Okay, that is not quite what we have been saying, but we have been saying that the economy looks pretty good by most measures. Given the hit from the pandemic and the disruptions created by the war in Ukraine, it is probably about as good as we have a right to expect.
Anyhow, I want to dig a little deeper into that one since I know many people are quite rightly not satisfied with the economy. They are absolutely right not to be satisfied, but I will share a bit of my thinking.
It’s 1935, Is the Economy Good?
I am not picking 1935 randomly. It was the third year of the first Roosevelt administration, the most transformative presidency since the Civil War. If we were discussing the state of the economy in September of 1935, would we be saying the economy was good?
That’s not easy to say. The unemployment rate was around 20.0 percent [2] at that point. That’s hardly something to celebrate, but it was down from peaks of over 25.0 percent in 1933. The economy was growing at a rate of around 9.0 percent [3], but GDP was still more than 10 percent [4] below its 1929 level. Millions of people were going hungry and homeless.
The best you could really say was that things were going in the right direction. Roosevelt had started the Civilian Conservation Corps at the beginning of his administration, which gave millions of workers jobs on construction projects in National Parks and other public lands. More recently, he had begun the Works Progress Administration, which undertook an even larger set of public works projects. But these were still only employing a fraction of the people looking for work.
Roosevelt had moved aggressively to stabilize the financial system, ordering a weeklong bank holiday immediately after taking office, during which weak banks were closed. He then arranged for the Federal Reserve to provide effective deposit insurance until the Federal Deposit Insurance Corporation existed the following year. He also established the Securities and Exchange Commission to police Wall Street and prevent many abuses that led to the 1929 stock market crash.
These important policies secured the financial system for many decades, but they didn’t get back the money people had lost due to earlier bank failures. And, at the time, people could not possibly know how well they would succeed.
The Wagner Act, which set up the rules that govern most labor-management relations, had just been signed into law in the summer. While this would provide the basis for a massive unionization drive later in the decade, in 1935, it was too early to fully appreciate its importance.
Congress had also approved the Social Security Act in the summer of 1935. This established the Social Security System that now supports tens of millions of workers and their dependents in retirement and provides insurance in the event of disability or early death. But it would be several years before anyone would receive any benefits. Other key measures — like the Fair Labor Standards Act, which established the federal minimum wage and the 40-hour workweek — would have to wait until Roosevelt’s second term.
Of course, the full menu of New Deal programs is considerably longer, but the point is that people could still find plenty to complain about halfway through the third year of the Roosevelt administration. The country was still in the grips of the Great Depression, and as much as Roosevelt’s policies were turning things around and providing more stability for both the system and individual workers, most people were not likely seeing the benefits yet.
The best that could be said was that they saw a president acting aggressively to do things that were in the interest of ordinary workers. Apparently, that view was widely held, as Roosevelt won re-election in 1936 with more than 60 percent of the vote, carrying all but two small states in the Electoral College.
Joe Biden Is Not Franklin Roosevelt
We all know that, or at least we should know that. Roosevelt was an extraordinarily gifted politician who took over the presidency during a crisis. He also had more than 300 Democratic seats in the House after the 1932 election, as well as 59 seats in a 96-seat Senate. His majorities in both houses actually grew in the 1934 elections, with a nine-seat Senate pick-up giving the Democrats 69 seats in a 96-seat Senate.
That world is different from the Congress President Biden had to deal with. He had literally the barest of majorities in the Senate, with the vote of the vice-president needed on any important piece of legislation passing without Republican support. This meant that his agenda was entirely at the mercy of two center-right Democrats, Joe Manchin and Kyrsten Sinema.
The situation in the House was not much better, with Democrats holding just a four-seat majority. Here also, conservative members were acting as a brake on virtually everything Biden put on the table. And, he lost even this slim majority in the 2022 election, although an additional Senate seat gave him a small amount of extra wiggle room.
But we know that most people don’t follow politics closely. They want to see their lives getting better, and they don’t care that some jerk in the House or Senate is blocking a key piece of legislation.
So, let’s just look at what Biden has delivered. The first and most important item in people’s immediate experience was the American Rescue Plan (ARP), which provided a $1.9 trillion boost to the economy. This guaranteed that we would have a quick recovery, in contrast to the slow painful road back to full employment following the Great Recession.
