Weighing in on President Biden’s first year: the economy and monetary policy
As part of a series examining the first year of Biden’s presidency, Harvard Law Today asked Christine A. Desan, Leo Gottlieb law professor and monetary policy and economics expert, to share her thoughts on the successes, failures and agendas for the future.
Harvard Law Today: What has the administration done well so far?
Christine Desan: The Biden administration is clear-headed about the tools it has to support well-being and productive exchanges. What is perhaps most striking is that he is not afraid to use fiscal policy in addition to monetary policy. Each has important distributional effects. We have relied on monetary policy since the 2008 financial crisis to promote investment through the financial sector. This strategy has stimulated capital markets, but it has disproportionately benefited high-income households whose investments there have appreciated enormously. Similarly, the strategy favored lending to areas financed by the capital markets. Finally, the policy also increased the risk to financial stability as it encouraged companies to increase their leverage and forced investors to seek riskier investments to obtain the returns they sought.
Fiscal policy allows the country to get out of this trap. Biden’s $1.2 trillion infrastructure bill fills a critical shortfall: our public transit systems, our roads and bridges, our energy grid, our broadband, and climate change amelioration — all need work. (The American Society of Civil Engineers gave us a C- for our infrastructure this year.) While personal emergency funds in 2020 averted disaster, infrastructure investment is looking to the future. and create good jobs. It’s a win-win that the vast majority of Americans support, and Biden is right to keep pushing for more. In fact, such spending could actually be anti-inflationary insofar as it promotes economic activity and productivity.
While we’re on the tax front, I would welcome Biden’s tax reform efforts, including the idea that we should increase the expertise and capacity of the IRS. We absolutely need to build a fairer tax system. But even those investing in the status quo should consider how much taxation is tied to robust markets. Historically, it is exactly those governments that create public demand for their currency with strong revenue systems that become financial behemoths – the UK in the 19th century, the US in the 20th century. It may sound counter-intuitive, but we can kill our market order by undermining the IRS.
Going back, the administration is geared towards the use of both monetary and fiscal policy (taxation and expenditure) to support equitable development, increase financial stability, and tackle issues such as inflation. His recent appointments to the Fed Board (Lisa Cook, Philip Jefferson and Sarah Bloom Raskin [’86]) suggest that it is interested in a diverse staff contributing to the policy mix.
The administration has also taken steps to close the racial wealth gap and disparities based on race. He relaunched the State Small Business Credit Initiative (SSBCI) with a reserve for socially and economically disadvantaged entrepreneurs and tribal communities, as well as priority for micro-businesses that are often owned by people of color. . The program works by using federal capital to leverage private funds up to 10:1, multiplying the federal government’s value for money.
The administration is geared towards using both monetary and fiscal policy (taxation and spending) to support equitable development, increase financial stability, and tackle issues such as inflation.
The program takes us back to the impact of the current banking network, as it depends on states having community banks and community development finance institutions (CDFIs) that can reach small entrepreneurs in an inclusive manner. The administration has decided to bolster these institutions with another program that injects capital into CDFIs and minority-owned banks. There is also a good provision in the infrastructure bill to reconnect neighborhoods, often communities of color, separated by old freeway projects. On the other hand, these measures are only the beginning; we need a lot more progress elsewhere, for example on the review of the Community Reinvestment Act.
HLT: What’s wrong ?
Desan: On existential crises, we are perpetually behind the ball on climate change, an issue that itself disproportionately affects underserved and minority communities with flooding, land loss and heat-related hazards. A recent study found that federal, state and local governments only contribute 10% of US climate finance. There are promising developments here, including the administration’s move to more accurately assess greenhouse gas damage, a reform that could boost returns from green infrastructure projects. But the scale of the problem we face demands much bolder action. A student of mine recently suggested a federal innovation inspired by the National Housing Act of 1934 or the Farm Loans Act of 1916, legislation that used federal authority to create mortgage markets that reduced risk for investors in these sectors and could be used in a similar way to create green bond markets. There are at least four bills in Congress proposing federal green banks that would dramatically increase funding, including loans, guarantees and equity financing. It is unclear, however, how this funding might be conditional and how far it would extend. And as we all know, in such a tightly divided Congress, the power of the fossil fuel industry has stymied a vital movement.
Moving from the deep to the prosaic level, the administration must also move forward in its appointments – these are the people on the ground who make the monetary and banking system work, including in the Office of the Comptroller of the Currency and the Federal Deposit Insurance Company. . The most vigorous appointees to date are not in banking regulation, but at the SEC (Gary Gensler) and CFBP (Rohit Chopra) and FTC (Lina Khan), while the OCC has lost an extremely talented and creative candidate in Willow Omarova, widely acclaimed by her peers in the fine law world. But I would now qualify that with the news of the nomination of Sarah Bloom Raskin; she would bring great insight to the oversight position on the board, while balancing Biden’s more conservative decision to stay with Jerome Powell as chairman.
HLT: What has the administration yet to address that it should?
Desan: In 2021, some $15 trillion in crypto assets changed hands, according to a recent Financial Times article. This included a 79% increase in theft, ransomware and illicit activity. However, market activity in the region has grown so much that total criminal activity has actually decreased proportionately. Fascinating, but not, in my opinion, a sign that the area is working well. The sheer number of scams and sheer scale of market activity in the region flags it as a high-risk area. This is true for individual investors given the volatility and opacity of crypto assets. And that’s true for us as a society for a host of reasons. The President’s Task Force released a report in November that identified stablecoins as posing a number of systemic dangers. Stablecoins, which are typically used to facilitate the exchange of other digital assets, promise 1:1 convertibility into sovereign currencies. Imagine, however, a run on these currencies if people began to doubt the value of the assets backing them. This is the kind of danger we strive to prevent in banking and have to deal with in crypto. The Biden administration must now make a whole series of decisions on the division of responsibilities between the SEC and the Commodity Futures Trading Corporation, and the FDIC, which would oversee stablecoins if they were issued by depository institutions.
We are consistently behind the ball on climate change, an issue that itself disproportionately affects underserved and minority communities with flooding, land loss and heat-related hazards.
Finally, I would argue that the Biden administration should think in more visionary terms about our monetary infrastructure. Finance funneled profits upwards; recent studies suggest that the industry is claiming significantly higher profits without increased efficiency. At the same time, the financial architecture has required large injections of public money twice in the past two decades – once when it collapsed in 2008 and then when it struggled to digest an external shock that came with COVID-19. There are powerful reform ideas that target both the inequitable aspects of the system and its structural vulnerability to instability.
“FedAccounts” would provide individuals with a public option for banking: digital accounts at the central bank would create access to banking services for Americans, about a third of our population, who are unbanked or underbanked; reduce their need for predatory services; and stabilize the banking system by reducing its role in money creation. Postal banking could dovetail with this idea, providing services in places as familiar, reliable and widely distributed as the post office. The Biden administration should also support initiatives that create state and municipal public banks. These entities can diversify the allocation of credits and recycle the benefits of public revenues into local communities.
There is a theme here: we should look for ways to innovate toward monetary and financial structures that have democratic legitimacy, that are inclusive, and that broadly benefit the communities that support them.
Read the series Weighing President Biden’s First Year