Will the Democrats overcorrect on US economic policy?

Unlock the White House Watch newsletter for free

Your guide to what the 2024 US election means for Washington and the world

Last week I listed several policy areas that I think will be fiercely contested between the “populist” and the “mainstream” or “oligarchic” (depending on your sympathies) flanks of both US political parties. As several of you made sure to remind me, I neglected to discuss immigration beyond mentioning it in passing. As is obvious to all, the wide rift within the Trump coalition on this issue is now clearly exposed. One reader replied to last week’s newsletter predicting that “the oligarchs lose on immigration and tariffs and win on everything else”. Personally, I’m not so sure — on immigration at least it looks like Donald Trump doesn’t mind selling out his Maga supporters to the asks of the Big Tech companies hurrying to kiss his ring.

The Republicans will of course rule the roost for the foreseeable future, and the contest between Maga populists and tech bro oligarchs will continue to play out in the headlines, or rather the social media feeds, as well as behind closed doors in the White House and at Mar-a-Lago. But I think it’s also important to think about where the Democratic party goes from here. It’s a fitting topic for this last Free Lunch column of the Biden era — Ed Luce’s elegy of which you should definitely read.

Timothy Snyder recently wrote a blog post calling for Democratic politicians to form a “shadow cabinet” along the lines of the UK model — in a follow-up he warmed to the label “people’s cabinet” — to hold Trump’s actual government to account. If an effective opposition is to be achieved, it matters which alternative policies it chooses to propose. Hence the question of where Democrats go from here on the economy.

I have been asking influential Democratic economists about this and I think the jury is still out and will stay out for some time. It is clear that the outgoing Biden team is not going to take any lectures from those in its own party who criticised them along the way. Here is Treasury secretary Janet Yellen in her valedictory speech last night:

. . . the US economy has done remarkably well in the aftermath of the pandemic. This fact becomes even more apparent when the recovery is placed in the proper context, namely by comparing US economic outcomes to those in other advanced economies, to performance in past recessions, and to what economists forecasted. US outperformance becomes clearer still if one considers an important counterfactual: what likely would have happened under an alternative approach that focused only on inflation and not on unemployment . . . 

This is a big intra-Democratic debate: whether the fiscal largesse of the Biden administration was excessive (in terms of good policy, and in terms of causing electorally fatal inflation). Yellen is unrepentant:

An important ‘what-if’ exercise would ask: how much more unemployment would have resulted from a fiscal contraction sufficient to keep inflation at the Fed’s 2 per cent target? The answer is ‘a lot’ . . . Estimates from representative models find that the unemployment rate would have had to rise to 10 to 14 per cent to keep inflation at 2 per cent throughout 2021 and 2022. That would have meant an additional 9mn to 15mn people out of work.

Jared Bernstein, the outgoing chair of the White House Council of Economic Advisers (CEA), is clear about how the emphasis on restoring full employment set this administration apart from earlier Democratic presidencies. “We learned the lessons about insufficient fiscal support leading to recoveries that became jobless or wageless,” he told me. “The president, in his first big economic speech in February 2021, talked about the urgency to get back to full employment as soon as possible — he used that phrase five times.”

But that judgment remains contested. “‘Big fiscal’ will face a huge headwind inside the Democratic party, probably larger than it deserves to face,” says Jason Furman, a predecessor of Bernstein’s in the Obama White House CEA. “I’m worried that next time we do too little instead of too much, as a reaction to what I think was too much” under Biden, he told me. (Bernstein, meanwhile, insists that the fiscal impulse was negligible once the initial pandemic recovery spending package wore off, as I also referred to last week.)

The question of whether Democrats will “overcorrect” is clearly important. There are signs of something similar in the immigration debate, where some House Democrats have just supported a Republican bill. But it seems wide open as to where Democrats will end up on the economy. There is “broader agreement on the direction of travel on immigration and cultural issues than in economics”, Furman thinks. So “it is easy to predict” that the next Democratic presidential candidate will have course-corrected on trans issues or immigration, say, but Furman says that “on trade and labour markets, I don’t know”.

The Biden team expresses confidence that some of its tenets of economic policy are here to stay — “I don’t think there is any swan song at all,” Bernstein told me. He lists “the idea of a worker-oriented trade policy — that workers are not just consumers but also producers”, sustaining employment through shocks without a recession, and industrial policy as potential lasting legacies.

Yellen, too, clearly wants to retain the focus on

 . . . the adverse structural trends that make it difficult for so many families to achieve or maintain a middle-class life. Traditional supply-side approaches wrongly assume that policies such as deregulation and tax cuts for the rich will fuel broader economic growth and prosperity. Modern supply-side economics, in contrast, rejects this trickle-down approach. Instead, it aims to expand our economy’s capacity to produce in a manner that is both inclusive and environmentally sound. It seeks to reverse decades-long under-investment in infrastructure, the labour force, and research and development that have held back productivity growth.

Will the next Democratic leadership and future presidential hopefuls hew to this line, let alone the unabashedly populist perspective Biden himself has sometimes embraced? (The slogan was “grow from the bottom up and from the middle out rather than trickle down”, remember, and Biden was keen to be seen as a union man.) It will depend, in part, on how much Bidenomics is seen among Democrats at least as an economic if not electoral success as time passes.

That’s hardly guaranteed. Furman remarks that Bidenomics delivered “good GDP growth, good employment, but high inflation — and supporters would say the good things came because of the policies and the bad things were exogenous, while opponents would say the opposite”. I think he also speaks for a good chunk of the Democratic economics establishment — the chunk that was left without that much influence in the Biden years — in asserting that Bidenomics was more political than technocratically evidence-based, compared with previous big Democratic policy achievements such as Obama’s healthcare reform. At the same time, he accepts that, in plain electoral terms, it’s not crazy to think that Biden didn’t do enough in a populist direction. So a lot will depend on what we learn about the electoral factors behind November’s result as more knowledge comes in.

In the end, the most important influence on Democratic economic thinking may therefore well be what Republicans do and how that plays for them. Some of Bidenomics’ ideological shifts — if not its style, let alone its beneficiaries — will see continuity in the Trump administration. If that is politically successful, preferences for a more inward-looking and protectionist economy with a more dirigiste government may triumph in both parties. If it goes badly, Democrats will be wise to run on a strong reaction to Trumpism — and jettison big parts of Bidenomics at the same time.

Other readables