The problem with Bidenomics

This is an audio transcript of the Rachman Review podcast episode: ‘The problem with Bidenomics’

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Gideon Rachman
Hello and welcome to the Rachman Review. I’m Gideon Rachman, chief foreign affairs commentator of the Financial Times. Welcome to the third and final podcast in our series on Bidenomics. The future of the American and global economies and President Biden’s chances of re-election may hang on the success or failure of the highly ambitious industrial and economic policies launched by the Biden administration. My guest this week is Adam Posen. He’s president of the Peterson Institute for International Economics, which is, I think, the most influential economic think-tank in Washington, DC. Adam’s a trenchant critic of America’s new industrial strategy. So what could go wrong with Bidenomics?

Brian Deese
Look, I talk about an industrial strategy and I choose those words explicitly because I think it goes to actually understanding what it is that the US has put in place across three big pieces of legislation infrastructure, semiconductors, and the Inflation Reduction Act, which really is a theory about long-term public investment focused on areas of the economy where the private sector on its own is not gonna generate enough output, enough capacity to meet our economic and national security goals. And it’s targeted in those three areas in infrastructure and innovation, in microelectronics and in clean energy.

Gideon Rachman
That was Brian Deese, one of the key architects of Bidenomics, speaking to me in the first podcast of the series. There’s no doubt there’s a lot of serious thinking about history, economics, strategy and the green transition underpinning Bidenomics. But is the theory fundamentally flawed? That certainly seems to be the view of Adam Posen. So I began our conversation by asking Adam to outline his objections to Bidenomics.

Adam Posen
I’m totally in favour of public investment and I understand and respect the motivation of the Biden administration on climate change, particularly that the US had to do something after inaction. But I hate the idea of too much subsidies going directly to private companies. First off, it’s not gonna produce millions of manufacturing jobs, and most of the advocates have now backed off those claims.

Second, and most importantly perhaps, there is no way you avoid corruption issues when you start entrenching companies as preferred providers with protections, particularly trade protections, but also with subsidies and government relationships. We’ve seen this with Boeing. We’ve seen this with the too-big-to-fail banks.

Third, I think that the international situation matters. We’ve seen already a huge escalation in essentially an arms race in subsidies between the EU, the US, China, among others. Similarly, the preference is for domestic production and domestic headquartered or owned production are crazy in terms of the technological outcomes we want, which leads finally to my concerns on the green front. Again, I support the fact that the Biden administration has reversed the terrible green policies of the Trump administration. I agree with them that the private sector alone isn’t gonna invest enough in green transition. The problem is, if you do it this way without any international agreements, without any international side payments to the rest of the world, I think we’re at great risk of repeating what we did wrong with Covid vaccines. And as with the pandemic, and even more so with green technology, it’s in all our interests to get the best green technology adopted as widely, as cheaply as possible. And this is gonna work against it.

Gideon Rachman
So that is quite an indictment put all together. But I guess that the Brian Deeses of this world will probably say, look, what Adam is essentially arguing for is the status quo. And the status quo is not working. You can see it in widening inequality in the United States. You can see it in our failure to move on green technology. So something had to change. And this is our strategy.

Adam Posen
Yeah. So as indeed reflects the strategy of Deese when he was in office and other advocates of this approach, it is one fix which deals with a thousand problems and that’s why they love it so much. We can deal with inequality, we can win districts away from Donald Trump, we can reverse climate change, we can change the neoliberal narrative, we can revolutionise technology, all just by spending some money in the hands of private companies. You know, am I advocating status quo? Not at all. I am advocating that we have a global agreement to prevent subsidies that are distorting and try to have a global agreement to have common subsidies towards technology development. I’m in it for a global agreement that the US can lead or the US can do with EU, Japan, China and others, excluding China if necessary, in which 5 or 10 cents of every dollar that gets spent goes into a kitty for transfer of technology to the developing world. I’m an advocate of much tighter regulation on the California model and subsidies of batteries and e-vehicle charging stations and other things in the infrastructure, all of which would induce more change. I am in favour of consumer subsidies to buy green products without specifying where they come from. So no, I’m not an advocate of the status quo. 

Gideon Rachman
Yeah, and particularly, I think an important distinction you’re making between subsidising the consumer, making it cheaper for them to, say, buy an EV and subsidising producers and it’s, I guess, producer subsidies that bring us to that old criticism of industrial policy that you’re picking winners.

