I often learn more from people whose views partially overlap than from those with whom I completely agree or completely disagree. So I learned a lot from reading Substack by Matt Yglesias, even though he has a much more favorable view of the Biden administration than I do. In particular, he supports their early efforts to pass major bills involving stimulus and grants for areas such as infrastructure, clean energy and technology.
But Yglesias also believes that the Biden administration deviated from its trajectory in 2022:
I published an article on August 25, 2022 advising Biden to take a break from his flirtations with heterodoxy and dealing with Congress and start listening to boring neoclassical economists. In my opinion, this did not mean denying everything he had done in the first 18 months of his presidency. It simply meant acknowledging that most of his pre-2021 policy agenda had been concocted assuming depression-like conditions, and that those conditions no longer applied. He had taken some big legislative steps, gotten some good hits, and now it was time to play defense.
But the pivot never really happened.
Yglesias is much smarter than many of the policy advisers Biden has relied on in recent years. Many of them don’t really understand neoclassical economics (i.e. supply-side economics), which has led to a series of policy initiatives that have made inflation worse:
I would not expect a Democratic administration to weaken the Davis-Bacon rules as an anti-inflationary measure, although it would advance a number of Biden’s stated policy goals. But did Biden need rewrite these rules to be stricter than under Obama or Bill Clinton? Likewise, every president likes to tout “Buy American” rules because they seem popular, but Biden’s lawyers actually wrote stricter rules than his predecessors. They adopted stricter energy efficiency rules this will drive up prices. They increase in tariffs on Canadian softwood lumber. They increased tariffs on solar panels from Southeast Asia. Repealing the Jones Act would be a tall order, but Biden made Jones Act rules stricter. Much of this can be seen as a special concession to union interests, which is not always ideal but is at least part of a rational political strategy. But beyond that, I think what you see at work in some regulatory agencies is a completely sincere and completely non-cynical worldview that the promotion of high nominal wages is a path towards national prosperity. Travel to implement stricter rules for au pairs Or create stricter rules for guest farm workers do not have a particularly clear interest group angle. These are just small measures that increase the cost of child care and food.
Let’s be clear, it is the Fed that determines long-term inflation. But if the Fed puts its policy tools in a position that can generate NGDP growth of 6%, then adopting new regulatory measures that increase costs will temporarily shift these nominal spending from production to prices. Yglesias believes this policy mistake could ultimately cost Biden the election.
The Trump campaign is also pushing for policies that could result in higher costs, such as 10% tariffs on all imports and the deportation of undocumented workers. Trump also opposes YIMBY policies to allow apartment construction in suburban areas. But voters tend to focus on the current president’s record, not the challenger’s campaign promises. And Trump is taking advantage of the fact that inflation was relatively low during his term.
Because I am less Keynesian than Yglesias, I am much more skeptical of Biden’s early policy initiatives. But I understand the Keynesian model and so I can easily understand why Yglesias is increasingly frustrated with Biden’s policy approach. Keynes believed that the free market worked reasonably well as long as aggregate demand was adequate. By 2022, the economy had recovered from the Covid recession and inflation had become a major problem. In this kind of world, the rules of classical economics apply: industrial policies have real opportunity costs. It was time to focus on efficiency. In November, we’ll find out whether Biden must pay the price for ignoring the advice of one of the most insightful Democratic pundits.
PS. In my opinion, the classic rules still apply. It is always a good time to focus on efficiency. So I think the Biden administration was off course well before 2022. Yglesias gave me a Essay by Ezra Klein from April 2021:
Biden has less confidence in economists, just like everyone else. Obama’s constant frustration was that politicians didn’t understand economics. Biden’s ongoing frustration is that economists don’t understand politics.
Many economists, both inside and outside the Biden administration, have told me that this is an administration in which economists and financiers are simply much less influential than in previous administrations.
Obama was re-elected against a traditional Republican. Biden is trailing in the polls against one of the most unpopular politicians in American history.
