“Has Bidenomics Been Good for Workers?” is the question posed by economist Paul Krugman in his latest New York Times column. And perhaps not surprisingly, the Nobel laureate answers in the affirmative. “More Americans—a lot more Americans—got jobs, and while those who were already employed suffered a decline in real wages, that decline reflected events in global food and energy markets, not U.S. policy,” Krugman writes.
To a large extent—so far at least—“Bidenomics” is the monster-scoop of fiscal stimulus known as the American Rescue Plan (ARP), passed in March 2021. At $1.9 trillion, it was four times as big as the new spending in the Bipartisan Infrastructure Act passed in the summer of 2021, while other big Biden bills—namely the CHIPS and Science Act and Inflation Reduction Act—were passed only recently. Did the ARP contribute in a substantial way to America’s biggest inflation surge in four decades? (This inflation surge, by the way, means that even though average hourly earnings are up a whopping 5.2 percent from a year ago, consumer prices are up 8.2 percent.) Sure it did.
Consider the output gap—the difference between what the US economy could produce if firing on all cylinders and what it is actually producing—when the ARP was passed. The bill filled that gap many times over. Then consider the mid-range estimate of the fiscal multiplier, the effect of $1 of government spending on overall economic output. A simple model based on the output gap and fiscal multiplier—including reasonable estimates of their values—predicted that the ARP would “generate substantial inflationary pressure in 2021 and 2022,” noted AEI economist Michael Strain earlier this year. At the time, Strain estimated “around three percentage points of inflation in 2021 were due to the ARP.”
In other words, the ARP-Bidenomics has been a substantial inflation driver and thus a substantial driver of the Federal Reserve’s monetary response. And if that response leads to a recession, then Bidenomics will have been a substantial cause. Even Krugman concedes that anything more than a brief downturn would undermine his case: “. . . controlling inflation ends up requiring a long period of high unemployment—I don’t think it will, but I could be wrong—workers could end up worse off, despite the current employment boom.”
A bit about the history of shallow recessions: In a research note last July, Goldman Sachs observed that “even shallow recessions have been unpleasant” with the average unemployment rate rising about two and a half percentage points. Now we found out last Friday that the US unemployment rate in August was 3.7 percent. So a typical shallow recession would nudge that number up to 5.2 percent. If the latter were the jobless rate today rather than the former—all else equal—there would be an additional 2.5 million American workers not working. That would be the equivalent of wiping out the past year of employment gains. Even a shallow recession would be a gut punch for many workers after the economic chaos since the start of the pandemic.
Passing the supersize ARP was a historic economic gamble, especially coming just months after President Trump signed the $900 billion COVID-19 relief bill in December 2020. Even if the Fed gets its Immaculate Disinflation and a soft landing, it will be far from clear that Bidenomics, adjusted for risk, has been good for workers. If you got a late start picking up a child from school, and you race down side streets to get there, you might well arrive on time. But was the risk worth it?
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