Adam Posen
You’ll notice, Gideon, I didn’t say that because I think that actually misses the point. If we waste a lot of body but we get green transition and we get no more neo-fascist anti-democracy party in the US it’s worth whatever amount of money we spent. If we happen to benefit a few rich people along the way or make a few rich people along the way just as with bailouts, banks — you know that’s a side effect of a good policy. So my complaint is very definitely not about picking winners. My complaint is it doesn’t work. My complaint is that there is a better alternative that is still more activist. And my complaint is that the Biden economics approach is missing fundamentally our interest in getting the green technology from wherever out as widely as possible. And by missing that, if you don’t do consumer subsidies and R&D subsidies and infrastructure subsidies, but instead do producer subsidies, you get this kind of political entrenchment and corruption.

Gideon Rachman
OK. So I think a counterargument would be, well, actually, and I think Brian Deese said this on the podcast, by accelerating the development of green technology in the United States, by throwing a lot of money at it, we’re not saying this technology will only be used in America. So we’re actually creating a global benefit because we will have a very focused attempt to produce this technology and we will then share it with the world. So what’s wrong with that?

Adam Posen
Because the fact that we will share it with the world is the important part. And we know from direct experience with the pandemic while Deese was in office that the US and Europe did do good things to get vaccines out there. And in the interaction with other players, they reneged on commitments to developing economies, they hoarded PPE, they hoarded vaccines before distributing them. They charged outrageous rates rather than resettling of lower intellectual property charges and letting others produce on license agreements. They battled with the Chinese and the Russians and others who were purveying alternative vaccines. And the point is, this wasn’t a one-off. This is how it works when you get the government involved in this, unless you make dedicated international efforts to avoid this. And it’s not that the US is gonna give it away and it’s not necessarily that the US will develop the best technology because other places also have scientists. So and what’s more important is that we get the best technology out there for the sake of the global climate.

Gideon Rachman
But does the pandemic analogy really work? Because that was a very specific thing where there was for a period a shortage of vaccines. Hard to say, look, we’re going to prioritise foreigners as much as we are our own citizens. But this is very different. I mean, people talk about a climate emergency, but it’s evolving over decades.

Adam Posen
I completely reject that. The incentive structure is exactly analogous. The more decades you spend it out, the more it becomes entrenched corporate favourites and national champions who fight about it. The longer you do that, the more you get divergence of international standards and barriers to interoperability or adoption. And it is frankly an emergency because as you have discussed on your podcasts and of course you in the FT have discussed ad nauseam, the decisions are already very late and have to be taken. So no, it is a very valid parallel between the way the Biden administration and the Trump administration before them did some good and then messed it all up with the pandemic response on vaccines. It is a very fair parallel.

Gideon Rachman
So another argument that the pro-Bidenomics folk make is, look, this period of saying industrial strategy or industrial policy is just spin, it never works, has all the pathologies that you’ve identified, is a relatively recent one and that if you look at American history in the round, actually in its most successful periods, you know, they talk about Alexander Hamilton right at the beginning of the republic but if you wanna be more recent, the 1950s, the space program, a lot of the things that America did were government-sponsored. You know, everyone’s watching Oppenheimer at the moment. That was government getting deeply involved in the development of world-breaking tech. And so this can work.

Adam Posen
That can work. This, meaning the specific Biden economics policies problem won’t. I don’t know how much it’s a tactic of disinformation or a genuine confusion and wishful thinking on the advocates’ part. But US government intervention in the form of building infrastructure, subsidising research, providing patent protection, investing in education and skills training, all of which are very productive. That’s really what the space race was about in the ’50s and ’60s. Some of it was commissioned through private sector, but, you know, Nasa and Darpa and other government agencies controlled it.

I mean, talking about Oppenheimer the movie, which is wonderful. You know, Los Alamos and the Tennessee Valley Authority turning into the uranium production there and in Washington, those were government-owned and sponsored institutions. Those were government-run. Those were not entrenching private sector. Those also were different technologies, because the whole point was in the sense of the space race, in the sense of the nuclear weapons programme, that you didn’t want the technology to spread, unlike, say, vaccines or green climate technology, when it’s in our interest to spread it as widely as possible. So that characterisation is completely false. If they were gonna triple the budget of all the R&D in the US government and say we’re gonna subsidise the hell out of the US federal workforce in science, I’d much rather have that than what they’re doing.