The unemployment rate, which stood at 6.3 percent when Biden took office, had fallen to 3.9 percent by the end of 2021, and has not gone over 4.0 percent since. This is the longest period where the unemployment rate has been below 4.0 percent in more than half a century.
The specific spending also did much to protect people from the impact of the pandemic. It included $300 a week supplements to people getting unemployment insurance. It enhanced the subsidies in the Affordable Care Act, allowing millions more to get health care insurance. It provided subsidies for child care, and extended a moratorium on evictions, ensuring that people could stay in their home. It also provided substantial funds for health care issues directly related to the pandemic, such as improving ventilation in schools.
In short, the ARP was a really big deal. And it passed with no votes to spare in the Senate and a four-vote margin in the House.
As a result of the ARP, the United States is the only major economy that is largely back to its pre-pandemic growth path. The US also now has the lowest inflation rate of any of the G-7 economies.
In spite of the inflation of 2021 and 2022, real wages for the average worker are higher than they were before the pandemic. And, there have been larger gains for those at the bottom, reversing [5] roughly a quarter of the rise in wage inequality we saw over the last four decades.
People have seen other benefits from the recovery under Biden. There was a massive reshuffling in the labor market in 2021 and 2022 as tens of millions of workers quit jobs they disliked or didn’t pay them enough. As a result, the Conference Board reports [6] that workplace satisfaction is at the highest level in the almost forty years they have conducted their survey.
Tens of millions of people are now working from home, either entirely or partially, saving themselves hundreds of hours a year in commuting time, and thousands of dollars on work-related expenses. These savings in time and money do not show up in our data on real wages.
Roughly 15 million homeowners could refinance their homes, taking advantage of the low mortgage rates we saw before the Fed started raising rates last March. This saved them an average of more than $2,000 a year on interest payments. Homeownership rates also rose [7] under Biden, with larger than average increases for Black, Hispanic, young and moderate-income households.
These are all extraordinarily positive developments for large segments of the population. There is no period since the late 1990s that could even come close to the progress made in the first two and a half years of the Biden administration.
Again, there are plenty of grounds for people being upset about the state of the economy. Tens of millions are still struggling at the edge of poverty. Many pandemic programs under ARP have ended, most notably the childcare subsidies, which will be eliminated this fall. Also, the jump in mortgage rates over the last year and a half has put homeownership out of reach for first-time buyers.
But on the whole, it is pretty hard not to see the overall picture as being overwhelmingly positive, especially considering that Biden had to deal with the disruptions created by multiple waves of COVID-19, as well as Russia’s invasion of Ukraine.
Just as people had plenty of grounds to be unhappy about their circumstances in September of 1935, they have grounds today. But, as in 1935, things are headed in the right direction. And, just as Roosevelt had a longer-term agenda that yielded benefits for many decades to come, Biden also does.
Biden’s Longer-Term Agenda
In addition to the ARP, Biden got three major pieces of legislation through Congress. The first was an infrastructure bill [8] that he managed to pass with a large bi-partisan majority. Apparently, a large number of Republicans couldn’t resist the opportunity to show up at the groundbreakings for roads and bridges, as well as dishing out contracts to campaign contributors in their states and districts. This bill will help to address long-neglected infrastructure needs across the country. It also includes substantial funds that will support a green transition, notably by modernizing the country’s power grid and setting up a system of charging stations for electric cars.
The second piece of legislation Biden got through Congress was the CHIPS Act [9], which appropriated $280 billion over the next five years (approximately 1.0 percent of the federal budget) for research and support for manufacturing of advanced semiconductors in the United States. A large bi-partisan majority also supported this bill. Part of the story was again Republican politicians wanting to get in on the gravy, but also some jingoistic Cold War sentiment.
The latter has to be grounds for concern for progressives. It probably makes sense in any world to ensure that key components for the economy will be accessible in the event of a conflict with China, and given that Taiwan is our major supplier, this is a real concern. However, insofar as this is part of a process of escalating tensions with China, which could lead to a Cold War-type military buildup, it is definitely bad news. The cost of another Cold War will almost certainly be sacrificing any progressive social agenda, as well as slowing a green transition to a speed that could make it irrelevant.
The money spent on researching advanced chips is almost certainly a positive story from an economic standpoint, although we should be asking more about ownership of this research than seems to be the case now. I’ll get back to this issue in the next section.
