Just because Congress is anchored in a toxic combination of partisan gridlock and Trumpian chaos doesn’t mean policy debates are dead. Democrats are working overtime to craft an alternative to the status quo, including progressive tax reform, jobs programs, pushback on climate change, universal health care, expanded Social Security and more.
As it happens, economic conditions right now make this an excellent time for a bolder-the-better agenda.
First, the Federal Reserve recently announced that its previously planned interest-rate increases were on pause. After holding the benchmark rate they control at zero for an unprecedented six years, in late 2015, the Fed began raising rates. A few years later, even as interest rates and unemployment remained historically low, enough economic head winds developed that the bank realized it had better stop tapping the growth brakes.
There were lots of reasons for those head winds, including President Trump’s trade war, global growth problems, stock market volatility and more. But there’s always a lot of other stuff going on in global markets. The key fact is that the U.S. economy started to wobble with the Fed funds rate at 2.5 percent, a level that’s but one-half of its long-term average.
Low inflation even at low unemployment means the Fed is correct to pause, and that the terms of the traditional trade-off of equally balanced inflation and employment risks have changed. In today’s economy, the risks of weak demand, left-behind people and places, and stagnant low- and mid-level wages and incomes are greater than those of higher inflation. This is a symptom of structurally weak underlying demand and a rationale for stimulative policies.
Second, the U.S. economy is probably significantly slowing as we speak because of fading fiscal stimulus. The tax cuts and a big uptick in government spending, both of which were deficit-financed, added close to an extra point to gross domestic product growth in 2018 and most of this year. But as they leave the system, the Atlanta Fed is predicting that GDP growth fell to 1.4 percent last quarter (half the average growth rate this year), and forecasts for the next few years are well below 2018’s pace.
These dynamics imply that a fiscal policy twofer is on offer. Increased investment in public goods, including education, infrastructure and the Green New Deal can help push back both on structural inequality and slower growth. At the same time, progressive tax policy, such as Sen. Elizabeth Warren’s wealth tax or Sen. Bernie Sanders’s estate tax expansion, can help support that fiscal agenda while also chipping away at wealth concentration.
But the broader point is that without the push of stimulative monetary or fiscal policy — or both — the U.S. economy will probably slow and the unemployment rate will rise. We’re a bit like a bicycle that cruises along at a decent clip until it hits the slightest hill, and then, without a push, starts to shake.
Third, even as the heretofore stimulated U.S. economy was closing in on full employment, interest rates and inflation stayed very low and lots of people were/are still struggling to make ends meet.
Low interest and inflation at low unemployment imply that a supposedly high-pressure economy isn’t showing up in traditional pressure gauges. Economist Larry Summers discusses this phenomenon under the rubric of “secular stagnation,” meaning that even late in an expansion, economies underperform without an extra push. Such sluggishness is occurring not just here, but in Europe as well, as Euro area growth rates, inflation and interest rates all remain historically low.
The result is that both here and abroad, weak underlying growth alongside high levels of inequality means many households and communities remain left behind.
In other words, the Democrats’ progressive agenda is not only a response to the upward redistribution that Republicans have successfully pushed since President Ronald Reagan. It is also a coherent and essential response to underlying stagnation that has grown to plague advanced economies.
Why that stagnation exists is not well answered. It may have to do with aging demographics, inequality, persistent U.S. trade deficits, the rise of unproductive finance, monopolistic concentration in key industries (retail, tech, health care), suboptimal public and private investment, and more.
But we needn’t wait for a thorough diagnosis of causes if we know what will reverse them.