chain disruptions have increased demand for US-based investments and, seemingly as a direct result of Covid-19, such a 4 million workers disappeared from the labor market. So policies that were appropriate before 2020 are now disastrous. Consumer demand appears almost indestructible, with retail sales continuing to rise despite efforts by the Federal Reserve to contain it through tighter monetary policy. Job security is high as employers are reluctant to lay off employees for fear of not being able to get them back.

The Biden administration was slow to see all this coming, promising early on that rising inflation was the result of transient factors rather than fundamentally strong consumer demand coupled with labor shortages across the economy. That was understandable. Turning points are difficult to detect in real time. What is less forgivable is the continued push for pre-pandemic policies, even now. It was only after the urging of Senator Joe Manchin of West Virginia that Congressional Democrats agreed on the slimmed-down Inflation Reduction Act, whose only major inflation-reducing component was $300 billion in deficit reduction. However, the White House blew those cuts in one fell swoop with its executive order to ease student debt.

It would be a mistake to interpret the modest losses suffered by Democrats in the midterm elections as an indication that voters are okay with the state of the economy. Rather, it was the public backlash against Jan. 6 and the MAGA movement in general that saved the Democrats from what would otherwise have been a midterm election defeat. Biden’s approval rating remains dismal and similar to where Donald Trump was at in his first term.

If the Republicans prove Biden the pleasure of making Trump president again, Biden may be able to win a second term simply by continuing to do what he was doing. Otherwise, his government will have to take the new economic environment seriously. That means policies that reduce government spending, reduce the budget deficit, and increase tax revenues. That kind of policy will ease longer-term inflationary pressures and give the Fed the breathing space to stop raising interest rates.

After the pandemic, countries are rightly concerned about making supply chains safer and less dependent on trading partners. Nevertheless, the Biden administration should aggressively seek comprehensive trade deals with U.S. allies like the UK and Japan, to maximize cost savings from free trade without leaving the country vulnerable to sudden shortages. It should also stabilize global energy markets in the longer term by encouraging the production and export of US natural gas by enabling reforms.

This set of policies would help reduce domestic demand, increase the supply of goods and services for 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 be the voters who push for change in 2024.

More from Bloomberg Opinion:

• Democrats messing with the debt ceiling: Jonathan Bernstein

• Biden Economy is second to one in the interim: Matthew Winkler

• Republicans have no plan to fix the economy: Allison Schrager

This column does not necessarily reflect the views of the editors or Bloomberg LP and its owners.

Karl W. Smith is a Bloomberg Opinion columnist. He previously served as vice president for federal policy at the Tax Foundation and assistant professor of economics at the University of North Carolina.

More stories like this are available at bloomberg.com/opinion

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