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Bidenomics: can the Democrats deliver new left-wing agenda?


“Nobody messes with Joe,” Barack Obama quipped as he handed a daunting task to his vice-president Joe Biden in February 2009: oversight of the $787bn stimulus that would help pull the US out of the deep recession triggered by the global financial crisis.

The following day, in the Roosevelt Room of the White House, Mr Biden gave his perspective on the mission. “We’ve got to make sure that we’re able to answer this economic crisis. And in order to do that, we’ve got to do something that’s somewhat unprecedented,” he said. “This is a monumental project, but I think it’s do-able.”

Nearly 12 years later, Mr Biden is potentially facing a similar undertaking, but with even greater power and responsibility. If he prevails in Tuesday’s US presidential election, unseating Donald Trump, the 77-year-old former Delaware senator will find himself having to shore up America’s recovery after an economic shock inherited from a Republican administration — this time created by the coronavirus pandemic.

Heading into the very final stretch of the race, Mr Biden is leading Mr Trump in national surveys by 8.5 percentage points, according to the FT’s poll tracker, with a smaller but still significant edge in the battleground states. Although Mr Trump could still pull off an upset, as he did in 2016, Mr Biden’s advantage has heightened interest in his economic plans and goals, as well as his ability to push them through Congress.

Many Democrats hope that any economic response this time will deliver a more rapid improvement in employment and wages than it did in the aftermath of the financial crisis, which was followed by a steady yet sluggish recovery. But they are also striving to achieve more than that: broader benefits for low-income and minority communities, a greener society, and a more highly skilled workforce.

Mr Biden’s platform is called “Build Back Better” — a nod to his desire to restructure the American economy by raising taxes on the wealthy in order to fund trillions of dollars of investments in public goods, from infrastructure to clean energy, education and healthcare.

The economic consensus has shifted dramatically in favour of those goals in recent years: both the Federal Reserve and the IMF have suggested that additional fiscal support is warranted in the US to tackle the economic fallout from the pandemic, even if it means higher deficits.

They have also pointed to the need to reduce income and racial inequalities, and address climate change as an economic risk. Moreover, the US central bank is likely to keep monetary policy exceptionally loose at the start of Mr Biden’s first term, creating favourable conditions for additional government spending and borrowing.

Implementing such a sweeping economic jolt will not be simple for Mr Biden. Republicans on Capitol Hill are likely to rapidly pivot towards a fiscal discipline — which, critics say, they ignored under Mr Trump — should the Democrat win the White House, potentially blocking the new president’s agenda from the start.

Medium-term spending

Joe Biden wants to use infrastructure spending to boost the recovery

$2tn

The amount Mr Biden has vowed to invest in green energy and infrastructure projects, from light rail to electric vehicle charging stations to broader broadband access and building upgrades. Other spending pledges include:

“The [Biden economic plan] is really tremendously ambitious in a way that 10 years ago nobody conceived of that level of ambition,” says Austan Goolsbee, an economist at the University of Chicago who served as head of Mr Obama’s council of economic advisers.

But, he warns: “I am jaded by the experience of 2010-11: I think it’s almost inevitable that Republicans will immediately begin trying to reverse everything that they’ve said for the last four years and claim that austerity and deficit cutting are critically important, to try to prevent an incoming Democratic president from enacting the popular mandate.”

At the same time, a Biden presidency would face huge demands from the left flank of his own party to stick to the promises of bold action made during the campaign, which could limit his ability to manoeuvre and compromise.

“The hole we’re in right now is too deep for incrementalism to be a part of the solution. It would make for bad outcomes for Americans and it would also make for terrible politics,” says Steph Sterling, vice-president at the progressive Roosevelt Institute. “We did a version of that in 2009, and it did not turn out well.”

January 2009: then president Barack Obama with Treasury secretary Timothy Geithner, left, and vice-president Joe Biden, whose economic response to the financial crisis led to a steady yet sluggish recovery
January 2009: then president Barack Obama with Treasury secretary Timothy Geithner, left, and vice-president Joe Biden, whose economic response to the financial crisis led to a steady yet sluggish recovery © Saul Loeb/AFP/Getty

Navigating the Senate

Should Mr Biden win the White House, his economic response will be heavily shaped by a number of still unknown factors. One is whether the coronavirus pandemic will still be raging across the US on January 20 when the next president is scheduled to be inaugurated, threatening to further slow the economic recovery from the pandemic shock. While data due on Thursday is expected to show a sharp rebound in gross domestic product in the third quarter, US employment in September was still 10.7m jobs short of the pre-pandemic level recorded in February.

