Patrick Semansky/AP
- President Biden's spending plans are shaking up how people think about economic policy.
- Debt fears are out, full employment and direct benefits are in, and inflation is the new big risk.
- Here are 7 major shifts in thinking on government aid, according to a top economics professor.
- See more stories on Insider's business page.
Though he was labeled as more moderate than some of his opponents in the Democratic primary, President Joe Biden frequently mentioned on the campaign trail that he'd be the most progressive president in history.
As far as economic policy goes, that claim is quickly proving true.
The $1.9 trillion stimulus package championed by Biden and approved earlier this month was the second-largest stimulus passed in US history, behind only the CARES Act, passed at the start of the pandemic. The administration is now eyeing another $3 trillion in spending on infrastructure, childcare, and education, a price tag that was practically unthinkable just a decade ago.
It's not just the plans' sizes that set Biden apart. The White House's views toward the national debt, unemployment, and stimulus delivery also mark a shift from past administrations, and economic thinking. And while the Federal Reserve enjoys independence from the executive branch, it too has adopted new manners of pursuing healthy economic growth.
The changes signal "a big move in the center of gravity of economic policy debates," JW Mason, an associate professor of economics at the City University of New York and a fellow at the Roosevelt Institute, wrote in a March blog post. Here are the seven shifts that Mason see taking place in how the government pursues economic policy.
(1) The headline unemployment rate isn't everything
The health of the labor market has long been summarized by the U-3 unemployment rate. The gauge, updated each month, measures the number of people who are jobless but actively seeking work. While helpful, policymakers are paying more attention to alternative measures like the broader U-6 rate and the labor force participation rate to get a truer look at how the economy is performing.
For one, the U-3 rate doesn't account for those discouraged from looking for work or those who work part-time but want a full-time job. There's also not a "well-defined labor force, but a smooth gradient of proximity to employment," Mason said, with the short-term unemployed the closest to the labor force and retired people furthest away.
The Fed hinted at the U-3 rate's ineffectiveness when it rolled out its new policy framework in August. Gone was its goal of pursuing full employment, replaced with a target of maximum employment. Chair Jerome Powell said earlier this month that, though baseline unemployment has fallen considerably, other gauges have made considerably less progress toward reaching pre-pandemic levels.
Greater employment is necessary for the Fed to pull back on its accommodative monetary policy, but improved wage growth and gains across racial and gender lines are similarly critical, Powell said.
"Yes, 4% would be a nice unemployment rate, but it would take more than that to get to maximum employment," he added.
(2) Weaker spending is the real enemy, not inflation
Recessions are part of the natural economic growth cycle, and not random shocks to production or consumer spending, Mason said.
"Economic activity is a complex coordination problem," the professor said. "There are many ways it can break down or be interrupted that result in a fall in spending, but not really any way it can abruptly accelerate."
Accordingly, it's demand shortfalls that pose a greater risk to long-term growth than unexpected bouts of overheating. Conservatives and moderate Democrats raised concerns that the latest stimulus plan will overfill the hole in the economy and kickstart a period of stifling inflation. More progressive Democrats countered with the argument that passing too little stimulus could leave demand below levels needed for a full recovery.
When overheating occurs, it's "much easier to interrupt the flow of spending than to restart it," Mason said.
(3) Keeping demand robust avoids a spiraling recession
Another critical factor in the "demand vs overheating" fight is a term called "hysteresis," used to describe when effects borne of initial causes persist after those causes are removed.
Overheating may drive stronger inflation, but it usually gives way to higher productive capacity, Mason said. Conversely, weak demand drags on potential output and can spark a repeating cycle of ever-lower potential output.
"Big falls in demand may persist indefinitely unless they are offset by some large exogenous boost to demand," Mason added.
Biden's stimulus plan aims to be that large boost. The massive plan contrasts with the lone $831 billion recovery package passed during the Great Recession by President Barack Obama in 2009. While that package was the largest ever passed at the time, many economists have since blamed its lack of adequate funding for a slower-than-necessary rebound.
(4) Maximum employment forms a more equitable economy
Democrats' push to fuel a rapid recovery and supercharge demand will do more than lift incomes and overall output, Mason said. Maximum employment encourages innovation and faster productivity growth, and it evens out the distribution of income to benefit the country's lowest earners.
"Those who are most disadvantaged in the labor market, are the ones who benefit most from very low unemployment," Mason wrote. The Fed's updated mandate and the Biden administration's push for full and diverse employment suggest policy may soon target such gains.
(5) Debt fears can wait, the recovery can't
Notably absent from Democrats' push for the American Rescue Plan Act were squabbles over how much it would add to the federal debt pile. Neither the White House nor Congressional leadership "made even a gesture" toward cutting down the bill's price tag, Mason said. That's a stark difference from the Obama years when parties haggled over how the government would pay off the massive debt.
That's not to say the bill - and the relief packages that came before - don't have a major impact. The Congressional Budget Office estimated before the latest stimulus measure was approved that the federal debt would reach 102% of GDP by year end. The debt would then surge to 202% of GDP by 2051 unless laws changed, the office added.
So far in 2021, fears of runaway inflation have quickly become the biggest risk to the government's policy strategy, eclipsing decades of worrying about the rising federal debt. The Fed has said it plans to let inflation rise above 2% through the recovery, but critics charge that overshooting the target could spark an economic crisis not seen since the 1960s.
Those projections did little to dissuade Democrats. The White House has since suggested it will pursue higher taxes, but its plans to spend trillions more on infrastructure and other improvements stand to offset those income gains.
(6) Weekly payments for the unemployed
US welfare measures have hinged on maintaining work incentives for decades. That changed with pandemic-era stimulus.
Federal supplements to unemployment benefits lifted those who lost work during the health crisis. For the first time in years, helping those left jobless took priority over ensuring that nobody was left better off for being unemployed, Mason said.
The federal benefit has shrunk from $600 per week to $300 per week, but remains in place into the fall. This policy, when coupled with the latest plan's child tax credit, "effectively abandons work incentives as a design principle" and might usher in a new era of jobless aid, Mason added.
(7) Replacing government-guided aid with direct-to-consumer stimulus
Compared to financial-crisis aid packages, ARPA does far more to push cash directly to Americans. The $1,400 direct payment, bolstered unemployment benefit, and child tax credit all give households cash to spend as they please. This differs drastically from previous stimulus plans, which included indirect spending aimed at altering incentives, Mason said.
"What's interesting here is that it reflects a view that making the payments more salient is a good thing, not a bad thing," he added.
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