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I’m joining Biden’s economics team. Here’s some of what I’ll be thinking about. - The Washington Post

I’m going into the Biden administration as a member of the president’s Council of Economic Advisers, so this is my sign-off column. I’ve greatly appreciated the chance to scribble out my thoughts on the economy and economic policy here.

By way of saying adieu, I thought it might be fun to look back on a few of the pieces whose ideas and points seem most germane to the nation’s economic challenges, particularly in some of the areas I’ve emphasized over the years, such as fiscal, monetary, tax, and trade.

Fiscal policies (taxes, government spending, deficits and debt): I’m leading with this because it’s an area where <a href="https://www.washingtonpost.com/outlook/2019/01/10/very-good-economic-idea-may-be-about-replace-very-bad-one/">I’ve argued</a> economics has made real progress. The key things we’ve learned are:

— Under conditions that prevail today and are expected to persist — specifically a fragile economy with families struggling and interest rates very low — borrowing to finance spending on virus control, productive public goods and inequality-reducing policies (as opposed to regressive tax cuts) is more than warranted. It’s essential.

— Arguments that such borrowing will push up interest rates and hurt the economy get little support from the data. That doesn’t mean deficits don’t matter: Any country carrying a high debt burden is more exposed to an unexpected rise in interest rates, a risk that shouldn’t be ignored. But that risk must be weighed against the avoidable suffering that can be obviated with robust fiscal relief.

— Especially since the enactment of the Trump tax cuts, which broke the linkage between overall growth and revenue flows into the Treasury’s coffers, our main problem isn’t spending; it’s too little <a href="https://www.washingtonpost.com/outlook/2019/01/30/our-fundamental-fiscal-problem-isnt-too-much-spending-its-not-enough-revenues/">revenue</a>.

— I’ve <a href="https://www.washingtonpost.com/outlook/2020/10/20/return-austerity-politics/">argued</a> that fiscal austerity is, at this point, more of a political than an economic argument, one used to block policies that partisans don’t like and quickly forgotten when those same partisans want to move deficit-financed policies they do like (for more on the contemporary economics of public debt, see <a href="https://www.washingtonpost.com/outlook/2020/11/12/economics-government-debt-this-unique-moment/">here</a> and <a href="https://www.washingtonpost.com/outlook/2020/11/18/limits-scarcity/">here</a>).

Monetary policies (interest rates and the Federal Reserve’s actions): Because the Fed plays such a key role in economic outcomes, I’ve spilled a few barrels of digital ink on how its policies have evolved; here again, economics has made real progress.

— I’ve applauded from the sidelines as the Fed has moved to being a lot more comfortable with allowing low unemployment. That is, in pursuing its mandate to balance the trade-off between inflation and labor-market tightness, it has elevated the critical fact that persistently low unemployment poses less of a threat to low and stable inflation than it thought. The current Fed chair, Jerome H. Powell, gets high praise for applying this wisdom, and so does one of my likely new colleagues in the Biden administration, Janet Yellen, who will be nominated to serve as the treasury secretary.

— But I’ve also pushed the Fed to go further, <a href="https://www.washingtonpost.com/outlook/2020/06/15/federal-reserve-could-help-make-job-market-fairer-black-workers/">writing</a> with Janelle Jones about ways the central bank can work to close persistent racial job, wage and wealth gaps. Importantly, this idea been adapted in Biden’s far-reaching racial inclusivity <a href="https://joebiden.com/racial-economic-equity/">agenda</a>.

Trade policy: Like a growing number of economists, I’ve tried to stress ways in which our profession has gotten a lot wrong when it comes to <a href="https://www.washingtonpost.com/news/posteverything/wp/2018/03/19/the-dangers-to-globalization-of-denying-its-downsides/">globalization</a>.

— The fundamental assumption that increased trade flows benefit everyone (which, for the record, is not what trade theory really predicts) elevates consumers over workers, when most of us are both.

