Biden’s Economic Policies Should Eclipse Trump’s In Style And Substance

Regardless of one’s political stripes, we economists are thrilled that, to date, Biden is placing in most of the top Executive Branch positions in our field with competent, seasoned professionals who both understand the process of how to design and execute national economic policy in the domestic and international spheres, as well as articulate to the American public and global markets the rationales behind why certain policy choices will be made and why they should be supported by the nation and welcomed by our allies abroad.

Admittedly, Biden faces a very low bar to surpass his immediate predecessor’s performance on this score. Trump had an incoherent, if not unstable, approach to economic matters (and in other policy realms as well), and he demonstrated an inability and lack of desire to exercise President leadership on economic policy at home and echo that with foreign heads of state.

But the nature and scale of the economic challenges before Biden now are orders of magnitude more complex and sizeable than what Trump inherited from his predecessor.

There is no mystery here as to why that is the case. It is directly the product of Trump’s mishandling, if not outright ignoring and, in important ways, exacerbating, the severe impact of the Covid19 pandemic on the growth prospects of domestic economy, and of his failure to address smartly U.S. challenges in the international economic arena, especially his naïve and ill-informed approach towards China’s abuse of the rules of the multilateral international trading system and his failure to focus on working collectively with the U.S. business community, labor, and other stakeholders to chart a course to revive U.S. international competitiveness.

It is always the case that the content of a president’s economic agenda is just as important as the form in which it is fashioned and executed. While that might seem obvious, without demonstrating policy credibility to markets and the key agents of the economy, the finest crafted, well-intentioned economy policy in the world will likely prove to be for naught.

In short, leadership credibility is, itself, a powerful economic policy tool. Think back to how important were both the actions and the policy pronouncements by the U.S. Federal Reserve and the Treasury, made in coordination with foreign central banks and ministries of finance, in navigating successfully through the Great Recession that began in 2008.

While Biden’s career has been largely built in the foreign policy arena (rather than in economic policymaking), without successfully honing the skill to demonstrate credibility in that avocation, where it is certainly a critical asset to being effective, he simply could not have gotten to where he is today.

To this end, at the very outset of crafting his new administration’s economic policy imprint, what should Biden do? 

He would be wise to signal in no uncertain terms his differentiation in style and over-arching economic philosophy from that of Trump’s.  Rather than his predecessor’s chaotic and market-degrading approach, Biden should quickly issue a declaration that the bedrock principles guiding U.S. economic policy are: stability, clarity and openness to work in close partnership with the nation’s democratic, market-oriented allies across the globe to boost economic growth in such a way that all of society should have the opportunity to participate in that process and enjoy the fruits of that growth.  

Frankly, this is a not a novel idea. Previous U.S. presidents have proclaimed similar working principles to guide their administrations.

As to content, it’s already abundantly clear that Biden’s team has thought long and hard about a putting together a substantive, cross-sectoral economic policy program.  While some elements of Biden’s proposed approach bear re-thinking and sharpening, there is literally no comparison with what the Trump produced over four years.  

Indeed, like most economists, throughout Trump’s term I had trouble discerning—let alone locating a systematic set of written materials that spelled out—a coherent program of economic policy initiatives to be undertaken by that administration. As far as most of us can tell there were two objectives on the agenda: (i) instituting a corporate tax cut and (ii) eliminating the U.S. bilateral  merchandise trade deficit with China—Trump’s metric for solving, once and for all, the ‘China trade problem.’  

He succeeded on the first agenda item but failed on the second. And this, even though he focused his battle against China solely on arranging state-to-state transactions in which China agreed to buy agricultural commodities from the U.S.  Not only did Trump fail to focus on securing Chinese commitments to execute reforms—the real issue at hand—but even his set of one-off transactions fell far short of what Xi Jinping promised him. Indeed, it is fair to conclude that Trump actually embolden Beijing’s flaunting of international trade rules.

In the wake of the harsh economic fallout across U.S. businesses and workers from the—still-ongoing—Covid19 pandemic, although the Trump team was able to work with the Congress to get financial relief packages enacted (though often thwarted by the President himself through his mercurial Twitter pronouncements), the only really meaningful solution, getting vaccines in Americans’ arms, coupled with the display of presidential leadership about the importance of mask wearing and social distancing, was dismally operationalized.

Biden’s economic policy program is necessarily constructed along two-tracks. The first—and obviously the most important component for the short-run—is focused on mitigating the health and immediate economic effects of the pandemic:  both significantly scaling up the roll out of vaccines and providing economic relief for the large slice of society that has been displaced by business closures, high health costs, among other severe hardships engendered by Covid19.

