Since taking office, Joe Biden has made headlines with his $1.9 tr. Covid relief bill, which he now wants to top with an additional $1.2 tr. in physical infrastructure spending and $3.5 tr. in social infrastructure spending, which taken together represents one of the largest fiscal stimulus packages in American history. In contrast to other stimuli issued in the past, Biden’s packages are designed to the benefit of low- and middle-income classes through a miscellaneous of measures, including direct payments, extended unemployment benefits, funding for schools and childcare services, and an expansion for Medicare.
Is all of this enough to claim that Joe Biden has kindled a new era in policymaking? And does Bidenomics have potential to stimulate change in other economies, even in fiscally conservative countries like Germany? This was the guiding question of the final session at our IX New Paradigm Workshop with Berkeley professor Barry Eichengreen, director of IMK Sebastian Dullien, and Michael Burda from HU Berlin. The session was moderated by Nicola Brandt, head of OECD Berlin.
According to Barry Eichengreen, Biden’s stimulus package rests on three major pillars: the belief that debts and deficits don’t matter the way they used to, that a more expansive role of the state is warranted, and that the economy can and should run hot to stimulate aggregate demand and distribute benefits more widely. In fact, empirical evidence shows that wages in the US, particularly among the lower paid, have recently risen faster than inflation rates. The reasons for this include strong labor demand and labor labor force participation rates that remain below historic trends.
Biden’s proposed stimulus package has broad support among the American public, which has grown more conscious of rising inequality rates, unequal opportunities, and the importance of the government in crisis times like Covid. A recent Gallop survey indicated that Biden’s proposal is backed by 63% of Americans, including 36% of Republicans. According to Eichengreen, “this is as much support as we can get on anything in America”. A new paradigm in practice, then?
Eichengreen remains skeptical and warns that the congressional view, which overrepresents rural areas, legacy coal mining areas, and frontier areas (rugged individualism), does not reflect the broad public support of Biden’s proposed bill. While there is a paradigmatic difference between Trump and Biden, says Eichengreen, there remains a disconnect between public attitudes and congressional actions which, at least for now, may hamper a policy package that reflects a new public paradigm. Michael Burda agreed, saying that especially with regards to climate change, the US has not undergone a paradigmatic shift (yet). He sees potential to stimulate change through a EU or Chinese carbon border tax.
With regards to the question whether the US fiscal debates will spill over into German debates and influence policymaking, Sebastian Dullien sees mixed potential. Some elements of Bidenomics, in particular the importance of additional physical infrastructure investment, he says, may well motivate political action in Germany, where a majority across all Bundestag parties for stronger physical investment already exists. Aspects of the debt debate may also influence discussions in Germany, but Dullien expects this process to be rather slow due to the constitutional element of the debt brake. In contrast, he expects the rather panicky inflation environment in Germany to prevent a running hot of the economy anywhere near the extent of Bidenomics.
Whether Bidenomics can blossom into a paradigmatic change remains to be seen over time and will largely depend on whether political decisions will evolve to mirror public attitudes more closely.