— The theory also ignores the reality that when it comes to expanding trade, Congress has too often “written trade deals and tax laws that have benefited international investors and corporate interests rather than workers.”

— I’ve tried to <a href="https://www.washingtonpost.com/outlook/2020/10/12/trumps-triple-fail-virus-control-stimulus-trade-deficit/">argue</a> (often with help from economist Dean Baker) that the way forward involves a much more representative crowd sitting around the trade-deal table, greater investment in American manufacturers and paying a lot more attention to ways in which other countries make their exports cheaper in dollars and our exports more expensive in their currencies.

How economics can improve: Finally, I’ve tried to identify ways in which economic policymaking must evolve to meet the challenges we face. We see that in new thinking about deficits, monetary policy and trade. But there are still important ways in which key economic assumptions undermine social justice.

— As I wrote this summer, <a href="https://www.washingtonpost.com/outlook/2020/07/07/built-in-biases-economics-that-sustain-systemic-racism/">when</a> people criticize the field of economics for its failures around issues of race, the most common critique is the extent to which Whites dominate the <a href="https://www.aeaweb.org/content/file?id=6592">profession</a>. It’s an important point and surely one reason economics has done far too little to address racial gaps. But there’s something foundational in the structure of economics that is too accepting about embedded racial injustice: the assumption that markets, left alone, settle into optimal conditions. The problem is that it is impossible “to observe the empirical record of Black economic outcomes and not conclude that market failure is pervasive. Their equilibrium is disequilibrium.”

— Especially as I undertake this next chapter, I’ve been thinking about “<a href="https://www.washingtonpost.com/outlook/2019/12/02/can-do-economics/" target=_blank>can-do-economics</a>.” This approach to economic policy rejects the view, still too pervasive in the field, that addressing problems such as inequality, climate change, wage stagnation, financial excesses, racial injustice and underinvestment in public goods will backfire by guiding what should be the invisible forces — the free hand — of unfettered markets.

We should all know by now that sometimes the free hand is all thumbs. Even a quick glance at the Biden/Harris agenda — which I informally advised this year, before I agreed to join the administration — shows a thorough rejection of the notion that we can’t meet the challenges ticked off above. It’s impossible to miss the urgency in President-elect Joe Biden’s voice when he asserts that virus control is but the first step of the agenda. The next step is building an economy on the other side of the crisis that’s far more resilient to shocks from pandemics to climate-change-induced floods and fires. It is to craft an agenda that takes on inequality, racial injustice and the struggle for working families to get and stay ahead.

It’s been a privilege to explore these challenges in these pages in recent years, but I’m now privileged to try to use what I’ve learned with a team of like-minded, highly diverse economists in the service of an ambitious, exciting new executive branch.

Jared Bernstein, chief economist to former vice president Joe Biden, is a senior fellow at the Center on Budget and Policy Priorities.

Jared Bernstein

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PostEverything

The conversation is bigger than you think.

Outlook

I’m joining Biden’s economics team. Here’s some of what I’ll be thinking about.

Reuters

The U.S. Capitol dome is seen through steam from a vent at sunset in Washington

The limits of scarcity - The Washington Post

If you ever sat through Economics 101, you’ll recall that the concept of scarcity is core to the discipline. The usual setup is to ask students, at least those who are still awake, why diamonds, a luxury good, cost a mint, while water, a vital necessity, is cheap. The answer in that water literally falls from the sky while diamonds are rare. Scarcity (supply), along with needs and desires (demand), determine price, and price signals are crucial to how economies work.

But how useful a guidepost is this concept of scarcity today? It’s still true, of course, that diamonds and rare and rain is free. But there are indicators and persistent dynamics in economies across the globe that suggest ways in which the scarcity framework can point us toward the wrong choices. For example, scarcity is invoked in fiscal austerity <a href="https://www.vox.com/policy-and-politics/2020/4/27/21232672/federal-budget-deficit-4-trillion-stimulus-coronavirus">arguments</a>, as when policymakers argue we can’t afford a big enough relief package to help people deal with the slowing economy and the surging coronavirus (it’s also true that such arguments are often more <a href="https://www.washingtonpost.com/outlook/2020/10/20/return-austerity-politics/">political</a> than economic).

