It’s hard to overstate how good the U.S. economic news has been lately. It was so good that it didn’t just raise hopes for the future; it led to widespread rethinking of the past. Basically, Bidenomics, widely reviled and ridiculed a year ago, looks a lot better in retrospect. It’s starting to look as if the administration got it mostly right, after all.
About the economic news: First up was the employment report for June, which didn’t just show continuing solid job growth. It showed that once you adjust for population aging, the employed share of American adults is at its highest level in decades.
Then came the Consumer Price Index, which showed inflation falling to its lowest level since spring 2021. Thanks to falling inflation, most American workers now have higher real wages than they did before the pandemic — in fact, nonsupervisory workers are earning roughly what we would have expected if the pandemic had never happened.
Economic growth, as measured by gross domestic product, came in above expectations, once again defying predictions of recession.
Finally, an alternative price measure favored by the Federal Reserve also gave solid evidence of falling inflation, while employment costs moderated — that is, there’s no hint of a wage-price spiral.
It’s still too soon to be sure that we’ll manage to pull off a soft landing, but the prospects for getting inflation under control without a recession have never looked better.
This is all great news. But why should it make us reconsider the past?
Well, when Covid disrupted the economy, it was clear to everyone except the most extreme laissez-faire types that the government needed to step in to limit the economic pain. Indeed, the CARES Act, enacted in 2020 under Donald Trump, was remarkably generous. In fact, it looked more or less as if it had been written by Democrats, which, to a large extent, it was.
The next big fiscal package, President Biden’s American Rescue Plan, was far more controversial. The economy had not yet fully bounced back from Covid, so there was a strong case for doing something. But how much? Do too little and the economy might run cold, failing to achieve full recovery — as many economists now believe it did for many years after the 2008 financial crisis. Do too much and the economy might overheat, leading to excessive inflation.
Notice that I said “excessive” inflation. In an economy discombobulated by the pandemic and its effects, there was a good case for policies that would lead to a brief spike in inflation, something like the inflation surge after World War II as America was adjusting back to a peacetime economy. (In 2021, as inflation was starting to rise, the White House Council of Economic Advisers invoked the parallel with the 1940s — an analogy that is belatedly looking quite relevant.) Trying to keep the overall price level stable would have required outright deflation in some sectors, which would have meant sustained high unemployment.
So it made sense to give the economy one more boost, even if it led to a brief period of inflation. But the rescue plan was huge, and critics warned that it would lead to a lot of inflation — which it did, far more than optimists like yours truly expected.
But was the inflation excessive? Did Biden run the economy too hot? Those who called the rescue plan “the least responsible macroeconomic policy we’ve had in the last 40 years” argued that ending the initial burst of inflation would require many years of very high unemployment.
Over the past year, however, inflation has come way down without any rise in unemployment at all. It’s true that most measures of underlying inflation are still significantly above the Federal Reserve’s target of two percent. But given how quickly even these measures have come down without a recession, you have to ask how “underlying” the inflation really was.
And as I said, we’ve had an astonishing recovery in jobs and G.D.P., which puts the sluggish recovery of the 2010s to shame — indeed, it suggests that the failure to achieve quick recovery from the financial crisis was a huge economic tragedy.
When Biden came into office, his economists were well aware of that record and believed that the Obama administration contributed to that failure, to an economy that ran too cold for many years, by not going big enough at the beginning. So they were determined to go big this time. And until recently it was widely argued that they overcompensated, that they went too big and as a result ran the economy too hot.
Given where we are now, however, it’s much harder to argue that they hugely overdid it. Yes, there was a spike in inflation, but it has been going away. Obviously the Biden team didn’t run the economy too cold. But maybe, in the light of recent data, they didn’t run it too hot either. It would be too much to argue that Biden’s economic policy was pure Goldilocks, that they set the economic temperature just right; even given what we know now, there’s a case that the rescue plan should have been smaller. But overall, it’s starting to look as if Biden got it more or less right.
Paul Krugman
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