The writer is a senior fellow at Harvard Kennedy School
A few years ago, one of my sisters decided we should all give new year resolutions to each other, instead of coming up with our own. The experiment was largely a disaster as almost everyone ended up offended. (What do you mean I need to exercise more?!) Nevertheless, I’m going to risk offence by offering President-elect Joe Biden some new year resolutions, based on things we learnt during the administration of Donald Trump.
Fiscal sobriety is overrated. With millions unemployed, a pandemic still raging and the US economy slowing again, the most important new year resolution is to embrace spending and not worry about budget deficits. Economists don’t think President Trump’s 2018 tax cut and spending programme accomplished much. But it did show big fiscal stimulus doesn’t have to be inflationary.
Here is the evidence. The US economy grew just over 2 per cent in 2017, and unemployment fell to 4.1 per cent, below the Federal Reserve’s full-employment estimate at the time. Worried about inflation, the Fed hiked interest rates three times that year. But then, in 2018, the economy got a $275bn tax cut-led spending boost.
Growth did pick up to almost 3 per cent in 2018 before slowing to 2.3 per cent in 2019. But while the Fed’s preferred measure of core inflation edged ahead to 2.1 per cent in December 2018, it then slowed to 1.6 per cent by end of 2019. Standard economic theory wasn’t totally wrong, but the pick-up in inflation was mild and temporary. If a massive fiscal stimulus hardly generates inflation with the economy at full speed, it is unlikely to do so now — although some investors are starting to fret.
This is no time to go on a diet. The large deficits created by Mr Trump’s economic programme and the massive amounts spent on pandemic-relief turned out not to be immediately dangerous for borrowing costs, either. The US spent $665bn more than it took in during 2017. By the end of 2019, that had grown to $985bn; by 2020, it reached $3.1tn. Yet the yield on benchmark 10-year bonds has fallen to 0.92 per cent. Traditional theory says large government borrowing pushes up borrowing costs for companies and crowds out private investment. But corporate bond issuance also hit a record in 2020, as spreads on investment-grade and high-yield debt touched record lows.
A rapid rise in interest rates always remains a danger. But with inflation apparently quiescent, and the Fed newly committed to letting the economy run hot to boost prices, most economists are little concerned. With rates so low, reject government austerity and keep on borrowing to maintain a safety net and finance a rebound.
Make a real effort to find a new job. Not for you, Mr President-elect — you’ve still got one. But true for the millions unemployed because of Covid-19, or displaced by automation or free trade. Mr Trump was on to something here. Economists David Autor, David Dorn and Gordon Hansen showed the devastating impact on US communities of import competition from China. They found that the labour market adjustments meant to happen in the face of a free trade shock — with displaced workers moving into new sectors — materialise incredibly slowly. That free trade creates winners and losers is not a new concept, but Mr Trump’s election in 2016 showed too little has been done to help the losers. So invest in training programmes, community colleges (the first lady can help here) and spend on job-creating infrastructure.
After the tumult of the past four years the instinct is to turn the page and move on. But whatever you think of the Trump administration’s rhetoric and policies, economists have learnt a few things in that time. I hope in 2021 the Biden administration can embrace them. And I promise to exercise more.