'Bidenomics': Policy Change or Paradigm Shift?

On this episode Mark talks with economist and Brown Professor John Friedman. They discuss why decreasing income inequality is good for economic growth, the challenge of assessing inflation risk on the heels of a global pandemic, and whether 'Bidenomics' is an evolution of Democratic economic policy or a genuine paradigm shift.

You can watch the full video of this conversation here.


[MUSIC PLAYING] MARK BLYTH: From the Rhodes Center for International Economics and Finance at Brown University, this is the Rhodes Center Podcast. I'm Mark Blyth the Director of the Rhodes Center. On this episode, I talked with economist and Brown professor John Friedman.

A little while back, John had some new research that was highlighted in the New York Times amongst other places about the effects of neighborhoods on inequality and how moving from one neighborhood to another could massively change life outcomes. We had a streaming conversation about it, and people really liked it.

Now of course, we have a new president and a new set of economic challenges, namely a global pandemic and the question of exactly how does one build back better? And we thought it would be fun to have a chat with John, about all of this. This conversation was actually part of a larger streaming event we had at the Watson Institute, which is why as you'll hear, my audio sounds a little less high quality than usual.

We will put a link to the full event on YouTube and the show notes. We started by talking about the definition of one of the newer phrases to enter the US policy lexicon recently, biodynamics. Welcome, John. Lovely to see you again.

JOHN: Thanks so much for having me on again, Mark. It's always great to be with you.

MARK BLYTH: So let's get started with this one. I sent you a piece from the Financial Times, they have a newsletter that's done by called Martin Sandbu. And he was talking about this thing called biodynamics. And his basic thing here, is he thinks this is quite a shift. This isn't business as usual, this isn't even Democrats spend a little bit more than Republicans, this is a different way of thinking about the economy.

And the argument seems to be at least in Sandbu reading of it and other people's reading of it, is that there's a new way of thinking about the economy now that we can more fundamentally change, if you will, the growth trajectory of the whole economy. How much productivity we can produce, et cetera can actually be augmented by high levels of government spending.

So first of all, what do you think of the argument and do you think that's what they're actually doing? How do you read biodynamics?

JOHN: So, I think it's completely right that this is a huge change in what Democrats are proposing to do and what the government actually might do. Although, I think this is less of a change in fundamentally how we think about the economy, because my sense is that Democrats have been basically wanting to do these types of things for a long time.

You go back to the Obama administration, many of the proposals that seem to have a good chance of getting enacted now or have gotten enacted as part of the COVID relief plans, were things that people talked about as being on their wish list, it's just because the politics of the moment were very different, they never really happened and even they weren't really part of the front line proposals.

And so I think what's basically happened is the Democrats have decided that they're not going to negotiate against themselves anymore. And rather than spending a lot of time trying to be bipartisan about it, which was I think largely the strategic aim both of the first two years of the Obama administration by choice then of the latter six years of the Obama administration by necessity, they're just putting out what they want to do and going for it.

MARK BLYTH: Let's assume you can get it through Congress. So we fund the relief bill and then the American families bill, is it useful to think that this type of spending and this type of scale really can change? If you will, the pool of outcomes that the economy could follow, that this will lead to higher productivity and higher wages without generating inflation, is that a reasonable from your point of view?

JOHN: So I think that a lot of the spending is going in areas, both in terms of physical infrastructure and in terms of social investments that do seem to have a lot of evidence that there's a great deal of payoff. And so whether that's upgrading, again the physical infrastructure, or the digital infrastructure, whether that's investing in kids in terms of having a higher standard of living, higher quality education, getting people to for instance be more likely to go to college, I think those are all things that there's really a ton of evidence behind that they do in fact lead to both higher outcomes at the individual level and also faster productivity growth from a social level.

I also think though that there has been an increasing focus on combating income inequality, and so some of the spending is also just trying to redistribute a little bit so that we try to have less disparities in the moment but also produce more balanced economic growth going forward.

If you go back 70 years to look at the whole postwar economy in the United States, about the first 30 years of that, call it through Nineteen-Eighty, the economy both grew quite quickly and in a quite balanced way, that is both people at the top and the bottom of the income distribution shared in the gains.