Gideon Rachman
And let’s look also at the international impact because as well as interviewing Brian Deese, I interviewed Ngozi Okonjo-Iweala and she was, you know, as international civil servants have to be, she attempted to be tactful about it, but I think she is concerned about the subsidy race. In fact, she was very explicit saying this is a danger and that this is going to hit the poorest countries most because they’re the ones who really can’t compete in this. So do you think the biggest impact of Bidenomics or perhaps, if you like, the most disruptive impact is actually outside of the United States?

Adam Posen
I agree with that. But I think I would take it one further that outside the United States impact actually has very big feedbacks on the US. And that’s what I think the Biden people miss. And that’s where unfortunately, I think they share the Trump view. It’s some combination of we’re strong, what matters is domestic politics so it doesn’t really matter what happens in the rest of world with we’re the bully, whether we call it that or not, and if we force other countries to comply, they will with we’ve been suckers for the last decades giving away too much and being taken advantage of. And this is the part that parts of the Biden administration and their policies shares with the Trump administration, all of which is mistaken. So it’s not that other countries are selfless and nice. Of course, they’re trying to pursue their own interests. But that where I go further than the international public servant you just mentioned is to say that these are really gonna do first order of foreign policy, economic and environmental harms to the US. It’s not just oh, OK, so we once again exploit and don’t care about what happens in Pakistan or Niger. It’s worse than that.

Gideon Rachman
You use the word, [and] defenders of these policies say, America have been suckers. And as you say, it seems to me there are read across between what Trump was saying and some of what Biden’s team say. But they say, look, America still runs a massive trade deficit. And, you know, China subsidises its industries. We’re not competing on a level playing field if we pursue traditional liberal economics because our major competitor doesn’t behave that way.

Adam Posen
As you may be aware, Gideon, I just published an article in Foreign Affairs called “The end of the Chinese economic miracle”. Just as with the cold war in the US in the early ’80s, the deep concern about the advantages of unfair competition, just as with Japan in the ’90s, occurs after the competition has already sabotaged itself. That’s not to say China goes away as a national security threat. That’s not to say China’s going away as an economic competitor. But the fact that China was growing and the fact that China did subsidies are not necessarily causally linked. It is arguable that, in fact, China would have been growing faster and would have not slowed down in growth as much if it hadn’t engaged in all of these behaviours. We know that the return on public investment in China is extremely low. We know that since she has been increasing intervention in the Chinese economy since roughly 2015, the growth rate has descended further.

But beyond that is two other points. First is who cares what the US trade deficit is because the trade deficit, it is about our reinvesting more than we have in domestic savings. And if the rest of the world is willing to invest in the US and all signs are that they continue to want to do so and geopolitical conflict makes them want to do so even more, it doesn’t matter.

Second, the issue is on the national security side. That’s the part where I have some sympathy for the Bidenomics. You can say, OK, if China becomes the sole producer of a critical battery or the sole producer of lithium or the sole producer of solar panels, then they can exploit that. So that’s an argument for some amount of provisioning in the US, for stockpiling, some amount of diversification enforced or subsidised diversification of supply chains, some amount of investing from the public sector in critical minerals. There are things you can do, but the national security argument that somehow we have been taken advantage of is just wrong. We’ve gotten both capital and goods cheap.

And then finally, and I know you wanna talk about the politics, despite the popularity of this China shock argument, the inequality in the US is fundamentally the result of the dominance of Republicans in Congress who have voted repeatedly to shrink the welfare state and reduce taxes, partially because of people not wanting to support people who don’t look like them.

Gideon Rachman
OK, you’re right. I do wanna get to the politics. I’ll close out with a question about the election. But before we get to that, I just wanna get your sense of where you think the centre of the debate lies in the United States right now. Because the arguments you’re making, I would regard it as completely mainstream. But do you feel a bit lonely making these arguments now, given that both the Democrats and the Republicans seem to have moved in the opposite direction?

