Posted in: Friday, September 17, 2021 – 8:00 pm | Last update: Friday 17 September 2021 – 8:00 PM
In just a few years, conversations about economic policy have completely changed in the US, as neoliberalism, the Washington Consensus, or market fundamentalism – you can call it whatever you want – have been replaced by something completely different.
In macroeconomic policy, concerns about debt and inflation have led to the preference of over-stimulating the economy and minimizing risks over price stability. On taxes, the tacit admission of a global race to the bottom is over, and a global minimum rate for multinational corporations is underway. As for industrial policy, which until recently could not be formally stated, it came back with a vengeance.
The list is still long, for while the terms liberation and flexibility were the buzzwords in labor market policy, the talk is now about good jobs, addressing imbalances in bargaining power, and empowering workers and unions. Big tech companies and platforms were once seen as a source of innovation and benefits for consumers, but now they are considered monopolies that need to be regulated and possibly dismantled. Trade policy revolved around the global division of labor and the pursuit of efficiency; Now it’s about resilience and protecting local supply chains.
Some of these changes are necessary to adapt to the shock of COVID-19. It may also be the inevitable transformation resulting from a long period of high inequality, economic insecurity, and concentrated market power in the US economy. But credit also goes to President Joe Biden, who brought a new economic team to Washington and was quick to endorse the new ideas despite criticism from the veterans.
The market fundamentalism paradigm that has shaped economic policy in the United States and most of Western Europe since the Reagan-Thatcher Revolution in the 1980s had an earlier intellectual origin. The latter was developed in academic halls, and popularized by popular intellectuals such as Milton Friedman.
And this time, academic economists are trying hard to catch up. Although free-market enthusiasm waned among economists, there were no programmatic developments in the conservative style of Keynes or Friedman. Policymakers who looked to economists for wholesale solutions beyond reform would have been disappointed.
However, it seems clear that economists have been affected by the changing mood. For example, at the annual central bankers retreat held in Jackson Hole, Wyoming, at the end of August, a team of academic economists from MIT, Harvard, Northwestern, and the University of Chicago presented a paper showing that a temporary jump in inflation could be A good thing. And when wages are hard-wired – they don’t fall as easily as they rise – structural change can be facilitated by increasing wages in the parts of the economy that are in high demand. Although this may cause overall inflation to exceed the central bank’s target, it may be desirable in terms of allowing it to adjust relative wages in various sectors.
Also, David Autor of the Massachusetts Institute of Technology recently wrote that the labor shortage in the United States that many employers are complaining about is actually a good thing. The problem, he says, is that the US economy produces a lot of “bad” jobs with low wages and few benefits. And if the pandemic has now made workers more demanding and picky, it is employers who have to adapt. In the end, equity and productivity require not only more jobs, but higher-quality jobs.
One advantage of academic economists’ writings is that they illustrate the contingent nature of current policy priorities in the United States. The Jackson Hole study shows, for example, that temporary inflation is an acceptable solution only under certain conditions: when sectoral adjustment is driven by changes in consumer demand, when wages cannot fall, and when monetary stimulus does not impede structural change by increasing profitability. To a large extent, in sectors that need to be reduced. Conversely, wages in developing countries are very flexible in informal employment, and the expansion of modern sectors is hampered by supply-side constraints. Under these circumstances, the likelihood that monetary or fiscal stimulus will be effective is very small.
However, there is a risk that other countries will misunderstand the changes in the United States, and that policy makers elsewhere will blindly imitate American treatments without paying attention to the peculiarities of their own circumstances. In particular, developing countries that lack fiscal space and are forced to borrow in foreign currencies should beware of over-reliance on macroeconomic stimulus.
The real problem with many developing countries today is that the traditional export-oriented manufacturing model has run out of steam. The process of generating good, productive jobs requires a different development model, focused on services, the local market, and expanding the middle class. Market or government failures that prevent the expansion of more productive jobs in services can only be resolved through structural remedies.
We welcome the reconsideration of economic policy in the corridors of the economic bureaucracy in Washington. But the real lesson other countries must draw from it is that economics, as a social science, supports different policy advice for different circumstances. Just as changing conditions and political preferences in the United States produce new treatments, other countries would do well to target their own problems and limitations.