While the infrastructure bill and CHIPS Act passed with large bipartisan majorities the Inflation Reduction Act (IRA), passed on a strictly partisan basis. Biden somehow managed to get the support of Joe Manchin on a bill that is jump-starting a green transition.
The IRA includes large subsidies for clean energy and electric cars. As a result, in the relatively short time since its passage, we have seen an explosion in plans for factories producing electric cars and batteries, as well as wind and solar power. While there are many issues with implementation, most notably environmental reviews that create lengthy delays for power plants and transmission lines, we at last seem to be making good progress towards a green transition.
Given the amount of money that industry now has on the line, it is difficult to envision how the transition can be turned back. We are now seeing conservative Republicans stand up for solar energy or electric cars because they mean jobs and tax revenue in their states and districts. The explosion in factory construction related to the green transition is impossible to miss in the GDP data.
The revenue parts of the IRA are also important. The main way it raises revenue is through increased funding of IRS enforcement. For many people, especially rich people, paying taxes has become voluntary. The government is losing hundreds of billions every year because rich people don’t pay the taxes they owe. The increased enforcement capacity created by the IRA will substantially reduce the money lost to tax evasion.
The other revenue raiser in the IRA is a 1.0 percent tax on money paid out to shareholders through share buybacks. As I have written [10] many times, I don’t think buybacks are the horror story that many progressives imagine. It makes little difference whether money is paid out to shareholders as buybacks or dividends. We might prefer they invest the money or raise workers’ wages, but if we completely outlawed buybacks tomorrow, the vast majority of the money would just be paid out as dividends instead. That hardly seems like a great victory.
But there is a reason the buyback tax is a big deal. The corporate income tax is an extremely difficult one for the IRS to collect. The reason is that corporate profits are difficult to monitor. There are all sorts of accounting rules on issues like the treatment of inventories and depreciation, that determine taxable profits. We can’t see corporate profits directly; corporate accountants tell us what corporate profits are. This leaves enormous room for gaming the tax code, which corporations naturally exploit to the fullest extent possible.
However, there is an alternative. We can make returns to shareholders [11] (the money companies pay out in dividends, plus capital gains from the increase in value of their stock price), the basis for the income tax. This has the great advantage that returns to shareholders are completely transparent. We can get this information off any financial website.
It would be possible to calculate the tax liability of all publicly traded companies on a single spreadsheet. Just put up their dividend payouts, the increase in their market capitalization over the course of the year, then plug in the tax rate, and we’ve got it. No muss, no fuss. It’s cheap for the IRS and we can put the whole tax gaming industry out of business.
While I doubt this was the motivation behind the buyback tax, it actually is an important step in this direction. The buyback tax is likely to go down as the most administratively efficient tax ever. We will be able to raise billions of dollars of tax revenue each year, just by monitoring what companies announce they are spending on buybacks. And, we don’t have to worry they will cheat. What will they do, lie to their shareholders?
And, if a tax is cheap to collect, it stands to reason, we would want to increase it at the expense of taxes that are harder to collect, like the current corporate income tax. In short, the buyback tax can be a huge foot in the door towards shifting the basis of the corporate income tax to returns to shareholders.
It’s a long way from a 1.0 percent tax on the portion of profits used to buy back shares, to replacing the corporate income tax, which currently averages around 13 percent of all profits, but this is an incredibly important first step. It will be important to pay attention to the efficiency of the buyback tax which has not so far received much attention.
Administrative Agencies
Before completing the list of Biden administration accomplishments, it is important to mention the impact of the people he has appointed to administrative agencies, most notably the Federal Trade Commission (FTC) and the National Labor Relations Board (NLRB). Starting with the former, Biden appointed Lina Khan, a legal scholar who believes in anti-trust law, to head the commission. Since taking office, Khan has challenged a number of mergers that likely would have gone through without question under prior administrations of both parties.
It is important to realize that the importance of an approach that takes competition seriously cannot be measured simply by Khan’s won-loss record in challenging mergers. (Microsoft won the FTC’s biggest action under Khan, an effort to block its merger with the video game company Activision.) When companies know that there is a competition cop on the beat, they may not even try some mergers that they think might have sailed through under prior administrations. And, they may structure mergers to pose less of a threat to industry competition in order to pass muster under the new regime, as happened to some extent with Microsoft and Activision. With a growing body of evidence showing that a lack of competition has been important in raising profits at the expense of wages, this is a big deal.