And what we've seen over the past 40 years, is that the economy has grown somewhat slower, still growing quite a bit faster than many other developed economies but growth has been increasingly skewed such that people at the top of the income distribution have seen their incomes more than triple since Nineteen-Eighty, while the median wage has only gone up by about 15%. And I think to the extent that it's not just about investment, I think a lot of the focus is trying to reverse that trend, not in that they're trying to limit economic growth but create growth that's more balanced.

MARK BLYTH: So from an economist perspective then, what would be the argument that says that if we make society more equal not as a normative end but as a positive end that's going to lead to more balanced growth, what do those words actually mean if you unpack them?

JOHN: So I think there are a couple of different aspects to it. The first thing, is that we've seen the skill demands in the economy change dramatically, where there are increasing returns to both generalized education and also particular skill in high tech not just technology itself, but high skill sectors. That's part of the transition from being a largely manufacturing economy to being an economy that's more focused on high skill services. And so part of this is trying to make education more readily available and encourage people from all walks of life to get as much education as possible.

If you look at the growth in for instance, college graduates going back to Nineteen-Eighty, the rate at which college graduates had been growing was actually higher than the rate at which many jobs are being created. And believe it or not, people were actually writing articles then about, do we have too many college graduates in the college premium, the extent to which college graduates are paid more than those workers without a college degree, it was at an all time low. That college wage premium is now at an all time high.

And so first of all, just increasing the amount of education, I think is one pathway towards that. But I think there's a broader aspect of this as well, which is that for too long we've not utilized all of the resources that we could in terms of the people in this country because there are barriers preventing people from various backgrounds from achieving all that they could achieve. Let me give you one example, if you ask who grows up to innovate in our country, key driver of economic growth, it will not surprise you that these are mostly kids. If you look back to how they were doing when they were in school, they were pretty good at math.

What I think is more surprising and more troubling is that even among the children who did really well in math say, when they were in elementary school children from white families, children from rich families, and children who are boys, are much more likely to grow up to innovate than kids from any of those other backgrounds.

And if you were able to raise the patenting rate for just kids who did really well on the math test for all those other groups to equal that of rich white men or boys coming from rich white families, you would more than quadruple the innovation rate in America. And so that's just one example of how having more broad based growth and really tapping into a broader set of resources that we have, is not just about normatively trying to redistribute resources in society, it's about helping us to grow faster.

MARK BLYTH: But there's also as you mentioned, the tax and regulatory changes we've seen over the prior 40 years, which have also driven this big skew in inequality. There was, I'm not sure if you saw it, but the RAND Corporation, had a paper at the end of November last year, which had a wonderfully anodyne title, it was Trends and Income Nineteen-Seventy-Nine to Two-Thousand-One, you can check out the web. But It had incredible figures in it rather than sort of trickle down economics, what they suggested happened was a giant and vacuuming up. And the figure was $34 trillion, had gone from the 90th to the 10th.

And if you kept tax and regulations the way they were in Nineteen-Eighty and run the economy forward, your average American worker would have been $16,000 a year better off. Now that's an imaginary world, but clearly raising wages is part of this. So this is a very important component to both growth and also doing something about inequality. But the worry that we see in the press all the time now is the "I" word, inflation.

So is it possible in your view to grow wages, to increase real wages without hitting an inflationary limit? Are we in a slightly different world, a bigger, more different world than we thought?

JOHN: So, yeah. I think inflation is a key thing to think about at this moment, but it's worthwhile breaking it into a couple of parts. So the first thing is that we need to separate inflationary worries in the long term from the type of inflationary spikes maybe that we might see over the next four to six months.

So over the next four to six months, everybody is going to want to go on vacation. So going on vacation is going to be quite a bit more expensive, because we can't build new hotels, we can't put together more live shows, we can't dramatically increase the number of places you can sit and eat on the beach. But I think that's something that's really passing, this is really driven by two facts. One, everybody's been cooped up and not able to get out and enjoy life in a social way for the past 15 months because of the pandemic. And so there's tremendous pent up demand to do that.

And second, people haven't really had a lot to spend money on over the last 15 months. The savings rate in this country has been higher than it's been for four decades. And so there's all that demand, there's a lot of money to spend, and so I do expect to see a big rush of spending on this stuff over the summer. But that's going to pass, this is not going to last more than six or nine months and then more or less will get back to where we are.