A second is whether Mr Trump and Congress will reach agreement on a new $2tn fiscal stimulus deal before the change of administration, which would remove some pressure on a Biden administration for quick economic action.

Chart showing voters are coming round to key Biden policies, New York Times Siena College poll

Perhaps most critical is the question of whether Democrats will be successful in regaining control of the Senate from the Republicans next week, which would make the political landscape far more conducive for Mr Biden to plough ahead with his plans.

“A Democratic Senate alongside a Biden administration is a true road map to getting things done, and codifying them into law, rather than four years of executive orders,” says Scott Mulhauser, a former congressional aide and US official in Beijing now at Bully Pulpit Interactive, a consultancy in Washington.

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Given Mr Biden’s long history in the legislature, having served as a senator for decades prior to becoming vice-president, he may be better positioned than most recent presidents to get his economic priorities passed. Mr Biden was the lead negotiator in a series of budgetary stand-offs between the Obama administration and Republicans in Congress, honing his reputation as a pragmatic dealmaker.

In the midst of the pandemic, there seems to be greater popular support for the kind of forceful government intervention favoured by Democrats, which could give Mr Biden more leverage early on.

According to an NYT/Siena national poll released this month, more than two-thirds of Americans back $2tn in stimulus for the economy, and similar spending on green energy investments, while opinion is roughly split on corporate tax rises. A USA Today/Ipsos poll in September revealed widespread and growing backing for an almost doubling in the federal minimum wage from $7.25 an hour to $15, another policy central to Mr Biden’s economic platform.

Immediate stimulus

Emergency jobless benefits and help for states to aid their poorest citizens will be a priority

$2tn

In new relief measures to help cash-strapped state and local governments, renew emergency federal jobless benefits and offer new support to small businesses. The final bill could be lower depending on whether Congress passes any additional relief measures before the next president takes office

“Something that seemed outside of the mainstream has become one of the first actions that will have transformative impact on people’s lives,” says Mary Kay Henry, president of the Service Employees International Union, adding that Mr Biden “knows how to bring people together”. “I think it’s going to be a combination of the New Deal, the Marshall Plan and the 1960s Civil Rights Act all in one administration.”

But given such high expectations, many Democrats and left-leaning economists are well aware of how the hopes of far-reaching economic transformation were scuppered a decade ago. The stimulus managed by Mr Biden served its purpose initially, but was in retrospect judged to have been too small and the Obama administration never succeeded in winning approval for more funding.

The legislative agenda became dominated by passage of healthcare reform and efforts to reduce carbon emissions, and the Democrats lost control of Congress to Republican spending hawks. Stagnant median household income dogged Mr Obama throughout his presidency.

“We didn’t do enough,” says Wendy Edelberg, director of the Hamilton Project, an economic policy think-tank in Washington and former executive director of the Financial Crisis Inquiry Commission. “And we shifted much too fast to austerity. We saw a number of sectors where the resulting drag on economic activity was really apparent.”

This time around, she adds: “It would be very frustrating if we turn to austerity before the economy has recovered and I will certainly be on the sidelines screaming as loud as I can to avoid that outcome.”

Waterfall chart showing forecast federal spending and revenue, 2021-24 ($tn)

Blue-collar instincts

Mr Biden’s current plan calls for any short-term stimulus, such as aid to state and local governments, and emergency jobless benefits, to be deficit-financed, while the long-term spending boost is at least partly paid for by raising corporate taxes from 21 per cent to 28 per cent, and increasing income, capital gains and payroll taxes on wealthier individuals.

Many economists have said that on balance the Biden plan would boost the US economy over the coming years. Among the latest is Oxford Economics, which said gross domestic product growth assuming Democratic control of the White House and Congress would grow by 1.2 percentage points to 4 per cent in 2021, compared to 3.9 per cent with the status quo. But the prospects of looming tax increases have nonetheless attracted much criticism in conservative circles.