Two critical indicators that should get us thinking differently about scarcity are interest rates and inflation. I’ve often commented about low interest rates, most recently <a href="https://www.washingtonpost.com/outlook/2020/11/12/economics-government-debt-this-unique-moment/">arguing</a> that they were essentially saying “be my guest” in terms of extending government borrowing to meet urgent needs. But why have rates been so low — not just here, but across the <a href="https://www2.deloitte.com/us/en/insights/economy/monetary-policy-low-interest-rates-advanced-economies.html">globe</a>, and what should that teach us about scarcity?

Going back to Econ 101, it must be that savings are not scarce, and thus the price of borrowing those savings — the interest rate — is low. In fact, this has been the case for years. In 2005, then-Federal Reserve Governor Ben Bernanke <a href="https://www.federalreserve.gov/boarddocs/speeches/2005/200503102/">observed</a> what he called the “global saving glut,” wherein he worried that excess savings could flood our capital markets and inflate a credit bubble in … wait for it … real estate.

In a similar vein, economist Larry Summers has written about the return of “secular stagnation,” another way of describing the problem of having more available savings than productive, private investments. In a new <a href="https://www.piie.com/sites/default/files/documents/summers-2020-11-rtge-memo.pdf">paper</a> addressed to the incoming economic team for President-elect Joe Biden, Summers argued that this imbalance demands attention as it “is the ultimate cause of excess leverage, asset bubbles, sluggish growth, and insufficient inflation,” the latter being another sign of soggy economies with excess capacity.

Simply put, the fact that interest rates are very low in many countries and expected to stay low for <a href="https://fred.stlouisfed.org/series/DFII30">years</a> to come tells us that scarcity is not the right framework for thinking about borrowing and spending right now. Instead, we should take advantage of excess savings and the low rates they provide, and apply these resources for two purposes: one, to act quickly to meet the most pressing challenges of the moment, including pandemic relief and economic hardship, and two, to invest in productive public goods.

Regarding the latter — public investment — recall my profound realization that water falls from the sky. True (outside of droughts), but there are <a href="https://www.greatlakesnow.org/2020/11/drinking-water-news-lead-illinois-michigan-first-nations/">still</a> places in this country where “water contamination is a major issue.” In other words, while private investors may not perceive enough worthwhile investments to absorb the world’s excess savings, there are tons of vital public projects that are starving for investment. The return on these investments, especially those in clean energy; clean water; and affordable child-care, health-care and education pay future dividends such that the return on these investments is much higher than the low cost of borrowing.

The constraint here is not scarcity — investment capital is, and is expected to stay, uniquely affordable at a rate well below projected returns. The constraint is another related problem: inequality. In this case, it is underutilized private capital that could fruitfully be moved over to the public side of the investment ledger.

Because of inequality, it’s easy to look around and conclude that scarcity abounds. Some people — too often people of color — clearly have too little access to health care, decent housing, quality schools, affordable child care and even criminal justice. But a closer look reveals that here again, the problem isn’t scare resources; it’s the imbalanced, unequal way in which access to these resources is distributed. After all, other advanced economies, all of which have lower per capita income than we do, provide much more equitable access to these necessities. A moment’s thought confirms that it makes no sense that Europe and Scandinavia have enough health care to go around, but we <a href="https://www.healthsystemtracker.org/chart-collection/quality-u-s-healthcare-system-compare-countries/#item-the-rate-of-pregnancy-related-deaths-per-100000-live-births-1987-2016">don’t</a>.

We live in an economy with tremendous gaps between the resources available to different groups of people. In that same economy, the cost of relief and investment capital is expected to stay low for a long time. The private sector is underutilizing that capital, while the public sector is starved for investment. And the return on those public investments, especially if we’re smart about them, is sure to be well above their cost.