MARK BLYTH: Just backing up what you said before we went on as a Cleveland Fed study that just came out looking at the components of inflation exactly as you're saying. And if you exclude lumber, which just went through a huge boom and bust, it was actually exactly what you're talking about, the outliers in the trend, it was airline tickets, computer peripherals, auto parts, and huge trucks, that's what was driving the spike. Take them out and it's still pretty much flat

JOHN: Yeah, you see more generally coming out of the pandemic, there are supply chain disruptions. It takes a long time if you want to order a computer right now, you want to order some furniture, there are huge delays there. But these things are issues that will work themselves out over the next year, I don't see those as being long term threats to the economy.

MARK BLYTH: But let me go back on this one a little bit, right? So I told you the story before and I want to bring it in so everyone can get a piece of this one because I'm sure that many people are sitting just thinking the same thing. So, when we talk about inflation, we talk about PCE, personal consumption expenditures, we talk about core, or all this sort of stuff, very technical, what's in the basket, what's not.

But for the experience of great many people, they tell me all the time, every time I see inflation's not going up, they go "Tell me another story." Housing is going up, rents are going up, medical expenses have been going through the roof for a decade, college costs more and more. So the large ticket items that people actually have to buy are going up. How do you explain to them that inflation really isn't going up when the felt experience of rising prices is part of many people's lives?

JOHN: So part of what's going on is that, as we talked about before, wages of very highly educated people who are at the top of the income distribution have been going up very quickly. And so a lot of the services that people buy that depend on the labor of those very highly educated people, that's been going up quite a bit. So you think about health care, that's one thing, doctors are making a lot more than they used to.

With health care also, it's not so much that prices go up, it's that we just spend more and more, we do more stuff over the years. Now it's a separate issue, how much of that stuff is worthwhile, how much of it should we be cutting back on. But we do lots more scans than we used to, and it's not necessarily that the scan itself is more expensive, it just that many more people are ordering scans.

Another aspect of this is that, when you talk about goods like housing, housing is very expensive in certain metro areas but that has nothing to do with the demand in the economy, that's almost entirely driven by the fact that these cities make it incredibly difficult to build.

And so for instance, if you compare, there some cities like Chicago, not that you can't find an expensive place to rent in Chicago, but rents there have remained much more reasonable than rents say, in Manhattan or the San Francisco Bay Area, why is that? It's because Chicago, has been willing to build more houses, more tall buildings, as more people have wanted to move into the area whereas New York and San Francisco have not.

And so in some sense, this is largely a problem of our own making that's not about overall economic growth or stimulus, it's just about the fact that if nobody lets you build a new building in San Francisco and lots more people want to live there, then we're going to bid up the prices of those houses.

MARK BLYTH: Another way that I think about it is, again, going back to the inequality we've been talking about earlier and we could also mention the so-called key [INAUDIBLE] recovery, right? One of those with assets I've done really, really well in the pandemic and those dependent on the wages of the left. So, if you build up 20 to 30 years of asset portfolio that are concentrated on top, then you can turn housing into an asset class, and that's essentially what we've seen. And I try and explain to people that lots and lots of people with money and asset bidding up the price of assets may have deleterious effects but it's not an inflation.

An inflation is a rise in the general level of oil prices, which seems to be rather different. But you can understand why people get torn between the two, between their personal experience and then what we are trying to say about the economy overall.

Let's talk about employment and the recovery coming out of COVID. What do you think is happening there in terms of are we going to really boom back? Will we see a very large increase in wages? Or is it more pottsy depending on where you are and kind of the distribution of life chances?

JOHN: So what we've seen in the last, 15 months, is that the economy as a whole recover really quite quickly. People were back spending something that was a little bit below where they were before by last fall. And as a result of the recent stimulus payments, we've actually been running at higher spending levels than we were before the pandemic started for the last three or four months now. That's translated into almost a complete recovery for high wage workers.

And people talk about a V shaped recession, it comes down very quickly and then goes back up very quickly, that's exactly what we saw for high wage workers, where employment fell very sharply in March and April last year bottomed out around the end of April, and then recovered very sharply such that by the time you got to July things were basically back to where they were before. The situation looks entirely different for low-wage workers, though, who experienced a much deeper fall at the beginning of the recession.