“Everything he is doing is a disincentive to work, a disincentive to invest, a disincentive to be productive,” says Casey Mulligan, an economist at the University of Chicago who served on Mr Trump’s Council of Economic Advisers.

Tax increases

Taxes are likely to rise for the very wealthy

$1.4tn

The amount by which tax revenues would rise over Mr Biden’s first term., according to Moody’s. This includes:

  • Corporate tax rise to 28 per cent from 21 per cent — still below pre-Trump levels

  • Higher income taxes for those earning more than $400,000 per year

  • Higher taxation on capital gains for the very wealthy

  • Higher payroll taxes for higher income workers

Republicans on Capitol Hill have already started to rediscover their fiscally hawkish roots. After enthusiastically backing Mr Trump’s tax cuts in 2017, and the initial coronavirus relief measures, many are now opposing additional stimulus — a position in which they are likely to become even more entrenched if there is a Democratic president. “I’m very worried about the debt,” Ted Cruz, the Texas senator, told Axios this week.

Aides, who worked closely with Mr Biden during the Obama administration, say he is unlikely to try to appease those concerns by drafting a deficit-reduction plan immediately after taking office. In the aftermath of the financial crisis, Obama economic officials were under heavy pressure not just from Republicans but also from Wall Street to come up with a medium-term plan to stave off a potential debt crisis, which split the Democratic party. The vice-president was never a big fan.

People walk by a closed bar in New Orleans. Democrats are not only striving to achieve a crisis recovery but broader benefits for low-income and minority communities, a greener society, and a more highly skilled workforce
People walk by a closed bar in New Orleans. Democrats are not only striving to achieve a crisis recovery but broader benefits for low-income and minority communities, a greener society, and a more highly skilled workforce © Shannon Stapleton/Reuters

“There was a constituency for doing that in the Obama White House — Biden wasn’t part of that constituency. And as an economic matter, I don’t think that’s [now] needed at all,” says Jason Furman, a senior economic adviser to Mr Obama throughout his administration, who is now at the Peterson Institute for International Economics. “Interest rates are actually much lower now than they were in 2009.”

Mr Biden was not involved in the minutiae of economic policy — his expertise was more in the fields of foreign policy and justice — but former officials say he tended to take positions that leaned towards the left of the internal consensus, including on the rescue of the car industry and financial regulation.

“His worldview was to be attentive to the workers and ordinary Americans and be less attuned to the needs of the financial institutions and the big parent companies,” says Mr Goolsbee. “That’s where he was coming from.”

Line chart of 10-year Treasury yield (%) showing US Treasuries offer diminishing returns

‘We need to do this better’

The current economic rescue mission may be easier for Mr Biden than it was a decade ago in some dimensions, mainly because the banks are in better health and the unemployment rate is dropping, whereas it was still rising in early 2009.

But, Ms Edelberg says, the economic problems produced and accelerated by the pandemic could still be massive, with businesses shutting down, people becoming permanently unemployed or dropping out of the labour force, and parents at home without childcare or in-person schooling for their kids.

Meanwhile, the crisis has forced more companies to accelerate automation plans, and led to greater consolidation and market concentration — which could both require policy reactions. “The labour market that folks are going to return to is going to look very different than the pre-pandemic labour market,” adds Ms Edelberg.

Former aides say Mr Biden is well-suited to the challenge, as long as he picks the right team. “He’s going to need to bring some really capable people in around him to run stuff. And let him be the decider,” says one former Obama administration official.

Ed DeSeve, a senior adviser to Mr Obama on the 2009 stimulus, says Mr Biden effectively avoided widespread fraud and waste in the distribution of the funds, which was his brief. “I won’t tell you that every conversation I had with him was cookies and cream. It wasn’t. It was ‘God Bless America, we need to do this better’,” he adds.

In that first stimulus effort, there were also some clear signs of Mr Biden’s interest in using the rescue package to achieve broader economic goals — and a glimpse of the presidential agenda he has designed more than a decade later.

“He was most focused on making sure it was transformational,” says Mr Furman. “How can we get a smart grid out of this? How can we get much cheaper solar out of this? How can we have better infrastructure, five years from now that we remember? He was focused on making it more ambitious.”

Line chart showing how Trump and Biden are doing in the US national polls



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