President Joe Biden is rejecting orthodox thinking to promote more just and equitable growth, but his woke agenda could all end in tears.
From Jimmy Carter to Bill Clinton, presidents may have disagreed about the boundaries, but free trade, controlling government deficits and trust in markets were the abiding ideologies.
This Washington Consensus was not official policy, but it offered guardrails on domestic and international economic policy. And on the prescriptions the United States offered allies and imposed on developing countries seeking aid when they hit debt crises.
The Washington Consensus
The free-trade movement began with the 1934 Reciprocal Trade Agreements Act and the 1948 General Agreement on Tariffs and Trade but was derailed when President Donald Trump withdrew from the Trans-Pacific Partnership, and slapped tariffs on aluminum and steel. Biden shows little interest in new trade agreements.
Carter appointed Fed Chairman Paul Volcker, who slayed inflation with a tight monetary policy. That constrained the federal government from borrowing too much lest it run up interest-payment carrying costs, but tight money ended with the 2008 financial crisis.
President Ronald Reagan wanted less domestic spending to pay for his tax cuts, Carter and Clinton sought higher taxes to pay for their spending priorities, and the Carter-Clinton era ended with federal surpluses from 1998 to 2001.
President George W. Bush, having lost the popular vote and dealing with a Democratic House and tightly divided Senate, spent on Medicare prescription drug coverage, a big farm bill and the like, and bequeathed President Barack Obama a half-trillion-dollar structural deficit.
The financial crisis set a new course. Obama signed Dodd-Frank and issued a record number of pages of regulations in the Federal Register. Fed Chairmen Ben Bernanke and Janet Yellen were never able to end the era’s low interest rates and quantitative easing—large Fed purchases of federal and mortgage-backed securities.
With the Fed printing money to buy bonds the pressure from interest-carrying costs abated, and deficits headed above $1 trillion even before COVID-19 struck. Biden’s expansive programs seem likely to push federal borrowing higher still.
Now, Biden wants to reprogram American capitalism and culture to address sexism, structural racism, and climate change.
The Federal Reserve is under pressure to fashion policy to serve that agenda, and the Securities and Exchange Commission will support progressive groups to similarly pressure private lenders. Biden’s infrastructure proposals would impose his social objectives on business decisions.
Social efficacy is subjective—what criteria should central banks and private lenders use to assess a race-neutral or transgender-friendly workplace? Are we imposing an ideological aristocracy of the woke?
All this can lead to poor investment choices from the perspective of promoting innovation, improving productivity, creating higher paying jobs and the like.
Biden promises to cut CO2 emissions in half by 2030, but he can, for example, only do so much to accelerate the development of electric battery technology and enable private investors to build out standardized charging stations to support intercity commerce and travel.
Auto makers are committed to the transition to electric vehicles. They can best calibrate the pace to accommodate the limits imposed by charging times and the cost of battery capacity to avoid putting more vehicles on the road than the evolving charging infrastructure can support. By pushing the process too quickly, through overly aggressive emissions requirements and other mandates, federal policy would risk greatly handicapping domestic transportation—not enough electricity where motorists and truckers need it and sometimes no power at all.
Forcing homeowners to convert to electric heat would raise annual household costs more than $4,000 a year in the Northeast. With median family incomes at about $60,000 in Maine, not much would be left for discretionary spending after mortgages and rent, taxes and the bare essentials.
The Fed buying bonds suppresses interest rates and makes federal borrowing cheap but also can creates zombie companies. Low-interest bond financing sustains businesses with few prospects for turning a profit over the business cycle but ties up capital and skilled labor that could flow into new enterprises that better to economic growth and employment.
In a crisis, massive stimulus spending can create a Keynesian boom, but so many resources steered into less-than-optimal purposes has a way of catching up—that’s what’s been going on in Europe and Japan since the 1990s.
Growth will stall and Americans will fight over a smaller pie. That’s not an attractive future.
Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.