Now there was then pretty fast recovery until that same point at the beginning of the summer, but we've basically then flatlined from then for the last really 10 months, if anything almost getting a little bit worse as you came out of the holiday season.

And so I think the disparity between the fact that spending is just going gangbusters, but still there aren't low wage jobs coming back. I think it's been not really something we've seen before and it's been a real contrast. Especially what you see, you look around, there are for higher signs everywhere, businesses everywhere are hiring. The number of new jobs being posted at this point, especially for low wage workers is something like 60% higher than it was kind of in normal times.

And so we're really suffering a huge crunch on the labor front. And it's hard to know exactly what was driving this back in September or December last year. But at this point, we're only now starting to see the low wage employment numbers tick up.

And I think it's hard to believe that something is going, on other than these workers being quite reticent to come back to work. Now maybe that's because they are continuing to be scared of the health consequences, right? Many of these are in-person service businesses, where as restaurants reopen, as clinics reopen, you're going to be interacting very closely with a lot of people, so health concerns could be one thing.

But as vaccination rates have grown, we haven't really seen those employment rates come back up nearly as quickly. So another possibility is that, the very large unemployment insurance payments are at this point still keeping people out of the labor force, there's been some estimates suggesting that that's part of what's going on.

And then a final possibility is that, as the labor force returns, the demand for new workers is just a little bit of a different place from where they started. And so partly what's going to have to happen, is that we're going to need some more people working in Amazon warehouses, fewer people working in main street businesses. And it's just going to take a little bit of time for the economy to readjust.

One really striking finding that we saw in the data last year, is that there were unbelievable differences in employment rates, even looking between neighborhoods in the same city, even among people who had the same job previously. So you take a chain restaurant like Chipotle, if you were in Midtown Manhattan, that Chipotle was closed and hasn't opened in 12 months. If it was in an outer boroughs in New York, it might have actually never closed and it reopened pretty quickly.

So that worker at Chipotle in the outer boroughs, maybe they were out of work for a little bit but they came back very quickly. Employment rates returned quite quickly and that worker who got laid off from Chipotle in Midtown Manhattan right at the beginning of the pandemic. It's not just that original Chipotle hasn't come back, that worker is still out of work, here we are 12 months later.

And so those really sharp disparities suggests that the standard, very rapid reallocation that we like to think about happening, that's just not occurring right now. And again whether that's because it's being held back, because of unemployment insurance, because of health concerns, because people just aren't looking for jobs in the new places, I think that's not really clear in the data. But what is clear is that we're really seeing a huge crunch on the low wage employment market. Now, I think one silver lining of that, is that's going to push up wages at the bottom of the income distribution, which is a good thing.

And I think the question that's going to arise as we go forward, is can we sustain that once people get back into the labor force more generally? Having higher wages because we've thrown 20% of people permanently out of work, that's not what we want to do because the total amount of income actually isn't really changing, you're just giving it to fewer people that might even increase income inequality.

MARK BLYTH: So the turn into the framework in which all of this is happening, if you talk to people in financial markets, they're getting a little bit weirder, not just about the possibility of inflation but the fact that the Fed has changed its role in their opinion. So the great line from the nineteen-fifties from a Fed chairman called McChesney was my job is to take away the punchbowl when the party gets going. And it seems to be the case now that the current Fed chairman is working with Yellen at Treasury to make sure that the party keeps going. How do you think about this change into some of the policy framework that we're using, is it significant or is it not?

JOHN: So I think this policy change is very significant. And one way to think about it is that the Fed has very clearly shifted its focus away from that single eye view on inflation, which was the mantra of central bankers, really for the last 40 years coming out of stagflation in the nineteen-seventies to something that's really a much more balanced look at both inflation and unemployment.

You go back to the early 90s, and the vise chairman of the Fed, Alan Blinder, who's now a professor at Princeton. Now he was basically thrown out of his job for stating in a speech that the law requires the Fed to think both about inflation and unemployment, right? It was so taboo in that era. And I think that has completely changed this point.

Now, why has it changed? I think partly it's about the experience coming out of the Great Recession, where we had incredibly sluggish recoveries across the developed world. And people had many, many worries about inflation and still those worries never materialized and we never even hit our target. If you have a 2% inflation target we've been below that for the last 10 or 15 years or something like that.