Once again, the economic constraint is not scarcity of resources. It’s scarcity of bold ideas and the political will to bring them to fruition. As we stand at the cusp of a new presidential administration (for which I was an informal adviser during the campaign) with very different ideas from the outgoing one about inclusivity, investment, inequality, racial justice and the role of government, I suggest we banish false scarcity arguments and watch what happens next. I suspect a lot of us will quite like what we see.

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The limits of scarcity

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The economics of government debt at this unique moment - The Washington Post

If you’ve been following the debate over spending and taxing in this country, you’re probably aware that the federal government has for years been spending more than it brings in through taxes. If you’re one of those who dive into the weeds of that debate, you know that accumulated budget deficits over the years equals the public debt. Think of the deficit as the flow of water from the spigot and the debt as the body of water in the tub.

Right now, there’s a whole lot of water in that tub. In fact, at about $20 trillion, the public debt is equal to the size of the economy, and it’s going to get bigger. The nonpartisan Congressional Budget Office recently projected that debt scaled to its share of the economy was expected to be 104 percent next year, and 106 percent the year after.

So, after all that, what if I told you that according to CBO estimates, the inflation-adjusted cost to the government of servicing that debt — meaning paying interest on it — is expected to be about zero, or even less than zero, over the next decade? Because that’s what the numbers show.

The reason for this counterintuitive result is neither complicated nor sleight of hand: It’s because interest rates are so low that the cost of paying for even our historically large and growing public debt is also very low, especially when we factor in inflation.

Here’s a highly simplified explanation of how it works.

Suppose you borrowed $100 at 10 percent interest. Your interest cost, or debt service, is $10 a year. Now, suppose, as the U.S. government does, you not only roll over that debt, you add to it, even double it. But also suppose that as you double your debt, the interest rate on it falls to 2 percent, or $4. Your debt has doubled to $200, but your debt service is down by 60 percent.

Next, here’s how inflation comes into play. Assume you’re still paying 2 percent interest on your debt, but inflation is also running at 2 percent. While the dollar amount of your debt grows by 2 percent each year, the real value of your debt — what it could buy in actual stuff — is not growing at all. When the real value of debt grows by zero — when 2 percent interest is offset by 2 percent inflation — that’s a big help for any entity carrying a large debt load.

Now, let’s apply all this to the government accounts. The table below shows the two oft-cited measures of public debt and deficit as a share of the economy. The debt share is headed for record territory, about to surpass its historical peak of 106 percent in 1946. Part of this is because fighting fascists and fighting infectious microbes are both expensive. And part is due to the reckless Trump tax cuts, which broke the linkage between the precrisis economy and the revenue flow to the Treasury, a point I have <a href="https://financialservices.house.gov/uploadedfiles/12.19.2018_jared_bernsteinl_testimony.pdf">often stressed</a>.

The Washington Post

But the bottom line, in bold, shows that as debt grows over the next five years, the real cost of servicing that debt falls. If this prediction holds, it means that the rate of inflation will be higher than the rate of interest, so real debt service will actually decline.

Putting aside all the wonkery, what this is saying is as simple as it is important: If interest rates stay as low as we expect, the cost of servicing even our highly elevated debt will be uniquely low and affordable.

But will rates remain so low? In fact, what we’re seeing now is part of a long-term trend across all advanced <a href="https://voxeu.org/sites/default/files/file/Geneva17_28sept.pdf">economies</a> (why this is occurring is a great question and the subject of a future column). These low rates persisted even before the pandemic, when economies were closing in on full capacity, a dynamic that usually pushes rates up. Moreover, broad expectations, which could of course be wrong, are that rates will stay low for at least the next decade (i.e., low relative to historical experience; we should expect some rate increases as the recovery proceeds).

Now, let’s remove our green accounting eyeshades and turn to exciting current events. The new, incoming administration will be inheriting many economic challenges which President-elect Joe Biden has listed as: the pandemic, the economic recovery, racial justice and climate change.