Adam Posen
It’s a fair point, Gideon, and I do feel lonelier in that sense than I did 10 or 15 years ago. But my concern is to have people advocate the right policies and do the right policies. And there are long periods in the US where Congress and presidential administrations, sometimes together, sometimes one more than the other, have pursued bad policies. What the Trump administration and the slight correction from the Biden administration have done on immigration for the last several years is shameful. And I will say that and all the evidence is that it’s shameful, and it doesn’t matter whether it’s popular or not.

But I think also I would say the anger that a lot of people have in Washington and that sort of spread out against elites or against neoliberalism is against the wrong neoliberalism. The neoliberalism that failed was the excessive financial deregulation and light touch supervision of the ’90s and early 2000s. The other neoliberalism that failed was the excess of austerity in particular and its incidence on lower-income people. That happened repeatedly, particularly after the financial crisis, but in general. And so those are the things that people should be opposing. And we’ll just keep trying to speak evidence-based truth. And I think we’re off the bottom in terms of our loneliness, frankly, over the last several months.

Gideon Rachman
OK. And then to finish on the election, I mean, you said even with all your reservations about these policies, if they were successful in turning back what you call with bracing directness “neofascism” in America, it would be worthwhile. How do you think Bidenomics is gonna play in this election? How is it playing? Because it looks like the polls show that people think the economy is in a bad way. I mean, maybe that’s not a verdict on Bidenomics, it’s just inflation. But how do you think all this is playing politically?

Adam Posen
I think you’re right, Gideon. The polls are really strikingly divergent between what the economic reality is versus people’s perception of the economy. And as you say, it may be inflation or may be partisanship. But when we talk about the electoral issue of Bidenomics, I think we have to focus on three things. First is the polling data that demonising trade or demonising globalisation is a winner is actually quite shaky. There’s a lot of data out there that there’s actually increasing support for globalisation and depending how you phrase the question, even for trade and immigration. So we shouldn’t just take that for granted.

The second point is if they are focused on winning these particular districts — western Pennsylvania, Wisconsin, West Virginia — the Democrats have more dimensions on which they can appeal. They can appeal on abortion and on Supreme Court corruption and on violence and on the genuine record of the economy, which may become more evident as inflation goes down, and on what’s gonna happen in terms of cuts to the welfare state and benefits if the Republicans get in, and a whole bunch of cultural issues. The Trump people only can campaign on these issues of mobilising mostly white, mostly non-urban people, hating foreigners and resenting others. And so for the Biden administration to think that they have to try to outbid the Trumpies on what’s their core value strikes me, I’m not a politician, but strikes me as too small a vision.

Thirdly, I’m not sure many of those people they call Trump voters can be bought. It’s not clear that they’re not gonna, just as they have for years, pocketed agricultural subsidies, pocketed local government subsidies, pocketed directed government investment to their districts arranged by their incumbent senators and representatives, pocketed bailout money, pocketed all these things which I’m happy to give them as citizens in the United States. But then they just turn around. So you have government’s terrible, federal government’s terrible, Democrats are terrible. So the Biden people thinking that they’re gonna win this by buying off these voters rather than looking for new voters or higher turnout from their voters strikes me as odd.

Final point I would make is I think we’re off the bottom of the opposition to my kind of point of view. Just one anecdote: Trump made a loud statement a few weeks ago that he would put up a general tariff of 10 per cent around the entire economy. And his advisers then went out to Fox News and wherever and repeated, he means this. This is for real. This wasn’t misspeaking. It may be because he believes it, maybe because he thought this was playing to the issue I was just saying trying to force Biden to outbid him and the Biden administration, probably due to some combination of Brainard and Yellen and Raimondo wisely said that’s too crazy. And they’ve made a number of statements — and I think they’ll make more — about trade is not evil, we just wanna run it differently. And I think the public reacted to Trump’s statements that that’s too far, that’s crazy. So, again, I’m not a politician, but just on the evidence we have, trying to outbid Trump in these particular districts by being more anti-globalist, more antitrade doesn’t strike me as necessarily a successful strategy or better than the alternative options the Democrat party has.

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Gideon Rachman
That was Adam Posen, president of the Peterson Institute in Washington, ending this edition of the Rachman review. And that’s the end of this series on Bidenomics, which I hope you enjoyed. Next week, we’ll be returning to our normal diet of geopolitics with a look at the turmoil in the Sahel region of Africa and the collapse of French influence there. So please join me again for another edition of the Rachman Review.

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