Predictably, these findings immediately become horse-race fodder for the election. That’s unavoidable, and it’s not a bad thing. When studies are carefully done without thumbs on the scale, which is how I’d characterize the three studies in The Post’s review, such reports provide useful information for voters. But what you don’t get out of either the reports or the political hurly-burly is their deeper economic meaning. What are these analyses telling us about underlying conditions in the U.S. economy, and what broad policy lessons can we take from them?
It’s a critical question that asks about changes in the structure of the U.S. and global economy, and in this regard, its answers should drive economic policy no matter who’s in the White House. Here are some of the insights I draw from these reports.
The U.S. economy is highly demand-constrained. Even in good times, it still takes significant stimulus from monetary policy (the Federal Reserve) and fiscal policy (the president and the Congress) for the economy to achieve full capacity. Absent such support, unemployment will remain too high, and key groups will be left behind, especially communities of color and rural communities.
But wait. Weren’t we closing in on full employment before the crisis, when the jobless rate hit a 50-year low? Yes, and both monetary and fiscal policy were highly stimulative, even if part of the fiscal stimulus — Trump’s tax cut — was terribly designed in terms of the bang-for-the-deficit-bucks it spent. The Fed kept the interest rate it controls near zero for most of the last expansion, and when it did raise rates a bit starting in 2016, the economy quickly got wobbly. Fiscal policy toward the end of the last expansion was far more “pro-cyclical” — i.e., stimulative in a recovery, as opposed to a recession — than at any period on record outside of wars.
The Moody’s report provides evidence of this dynamic by comparing Biden’s ambitious investment agenda — in renewable energy, clean transit, infrastructure, education, health care, child and elder care — with Trump’s tax cut agenda. It finds that by 2024, Biden would add 7.4 million more jobs than Trump, 4.5 percent more gross domestic product, faster productivity growth, higher homeownership rates and more labor force participation.
Revealingly, these diverging results are not driven by differences in fiscal austerity. By 2030, Moody’s projects debt as a share of GDP to be about equal for both candidates’ agendas. The difference is between the multiplier impact of Trump’s tax cuts vs. Biden’s broad investments.
Why does it take so much stimulus to get to full employment? The reality of demand-constrained economies begs an explanation. What’s changed over the decades that requires much more policy intervention to achieve full economic capacity?
One reason is the growth of economic inequality. More so than the economies of Europe and China, the U.S. economy is driven by consumer spending, and when most of the growth accrues to those with the least need or propensity to spend their accumulated wealth, the growth engine stalls.
A related problem is the ascendancy of unproductive financial engineering, meaning ways for the rich to grow their fortunes by investing not in productive areas such as clean energy but in arcane tools like derivatives that bet on some outcome that has nothing to do with growth, jobs or middle-class wages.
Inequality also interacts with money and politics to block the very types of productive, equalizing spending that Biden proposes, while insisting on the nonproductive tax cuts that partially drive the Moody’s results. Consider, for example, that one of Trump’s few campaign proposals is to cut the tax on capital gains. According to the Institute on Taxation and Economic Policy, 99 percent of the benefits of that change would go to the richest 1 percent of taxpayers.
Another barrier to full employment in recent years is the trade deficit. When we import more than we export, it’s a drag on U.S. growth and jobs, but often in our past, that drag was more than offset by other growth. Lately, however, in part because of growing inequality, any such offsets, besides explicit fiscal and monetary stimulus, have been less forthcoming. While politicians from the center left to the center right have long denied this reality, Trump correctly identified and elevated it. Then, because of his feckless, counterproductive trade war, he made it much worse. The most recent trade deficit was the worst in 12 years, and the manufacturing sector was in recession even before the pandemic.
Markets fail to address climate and systemic racism. A final reason economies need more help to get to full employment these days is that markets fail in big, bad ways that we’re only beginning to admit. Far from being a hoax, climate change poses a huge challenge to economic activity, though as the estimates of the Biden plans reveal, it also provides an opportunity for greater investment and green jobs. In a compelling new book, economic journalist Jim Tankersley argues that racism and anti-immigration policies turn out to be highly effective tools to undermine productivity, jobs and working-class incomes. The global financial services company Citigroup — perhaps not the source you’d expect here — just estimated that racial discrimination cost the economy $16 trillion since 2000.
Of course, the horse race will dominate until the election, and unbiased information as to which horse pulls the economy further ahead is fair game. But the deeper, more fundamental lesson from this work is that it will take considerable intervention to ensure a strong, fair economy that reaches everyone willing to participate in it. These recent studies do us an important favor by showing which of those policies help to achieve that goal and which ones block it.