Biden and Vice President-elect Kamala D. Harris have an agenda with ambitious policies targeting each one of these issues (I informally advised Biden during the campaign). Legislating that agenda was never going be easy, and if the Republican majority holds in the Senate, it will be harder. Still, I take seriously the president-elect’s recent comments about reaching across the aisle, and to those rolling their eyes, I say a) he’s got to try, b) he’s just the person to <a href="https://www.washingtonpost.com/us-policy/2020/11/09/mcconnell-biden-bipartisanship/">do so</a>, and c) at transitional moments such as this, politics can sometimes surprise you.

But either way, the calculations above provide solid evidence of a highly underappreciated tail wind for the new administration: To the extent that they need to deficit-finance these essential initiatives, the borrowing environment is saying “be my guest.”

To be clear, that’s not an invitation for reckless or wasteful borrowing. But it is a welcoming invitation for the four elements of the list, each one of which will have a return on investment that will far surpass their historically low costs.

It would be folly to ignore the debt and the deficit, but it would be a much bigger mistake to ignore the pent-up needs of the country and, in particular, the low cost of financing those needs.

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The economics of government debt at this unique moment

NerdWallet-Chasing Savings Rates

This precarious economic moment: Diagnosis and prescription - The Washington Post

With only a week until the election, it’s no surprise every debate, discussion and analysis is viewed through the lens of that portentous contest. But whichever candidate wins, he will face an economy at a precarious, sensitive point, one in need of smart policy. Thus, at least for a few paragraphs, let’s put politics aside and tackle the most basic economic questions of the moment, with an eye toward a clear diagnosis and prescription.

Q: Is the U.S. economy in recession or recovery?

A: Many indicators show the economy is transitioning from recession to expansion, but slowly and haltingly, and recessionary conditions persist. Whether a sustainable, robust recovery takes hold is yet to be seen and will depend on policy choices made by the administration and lawmakers.

The jobless rate, though falling, remains more than twice where it was before the pandemic-induced shutdown (7.9 percent vs. 3.5), and we’re still short 11 million jobs relative to that peak. Thus, the job market remains slack, with too many workers chasing too few jobs. Growth, while positive, has most recently downshifted: The pace of job gains and GDP growth has slowed. IHS <a href="https://cdn.ihsmarkit.com/www/pdf/1020/US-Monthly-GDP-Current-Index.pdf">Markit</a> estimates GDP growth in September was about zero.

Q: What’s responsible for the downshift?

A: Because this is perhaps the key diagnostic question, a few graphics should help. This first one is most important, as it gets at the underlying dynamics of what I believe is going on right now.

The top line shows real consumer spending — 67 percent of GDP — January to August, the most recent data point. It falls, partially recovers, then slows. But it’s what’s fueling this growth that’s most revealing.

As most working-age Americans depend on paychecks, as opposed to stock portfolios — the bottom half of households hold less than 1 percent of the value of the stock market, including any retirement <a href="https://www.federalreserve.gov/releases/efa/efa-distributional-financial-accounts.htm">accounts</a> — labor income is essential, but it’s been slow to return, a reflection of the slack labor market indicators noted above. Instead, the clear ramp up in government support has played a key role in supporting spending, most notably the checks to households and enhanced unemployment benefits that were in the Cares Act, passed in March.

The problem is that these income sources have expired, and that’s a big reason for the downshift. Simply put, government support faded before labor income returned.

Q: Why is savings in the chart? What’s its role in all this?

Jared Bernstein

I’m joining Biden’s economics team. Here’s some of what I’ll be thinking about.

The limits of scarcity

The economics of government debt at this unique moment

This precarious economic moment: Diagnosis and prescription

The return of austerity politics

Trump’s triple failure: Virus control, stimulus and the trade deficit

Why the U.S. economy just downshifted, and how to reverse that

What Trump’s and Biden’s competing economic agendas reveal about the economy

Thanks to Trump’s actions, millions lose health coverage

Miracles are not a plan