As I watched Federal Reserve Chairman Jerome Powell grapple with tough questions in Congress last week, my mind returned to October 2008, when Maestro himself, Alan Greenspan, the former chairman of the Fed, went to Capitol Hill and conceded that he had “found a loophole” in the economic model he had had in mind for about half a century, and that he had used to justify his support for deregulation financial and other conservative policies, such as tax cuts. Greenspan’s admission, which came shortly after Congress reluctantly agreed to bail out Wall Street following the collapse of Bear Stearns and Lehman Brothers, was an epitaph of a certain way of thinking about the economy. . Much less clear at the time was the type of model that would replace the one Greenspan, during his nearly two decades at the Fed, had done a lot to promote.
Almost thirteen years later, the answer to this question is still relevant today. Recently, while writing the preface to a new edition of “How Markets Fail: The Rise and Fall of Free Market Economics”, a book I wrote on the great financial crisis, I was struck by the number of problems raised at the time which remain urgent. now, from ensuring a sustainable recovery after a deep recession to tackling glaring inequalities, to balancing urgent spending priorities with long-term concerns about the budget deficit, to tackling populism of the right and an increasingly rogue Republican Party. In some policy areas things have changed a lot over the past decade, but in others the legacy of the past weighs heavily on the present. In words attributed to Antonio Gramsci, an Italian Marxist whom Mussolini imprisoned on false charges in the 1920s: âThe old is dying and the new cannot be born.
One welcome change, exemplified by the launch last week of monthly cash payments to tens of millions of American families with children, is a rush by elected Democrats to challenge old words about spending and incentives. Ten years ago, as the economy struggled to recover from the financial crisis, some senior Obama administration officials embraced the idea of ââcutting government spending growth and reducing the budget deficit, even if they resisted Republican calls for deeper cuts. Today, the Biden administration and its allies on Capitol Hill are calling for more than $ 4 trillion in new spending over the next decade. This is in addition to the $ 1.9 trillion contained in the US bailout package, which Congress passed in March. Almost all of the proposed spending is targeted at serious and long-standing market failures, such as climate change, an inadequate social safety net, and a shortfall in investing in America’s greatest asset: its young people.
Another important development is that the Powell Fed, unlike some of its predecessors, including Greenspan’s, has taken a fairly relaxed stance in the face of the prospect of increased federal spending and debt. The new approach to spending goes beyond budget arithmetic. Ten years ago, many Democrats were still pretending, at least, to argue that increased financial assistance to poor families would undermine incentives to work and save. This framework had a long history. In the 1990s, President Bill Clinton promised to “end welfare as we have known it” and then kept that commitment by imposing work demands and time limits on welfare recipients. social assistance, as well as by transferring responsibility to states, which has led to a sharp drop in the number of people assisted. Misplaced arguments over incentives have also played a role in the US failure to put in place a broader social safety net, including a system of “family allowances” of cash payments, which many other advanced countries have. adopted to reduce child poverty.
An important factor in overcoming this story has been research from economists – including Janet Currie, Princeton, James Heckman, University of Chicago, and Hilary Hoynes, University of California, Berkeley – who have shown that In the long run, government targeted early childhood interventions generate high returns for affected individuals and for society as a whole. Prioritizing real-world results over a priori theorizing has marked an important advance in economics, and it is no coincidence that Biden’s economics team is heavily populated by empiricists. But, to make monthly child tax credit payments a reality, it also took years of political effort, two Democratic Senate victories in Georgia, and a president willing to prioritize a costly anti-government initiative. poverty. For the latter, Biden deserves special credit.
Even now, however, the future of the revamped child tax credit program is uncertain. The cash payments allowed in the American Rescue Plan will expire at the end of the year. What happens beyond that depends on the outcome of two major spending proposals: a bipartisan physical infrastructure package for $ 600 billion in new spending and a $ 3.5 trillion social infrastructure plan, which Democratic leaders aim to push through without GOP support, through reconciliation, and pay by raising taxes on corporations and the wealthy. In all likelihood, the Social Infrastructure Bill will provide longer term funding for the new monthly payments. It is not yet known whether this will cover their full cost – about $ 1.6 trillion over ten years, according to the Washington-based Tax Foundation.
Similar issues hang over many other costly Democratic priorities, including reducing greenhouse gas emissions to net zero by 2050, ensuring child care, and paid family and medical leave for all Americans, the extension of health insurance, the strengthening of home care for the elderly and the creation of a free community college. Even with $ 3.5 trillion to play, it’s not easy to fit into all of these programs. Last week Jim Tankersley of Times, reported that Democratic leaders planned “to push forward as many new spending programs and tax cuts as possible, but also allow some of them to expire in a few years to suit the appetite limited in tax and moderate senator expenses. . . . The hope – and the bet – is that the programs prove to be so popular that a future Congress will keep them alive. “
These political maneuvers are taking place in a financial environment which, in some respects, evokes the aftermath of the great financial crisis. In 2009 and 2010, Americans were furious when bailed out banks rebounded with remarkable speed, paid off their government loans, and started paying big bonuses to their star traders. Today, the good times are rolling again, at least for Wall Street. As recently as last week, JPMorgan Chase, Goldman Sachs and Morgan Stanley together announced more than $ 20 billion in profits during the three months of April through June. âThe pandemic is kind of in the rearview mirror, hopefully,â said Jamie Dimon, managing director of JPMorgan, after the release of his company’s exceptional results.
What Dimon didn’t say is that, just like in 2009 and 2010, the Wall Street manna owes a lot to the largesse of the Fed, which in contemporary American capitalism plays the role of a sort of firefighters, fires with his silver fire hose. In the months following the Lehman Brothers collapse in 2008, the Fed pumped an estimated $ 1.25 trillion into the financial system through a series of emergency lending and asset purchase programs. Since the onset of the coronavirus pandemic, the central bank has outdone itself, increasing its balance sheet by more than $ 4 trillion, largely through purchases of treasury bills and mortgage securities – a policy known as name of quantitative easing. While the stated (and meritorious) goals of quantitative easing are to lower interest rates and increase interest rate sensitive spending, it also acts as fuel for the stock market. Even after the market crash on Monday, the S&P 500 Index has risen more than thirty percent since February 2020. Because the richest ten percent of households own more than eighty percent of all stocks, they benefited greatly from it. And the ultra-rich have benefited above all: Jeff Bezos’ Amazon stock, for example, has appreciated by more than eighty billion dollars.
Certainly, part of the rise in stock prices of Amazon and other tech giants over the past seventeen months has been due to economic changes that are likely to endure, especially the shift to remote working. Yet the Fed’s response to the pandemic undoubtedly exacerbated wealth inequalities, which were already extreme. Over the past few decades, it almost seems like the best thing that can happen to the rich is to push the economy into a ditch and get the Fed to turn on its money tap. This is the reverse logic of a world in which the ownership of financial and industrial capital is so unbalanced.