And so I think what people realized is that, first of all from a real effects perspective, having that hard of a line on inflation was really having strong effects in terms of holding back economic growth, especially in a way that maybe increased the unequal growth. But second, I think people are realizing that, we can maybe push a little bit more or they're trying to push a little bit more on keeping interest rates low. And fine, maybe inflation will get up to 3%, 3 and 1/2, but they seem confident that it's not really going to get beyond that.

And certainly taking a step back, if you look at the broad data, there's no evidence that having inflation, say at 4% versus 2% or 1%, there's no evidence that that's harmful. If anything having slightly higher inflation is helpful because it allows the real interest rate to go a little bit lower if you need in terms of stimulus.

Now of course, when you get inflation up 10, 20, like that which is what the United States-- People forget, we had inflation 14, 15% in the nineteen-seventies and early 80s. When you get to that level, there is then evidence that it starts to hurt economic growth. People have to be very careful how they save their money to make sure that it's basically saved in a real asset. But I think the consensus has really shifted to put a lot more weight on reducing unemployment as a goal of monetary policy.

MARK BLYTH: Another way is in thinking about debt sustainability. So for a long period of time, the standard answer was, if you get too much debt you'll hurt growth and eventually you'll go insolvent and go bankrupt. And now very mainstream and very respectable people in your profession like Olivier Blanchard and others, have started to say, "Well hang on a minute, let's look at this empirically." And it seems to be the case that we're rethinking the whole notion of fiscal sustainability, Is the ultimately coating problem?

If you basically say to politicians, you don't really have to worry about inflation as much as we thought and honestly you don't have to worry about debt as much as we thought either, this is going to end badly at some point.

JOHN: So, it's clear that you can't borrow an enormous sum of money infinitely, right? But I think there are two things. The first thing is I think that, this is the point that Olivier Blanchard and others have made, is that when interest rates are very low, real interest rates have been declining for the last 25 years and are now often below 1% for what governments can borrow. The carrying cost of say like 100% debt to GDP ratio, it's 1% of GDP, that's just not that big of a deal. And so I think people are recalibrating what they think of as sustainable levels of debt.

Now, the second thing, of course again, just because you can get to 100 or in some cases 200, I don't know what the limit is but at some point you're going to reach a point where things start to become unsustainable. I think there was a worry in the past that the gap between sustainability and unsustainability would be like a flip of a switch, right?

It's not that some things would gradually start to go wrong but that, one day you would wake up at overnight, borrowing costs had quadrupled, and nobody wanted to lend anymore and suddenly you just flip into a regime where no one wanted to lend money. And of course, if you're worried that that's going to happen, not only do you not want to get to that point, you don't want to get anywhere close to that point.

On the other hand, if you think that, "Well, fine interest rates may start to go up," we may start to crowd out a little bit of investment in the private sector but things are going to be much more gradual. And because interest rates are so low by definition, investment in the private sector can't be that profitable to begin with. I think you're a lot more willing to push it out towards the boundaries and you say, "Well, does going to 100% debt to GDP ratio, is that going to start to make things go wrong?" Well I don't know, but probably if they do start to go wrong and they're not going to go wrong sufficiently fast that we won't be able to realize that and put a brake on it.

And so I think again, people are just much, much more accepting not only of high debt levels, but of being more aggressive in pushing towards the limits of where we can go. I think this was a Keynes quote he said, "When the facts change, so do my opinions, what do you do, sir?" And so I think we have to be empirical about this stuff and there's no orthodoxy about it, right?

If it turns out that having inflation at 3% as opposed to 2% is not that big of a deal then we should reevaluate these trade offs.

MARK BLYTH: That's a great place to end at. Always a pleasure, John. Great conversation.

JOHN: Thank you, Mark.

MARK BLYTH: Bye-bye.

JOHN: Bye now.

MARK BLYTH: This episode of the Rhodes Center Podcast was produced by Dan Richards. For more information, go to watson.brown.edu/rhodes. Thanks for listening.


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The Rhodes Center Podcast with Mark Blyth
A podcast from the Rhodes Center, hosted by political economist Mark Blyth.

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