Comment To President Joe Biden’s credit, his policies did not cause many of the economic problems we face today. But they made them worse. Even more worryingly, his policies may reduce growth in the future and make the economy less equal and resilient. The president usually doesn’t have much of an impact on the current economy. it does not set energy or asset prices. But this administration has been particularly prolific in making economic policy, and most of those policies have been bad for the economy. A healthy economy grows. has low, stable inflation. it is shock resistant. it is able to create and adapt to new technology; and it has some degree of fairness among its constituents. Biden’s policies undermine all of these things. Biden insists the economy is strong, and to some extent that is true: unemployment is low and household balance sheets are still in good shape. But inflation is high, GDP numbers are weak, recession is looming, post-inflation wages are falling and so is the stock market. Biden didn’t cause inflation – that was the result of supply constraints from the pandemic, loose monetary policy and Trump-era stimulus bills. But then, just as the economy was starting to recover, the 2021 US Bailout came along and made inflation even worse. Economists estimate it was too big and may have added 2 to 4 percentage points to inflation. Beyond the trillions of dollars in aid spending from the previous administration, the American Rescue Plan was excessive, in part, because it provided generous benefits to families who didn’t need it—middle- and upper-middle-class families making six figures got checks. This may have been politically popular at the time, but the inflation it caused is harder on low-income earners who are more price-sensitive and will suffer more during any recession caused by anti-inflation efforts. Nor is Biden to blame for high energy prices, which started to rise as we emerged from the pandemic and then rose even more because of the war in Ukraine. But his anti-oil company rhetoric — suspending leases on public land, pledging to eliminate fossil fuel use and calling for oil companies to pay more for capital — has reduced their incentive to invest in new production. It also scrapped Canada’s Keystone XL pipeline, which was scheduled to be completed in early 2023. All of this adds up to fewer energy sources now and less resilience to international price shocks. Biden’s next, and arguably best, legislative achievement was the $550 billion 2021 infrastructure bill. And there are aspects of it that are good for the economy: improvements to ports and roads, building resilience to climate change and expanding access in high speed internet everything is a winner. But how the execution of these goals will play out is a major source of concern. For example, the bill ensures that as many jobs as possible go to union workers. In the first place, there is nothing wrong with hiring union workers. But when government projects give unions a monopoly, it drives up costs and delays schedules by years. A more competitive bidding process for the work would increase the chances that the projects will go well and not cost taxpayers extra money. Overall, little or no attention has been paid to cost control. The bill also contains a lot of money for politically favored projects, such as his administration’s love affair with passenger rail and electric cars. Investments in the economy can pay off, but like any investment they must be well targeted and not overly expensive, otherwise they just add to the deficit without generating much growth. And more debt makes the economy less resilient because higher interest rates mean there’s less room for spending in the future when we really need it.
This year’s $280 billion CHIPS Act suffers from many of the same problems as the infrastructure bill. It aims to increase production of US memory chips that are critical to the economy. Funding for scientific research is large and in theory the bill aims to make the economy more resilient by renewing the production of an important good. But the US lacks the skilled labor to make the chips it needs. Even more troubling is the instinct to create industrial policy that tends to make domestic industry less competitive, rob domestic producers of quality inputs from abroad, and make goods more expensive. It also creates more distortions in the economy by spending on favored industries. Again, the bill favors the more expensive unionized workers, who don’t have a good track record of embracing new technology. Innovation and the ability to adapt to new technology is vital to a healthy economy. Industrial policy is attractive because you can direct money to places that seem promising for growth. But even if the process is never tampered with (which it often is), picking winners is extremely difficult without market discipline. In addition, Biden’s “Buy American” provisions and new trade sanctions are aimed at reducing trade. However, trade has been one of the biggest deflationary forces over the past 30 years. Resilience comes not from domestic production, but from diversification — as with many sources of computer chips from a globally competitive market. The Inflation Reduction Act of 2022 at least claimed to address inflation, although much of the bill is devoted to spending, which is bad for inflation. The hope is that it will reduce inflation in the future by reducing the deficit over the next decade. But within weeks of its passage, any potential deficit reduction was undone by the student loan forgiveness executive order. It gets worse. Biden’s Labor Department is trying to make it harder to hire gig workers. These jobs are an important source of supplemental income and flexibility for many families. Biden has also promised to keep entitlements like Social Security on an unsustainable path, has kept Trump-era tariffs in place, and has not made easing immigration backlogs (a big part of the labor shortage) a priority. The best thing that can be said about Biden’s economic strategy is that Republicans don’t have much better ideas. Regardless of what happens in the midterm elections, we need policies that restore dynamism and growth to the economy instead of shoveling money into pet projects and political favoritism. Events in the UK demonstrate that advanced economies do have a limit to what they can spend, especially in a high inflation environment where there are fewer foreign buyers of our debt. Resilience and growth are what the economy needs to reduce inflation and bring more prosperity, and that requires a functioning market that can spread risk and trade as freely as possible. Biden’s policies don’t achieve that, they just stand in the way. More from other Bloomberg Opinion writers: Why breaking the QE addiction is such a struggle: Daniel Moss The Krugman-Summers Inflation Controversy Explained: Karl W. Smith Biden’s SPR Policy Fails: Evidence by David Fickling This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. Allison Schrager is a Bloomberg Opinion columnist covering finance. As a senior fellow at the Manhattan Institute, he is the author of An Economist Walks Into a Brodhel: And Other Unexpected Places to Understand Risk. More stories like this are available at bloomberg.com/opinion