In a previous post “From Reaganomics to Bidenism?”, inspired by the thoughts of E.J. Dionne Jr., we hinted to the possibility that the new U.S. presidency could be the dawn of a new era, or rather, a new economic paradigm. This thought is now shared also by J. W. Mason who sees the $1.9 trillion rescue plan as “a fundamental shift” and “a big break with prevailing orthodoxy”. Not just for the magnitude of the package, but also and foremost because to it – unlike previous stimulus packages – are not attached the strings of future deficit reductions or the inflation fears extensively invoked by deficit and inflation hawks. This is certainly also a result of a change within the Federal Reserve that – under the leadership of Janet Yellen first and Jerome Powell now – is slowly shifting its focus away from inflation control and support for austerity.
The driving principle behind the American Rescue Plan has been – as Biden himself stated last February and as Claudia Sahm in her last contribution for INET echoed – that of wanting to avoid past mistakes of doing too little, not certainly too much. In his latest blog post J. W. Mason analyzes the newly approved rescue package in light of how the rationale guiding economic policy is changing and how this, in turn, is reflected back onto economic theory. He identifies a number of points that vastly resonate with what has been said for years outside the mainstream macroeconomic debate. Among them there is the implicit recognition that in the real economy negative shocks, such as sudden demand drops, are much more likely and frequent than positive shocks or overheating. A timely and adequate response to such shocks is thus necessary in recognition of the fact that the lack thereof would imply a prolonged period (not just one or two years) of stagnant growth and wages. Furthermore, the lack of any reference from the current administration to future deficit reductions confirms that public debt seems to be no longer an issue. The extended unemployment insurance (although reduced) is also a sign that reaching everyone who is out of work is more important than worrying about work incentives; in other words it gives credit to the many empirical evidences showing that income-support programs are not a disincentive to work. All this, according to J. W. Mason, is a sign that unlike textbooks, the policy debate is moving away from rigid orthodoxy. The inability of traditional textbooks to reflect the evolution in modern policy debates and the unwillingness of mainstream economists to adapt them and include new economic theories is another point we sought to tackle in our January Short Cut with economists Greg Mankiw and Peter Bofinger.
Finally, in support of the fact that the American rescue Plan does not represent a measure confined to the current exceptional emergency but is a signal of a greater underlying shift, comes the most recent news that the Biden administration is gathering forces for the next legislative effort, namely pushing for a $3 trillion infrastructure package encompassing also climate measures, universal prekindergarten, free community college, and an extension of the child tax credit part of the recent Covid relief plan. Among the options to fund the multi-trillion plan are increased wealth- and corporate-taxes, as well as a measure forcing pharmaceutical companies to lower their prices which, according to the Congressional Budget Office, would save the government more than $450 billion spent on public health programs over a decade. This abrupt shift not just from the previous Trump administration, but also from the timid and cautious policy agendas of the latest decades hints that the lessons learned from the past crisis are being well put into practice.