Some lessons to be drawn from the American economic experiment
The conversation about economic policy in the United States has changed dramatically in the space of just a few years. Neoliberalism, the Washington Consensus, market fundamentalism – call it what you want – have been replaced by something very different.
In macroeconomic policy, concerns about debt and inflation have given way to a preference for over-stimulating the economy and minimizing risks to price stability. As for taxation, tacit acquiescence to a race to the bottom no longer exists and the establishment of a world minimum rate for multinational companies is in order. Industrial policy, which could not even be discussed in polite society until recently, is making a comeback.
The list goes on. While the buzzwords in labor market policy were once deregulation and flexibility, we are now talking about good jobs, correcting bargaining power imbalances and empowering workers and unions. Large tech companies and platforms were once seen as a source of innovation and benefits for consumers; now, they are monopolies that must be regulated and eventually dismantled. Trade policy focused on the global division of labor and the search for efficiency; it is now about resilience and safeguarding national supply chains.
Some of these changes are necessary adjustments to the covid shock. And they are also perhaps the inevitable turnaround produced by a long period of growing inequality, economic insecurity, and concentrated market power in the US economy. But credit also rightly goes to President Joe Biden, who brought a new economic team to Washington and was quick to endorse new ideas despite criticism from old ones.
The fundamentalist market model that has previously shaped economic policy in the United States and much of Western Europe since the Reagan-Thatcher Revolution of the 1980s had an earlier intellectual pedigree. It was developed in academic halls and popularized by public intellectuals such as Milton Friedman.
This time around, academic economists have largely caught up. Even though enthusiasm for the free market has waned among economists, there has been no programmatic development in the style of Keynesianism or Friedmanian conservatism. Policymakers looking for economists for wholesale solutions that went beyond DIY would have been disappointed.
Nonetheless, economists were affected by the change in mood. For example, at the annual central bankers’ retreat in Jackson Hole, Wyoming, in late August, a team of academic economists from the Massachusetts Institute of Technology (MIT), Harvard, Northwestern, and the University of Chicago presented a paper showing why a transitory jump in inflation can be a good thing. When wages are rigid downward (they do not fall as easily as they rise), structural change can be facilitated by an increase in wages in those sectors of the economy that experience increased demand. While this may cause headline inflation to exceed the central bank’s target, it might nonetheless be desirable, as it allows for the adjustment of relative wages across sectors.
Likewise, David Autor of MIT recently wrote that the labor shortage in the United States that many employers complain about – unfilled vacancies because there are simply not enough workers ready. to accept the jobs offered – is actually a good thing. The problem, he argues, is that the US economy produces too many “bad” jobs with low wages and few benefits. If the pandemic has now made workers more demanding and demanding, it should be employers who must adapt. Ultimately, equity and productivity require not only more jobs, but better quality jobs.
One of the virtues of the writings of academic economists is that they clarify the contingent nature of today’s political priorities in the United States. The Jackson Hole study, for example, shows that temporary inflation is an acceptable solution only under a particular set of conditions: sector adjustment is driven by changes in consumer demand, wages cannot decline and monetary stimulus does not prevent structural change by also increasing profitability. many in sectors of the economy that need to contract. In developing countries, by contrast, wages are quite flexible in informal employment and the expansion of modern sectors is hampered by supply side constraints. Under these conditions, monetary or fiscal stimulus are much less likely to be effective.
Nonetheless, there is a risk that changes in the United States will be misunderstood in other countries and that policymakers elsewhere will blindly copy American remedies without paying attention to the specifics of their own circumstances. In particular, developing countries that lack fiscal space and need to borrow in foreign currencies should be wary of over-reliance on macroeconomic stimulus.
The real problem in many developing countries today is that the traditional model of export-oriented industrialization has run out of steam. Creating good productive jobs requires a different development model, emphasizing services, the internal market and expanding the middle class. And market or government failures that block the expansion of opportunities for more productive employment in services can only be addressed through structural remedies.
The re-examination of economic policy in the halls of Washington’s economic bureaucracy is welcome. But the real lesson other countries should learn is that economics, as a social science, supports different policy advice for different circumstances. Just as changing circumstances and political preferences in the United States produce new remedies, other countries would do well to target their own specific problems and constraints. © 2021 / Project union
Dani Rodrik is professor of international political economy at the John F. Kennedy School of Government at Harvard University and author of “Straight Talk on Trade: Ideas for a Sane World Economy”.
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