The other notable area where Biden’s administrative appointees have made a visible difference is at the NLRB. Biden’s appointees are committed to respecting workers’ rights to have a union, if they want one. They have been markedly more pro-union in their rulings since the current chair, Lauren McFarren took over, but they made a qualitative break with the past boards in a ruling [12] two weeks ago.
The workers at the Cemex building materials company had been involved in an organizing drive. They had already submitted cards, signed by a majority of workers, to get an NLRB supervised election. As is standard practice, Cemex engaged in a number of actions designed to delay the election and intimidate pro-union workers. The union complained that these were unfair practices and violated the National Labor Relations Act.
Past NLRBs have generally responded to such violations with what amounted to a slap on the wrist. They would tell the company to stop doing them. And, if they kept violating the law, the NLRB would tell them again to stop, rinse and repeat. Biden’s NLRB told Cemex that it has a union.
One way that workers can organize is by having a majority of workers sign cards requesting recognition, as happened at Cemex. If the company voluntarily accepts recognition, then the workers have a union. If it doesn’t, then the NLRB holds an election. Biden’s NLRB effectively said that by violating the law, Cemex has now accepted that it has a union.
This is potentially a huge deal, since it will remove one of the major roadblocks to workers seeking to organize. There still is a long way to go on this one. Cemex will contest this in the courts, and who knows where the Republican Supreme Court will end up. There is also a second major roadblock in getting first contracts. Companies routinely treat the legal requirement to negotiate in good faith as a forced weekly meeting to talk about the weather and Superbowl prospects. But this NLRB ruling is a big step forward.
Does Biden Have a Vision?
It’s possible to point to the things that Biden has done as both offering immediate benefits and much more important changes done the road, but does he have a clear vision of a better society down the road? I guess my answer is that I don’t know, and I don’t especially care.
Does Biden see that his share buyback tax can lay the basis for switching the basis for the corporate income tax from profits to returns to shareholders? My guess is that he doesn’t, but when we have clear evidence of the much greater efficiency of this sort of tax, we will be able to move quickly down that road. The Republicans, and many Democrats, will do everything they can to prevent corporations from paying more tax, but when we have them defending pure waste, we are fighting them on favorable turf.
I do worry that the administration does not seem to be attentive to who owns the benefits from government-subsidized research. This issue comes up with both the CHIPS Act and the IRA.
This is a huge deal. While it is standard practice in policy circles to attribute the upward redistribution of the last four decades to technology, that is a lie. It was government policy on technology, in the form of longer and stronger patent and copyright protections, that allowed a relatively small group of capitalists and well-placed workers to get a grossly disproportionate share of the benefits from the technologies developed over this period. As I like to point out, if the government did not threaten to arrest people who made copies of Microsoft software without his permission, Bill Gates would likely still be working for a living. (Yes, I’m talking my book, Rigged [13] [it’s free], see also here [14] and here [15].)
To take a more recent example, we created at least five Moderna billionaires [16] by paying the company to develop a COVID vaccine and then letting it keep control of its distribution. We should worry about how many more billionaires we will create if the government pays for research on semiconductor technology and various types of green technologies and then hands out patent monopolies to private actors. It will need some huge efforts on the tax and transfer side with the left hand to offset the inequality we are directly creating with the right hand.
While I see little appreciation of this problem in the Biden administration, on the plus side here, he is moving to negotiate drug prices in Medicare. This is hitting one end of the problem. Absurdly, the Biden administration’s efforts to restrain prices is being discussed as an interference with the free market. This is absurd because the big interference with the free market was when the government-granted monopolies or related protections in the first place. It was the government that made drug prices high, Biden is just attempting to limit the damage.
Anyhow, we need to have a more critical view of rules on intellectual products. Biden has not expounded one, but his actions do open the door.
And, this has to be seen as the bigger picture on other issues as well. Progressives were endlessly frustrated with Roosevelt as well. He didn’t openly embrace many of the issues that progressives felt were hugely important. However, he did create a framework that allowed for enormous progress in a wide range of areas.
I would say the same about Biden, but he is doing it in a context where he enjoys a far more tentative majority than Roosevelt faced. And he clearly is not the same sort of charismatic figure as Roosevelt. But all in all, he is doing a damn good job.