In March, US Congress approved President Biden’s Rescue Plan. Beyond its exceptional size (although in truth it is less massive than it appears), this rescue plan marks a radical change of perspective in US economic policy: first, because of the expected consequences on future macroeconomic policies (the so-called policy mix); second, and most importantly, because it shows Biden’s path to address the disequilibria within American society.
The size of the plan and a comparison with the EU
Let us begin with what has most impressed commentators: the sheer size of the scheme. This 1,900-billion-dollar plan would add to the 900 billion dollars already voted for in December, bringing the support measure to a total amounting to over 13% of US GDP. Even without considering the 2020 spring measures, totalling over 2,000 billion dollars, Biden’s plan represents the greatest stimulus package since WWII. To those astonished by the lack of public investments, the US administration has already announced that a “recovery” plan, accounting for over 3000 billion dollars, will be presented once the “rescue” allows to overcome the crisis. Many, including Martin Sandbu in the Financial Times, claime Europe has been left in the hay once again and has renounced to support its economy. In truth, such a claim does not take into consideration the crucial differences between the two systems. Of course, the figures of the American measures are staggering. However, they include actions that have already been incorporated into European countries’ national welfare systems. US budgetary policy is mainly made up of discretional measures, while the European one leaves a major role to automatic stabilizers.
Looking at the picture below, taken from the OECD March Interim Report, we can see that in the Euro Area fiscal deficits increased slightly more than in the US in 2020. This is the result of national recovery plans, but also of traditional welfare tools. The leap forward represented by Biden’s Plan (the orange area in the graph below) will likely be followed by European countries as soon as their social protection systems and measures following sanitary restrictions (such as the new Italian fiscal gap announced by Mario Draghi on 13th of March) will soften the impact of the economic slowdown. Therefore, it is necessary to pay attention when drawing a comparison between different measures taken in different systems.
The change of pace
Nonetheless, Biden’s Plan marks a true change of pace in US politics. Almost half of expenditures will go to households, with a 1400-dollar check sent to individuals with an income lower than 75000 dollars per year (nearly half of the US population) and progressively lower checks for higher incomes. This measure, on top of tax credits on childcare and the extension of unemployment benefits, goes beyond tackling poverty. The Biden administration is strongly signalling that the reduction of inequalities is one of their main objectives. The rest of the plan will support financial institutions (including pension funds) shaken by the crisis.
Inflationary fears
The plan has caused debate even among Keynesian scholars. Some, such as Olivier Blanchard and Larry Summers, have noted that the plan is almost four times the output gap (the difference between current GDP and what could be produced without risking inflation) and are worried about the inflationary effects of a stimulus that is so disproportionate to aggregate demand. Summers also points out that this kind of fiscal “big bang” could exhaust Biden’s political capital, ultimately making it harder to pass other investment projects and the green transition. Others, including Paul Krugman, believe instead that the Covid-19 shock resembles those caused by war. Hence, standard criteria to evaluate economic policies should not be applied. In war, says Krugman, you do not ask how much to spend to reach full employment, but only how much is necessary to win the war. The conclusion is that a shock therapy is required to prevent the crisis from having permanent effects on employment and productivity, even if this strategy risks overheating the economy.
Fears of macroeconomic instability, however, do not appear justified. The first estimates indicate a transitory increase of inflation of a few percentage points, certainly not a worrisome trend. On the one hand, an increase in demand could lead to a reorganization of production and increased productivity. There is abundant literature (which could be extremely relevant in a shock of such titanic proportions) on demand-generated innovation. On the other hand, demand would probably direct itself on imports, too. Once again, the American steamer is ready to tow the rest of the global economy. Thus, it is reasonable to affirm that fears of high inflation are excessive, even though unemployment could reach a historical low and (finally!) an increase of the lowest wages (we should remember that the debate on raising the minimum wages in the US is also popular). Finally, the Fed has already indicated it has no intention of raising interest rates, at least until 2024, even in the case of inflation over 2%. Quite significantly, Fed Chairman Powell has supported the plan with arguments echoing Krugman. Higher inflation, even if moderate, with low interest rates would guarantee the sustainability of US debt, further financed by global savings — which have never been as high as today.
Redistributive effects
Overall, the plan is disproportionate, but macroeconomic risks are limited. We can thus concentrate on its redistributive effects, which are much more interesting. Beyond the impact on lower wages, the plan would also probably cause income redistribution among savers (penalized by low-interest rates) and workers (especially lowest income ones), whose salaries would increase in line with inflation and beyond. It is important to remember that since the late ‘70s the proportion of wages on income has declined by 5%, and that within wages inequalities have increased. An increase in the proportion of salaries would likely bring about a resizing of the stock market and an additional reduction of inequalities (only half of Americans hold equities, whether directly or through pension funds).
Yet, the rescue plan is just one of the many signs pointing towards new attention for inequalities. Initially, the package also included a proposal to raise the minimum wage, which was eventually discarded. Nonetheless, even if not as originally planned (over doubled to 15 dollars an hour, from the current 7,5$), minimum wages will increase. Additionally, Biden announced an ambitious fiscal reorganization only two days after the approval of the rescue plan. Treasure Secretary Yellen is working to revoke Trump’s 2017 reform, which massively reduced taxes for the wealthiest. The project, which will be presented in the coming weeks, will include a significant increase in tax rates for incomes above 400’000 dollars. Moreover, some of the rescue plan measures favouring lower incomes would become permanent. Overall, a few weeks after his inauguration, Biden is starting to delineate an ambitious and coherent project to support low income households and reallocate fiscal burdens towards the wealthiest. This strategy could represent a radical turn and signal unexpected attention by Biden, a moderate candidate, to the requests of radical Democrats. As such, it will be interesting to follow the debate in the coming years: the goal of reducing inequalities, highly consensual as long as it remains an idea, would instead generate tensions when it would become clear who the winners and losers of specific measures are.
What about Europe?
Biden’s progressive turn offers several lessons to European policymakers, whatever their political ideology.
First, Mario Draghi’s “whatever it takes” attitude around budgetary policies as defined by the Financial Times a year ago remains relevant today. It is necessary to do everything to overcome the economic and health crisis as soon as possible, without fears of overheating the economy. On the contrary, the end of a semi-stagnation that has lasted for over a decade could stimulate investments, innovation, and technical development. It is important to remember that contrary to the US, the Eurozone never returned to fast growth after the global financial crisis. For instance, Italy, before the pandemic, had never reached its pre-2008 GDP. Moreover, an aggressive fiscal policy could be made possible only if accommodating monetary policies protect governments. In the US, the central bank and the Treasury have always coordinated their economic policies. In the Eurozone, this exercise is made harder by the existence of 19 different budgetary policies, though this does not make it any less necessary. During this pandemic, we have seen the ECB, the Commission, and national governments rowing in the same direction. This must continue even beyond the emergency phase. While it is reasonable to expect that asset purchases will continue for a long time, the ECB has remained silent over its inflationary strategy. It would be beneficial if, much like the Fed, the ECB announced the goal of an average 2% inflation. The objective is to reach a higher inflation rate for some time in order to overcome the last years’ stagnant prices and keep long-term inflationary expectation at 2%.
Finally, the most important lesson for the future is that Biden’s focus on inequalities reminds us that our societies have become progressively more unequal. This trend represents a threat to our economies as much as climate change does. Amongst next years’ priorities, social sustainability deserves a place on par with environmental sustainability. With its first 100 days under Joe Biden, the US might have started a paradigm change. Europe should follow suit decisively.
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