The other track of the new administration’s economic program is directed at a series of detailed policy reforms and plans for investments in the structure of the economy. It is clear the Biden team has done its homework.

While much of the administration’s plans fall into the mainstream of current economic thinking, here are some key areas to call out for various reasons.

Infrastructure Investment:  Job Creation and Reduction of the ‘Social Costs’ of Fossil Fuels

Long-overdue is the need for systemic investment in the country’s infrastructure. Virtually every president calls for this; few succeed. Much of the problem stems from the sausage-making process that pits the benefits to the nation as a whole against those that accrue to Congressional districts. Then there are those on Capitol Hill whose time horizon in thinking about how to spend government resources is limited to measuring results on the ground that can be achieved in either two or six years and do not understand the concept of long-run national investment.  And, of course, the elected officials in Washington who don’t understand how to finance such investments.

As Biden has begun to do, it is important to infuse thinking about the need to once and for all tackle infrastructure with the imperative to reduce our country’s contribution to global warming—not just for the sake of us living today, but for our children and their children. At the same time, a large share of the financing for improvements to our infrastructure should come from measures that buy-down the “social costs” associated with our over-consumption of fossil fuels.  Almost every other G20 country does this; the U.S. does not. And, Biden needs to work with members of the House to educate them that infrastructure projects are local job-creation investments that have sizeable salutary multiplier effects that ripple throughout Congressional districts.

Buy America

One of Biden’s first acts was to issue an Executive Order to strengthen existing rules for implementing “Buy America” protocols in federal government procurement transactions. The Order makes it more difficult for agencies to buy imported products, raises “local content” requirements in such transactions, and alters the definition of American-made products.  

Based on his campaign promises, it is clear why Biden took such action. Many countries have such rules; some far tougher than the U.S. But economic assessments of the intended benefits of these provisions around the world indicate that they tend to be temporary; diminish incentives for suppliers to engage in innovation with respect to the products governments purchase; and can encourage “gaming” the system (a polite term for corruption). Moreover, such moves by one government, creates ammunition for other governments to engage in such practices. For this reason, years ago WTO members (led by the U.S.) established an international protocol—The Agreement on Government Procurement—of which the U.S. is a signatory that establishes rules to mitigate such conduct.

China: Tough But More Effective Through Collective Action

Both because of Biden’s proclivities and the views of the members of his team he has begun to appoint, the new administration is likely to be as tough with China as Trump. But unlike Trump, who favored dealing with Xi bilaterally, Biden will deal with China through collective action, arm-in-arm with the world’s other large trading partners. Indeed, what Trump did not understand is such countries have been equally unhappy with China’s trade conduct as has the U.S.  This is an approach that Beijing worries about most.

At the same time, Biden should understand that unlike Trump, the imposition of tariffs on Chinese imports is the wrong tool to reach the appropriate target to induce economic pressure on Beijing so it alters its trade behavior. Such action it actually harms the U.S. instead. Look for Biden to utilize other methods that focus on Chinese need to execute reforms “behind the border.”  

Indeed, as I have indicated earlier in this space, the members of the WTO, led by the U.S., should give China a clear choice:  it can remain in the WTO and continue to enjoy the significant economic advantages that have come with its membership—but only if it implements the specific reforms it legally agreed to in its 2001 Accession Agreement; or China shall exit the WTO—in which case just as China can then operate its economy as it sees fit, the remaining 163 members are fully free to impose any penalties on China that they wish. In short, China simply cannot have its cake and eat it too. This is not only the adult approach, but absent such action, the WTO will lose its credibility, which many in the world already question.

Reviving U.S. International Competitiveness

Biden has signaled his interest to focus on efforts to step up public-private investment in the U.S. R&D enterprise—businesses, universities and government labs—to revive U.S. international competitiveness.

This is long overdue. Not since the mid-1980s, when the nation was rivetted on the technological rivalry presented by Japan, have we focused systematically on this issue.  The fruits of that effort paid handsome dividends—think internet—from which we all currently benefit but take for granted.

Today, the need for a new collective undertaking is critical, given the unchecked rise of China in state-sponsored science and technology and the resulting changed global locus of value capture.  

This is an effort for which Biden’s foreign policy skills will be significant. His new team should play a lead role in fostering international R&D collaboration among other advanced country democracies. A Biden initiative to create a G7 group that emphasizes R&D cooperation—”the R&D7”— would be very well-received and could be a game-changer.