I often learn more from people whose views partially overlap, than from those with whom I completely agree or completely disagree. Thus I’ve learn a lot from reading Matt Yglesias’s Substack, even though he has a much more favorable view of the Biden administration than I do. In particular, he supports their early effort to pass major bills involving stimulus, and well as subsidies for things like infrastructure, clean energy, and technology.
But Yglesias also believes that the Biden administration went off course in 2022:
I published a piece on August 25, 2022 advising Biden to press pause on his flirtations with heterodoxy and congressional dealmaking and start listening to boring neoclassical economists. To my mind, that didn’t mean disavowing anything that he’d done in the first 18 months of his presidency. It just meant acknowledging that most of his pre-2021 policy agenda had been cooked up assuming depression-like conditions, and those conditions no longer applied. He’d taken big legislative swings, had some good hits, and now it was time to play defense.
But the pivot never really happened.
Yglesias is much smarter than most of the policy advisors that Biden relied upon over the past few years. Many of them don’t really understand neoclassical economics (aka supply side economics), and this led to a series of policy initiatives that made inflation even worse:
I would not expect any Democratic administration to weaken Davis-Bacon rules as an anti-inflationary measure, even though doing so would advance a number of Biden’s stated policy objectives. But did Biden need to re-write these rules to be tougher than they were under Obama or Bill Clinton? Similarly, every president likes to tout “Buy American” rules because they sound popular, but Biden’s lawyers genuinely wrote stricter rules than his predecessors. They adopted stricter energy efficiency rules that will drive up prices. They raised tariffs on Canadian lumber. They raised tariffs on solar panels from Southeast Asia. Repealing the Jones Act would be a heavy lift, but Biden made Jones Act rules stricter. A lot of this can be seen as special giveaways to union interests, which is not always ideal but is at least part of a rational political strategy. But beyond that, what I think you see at work in some of the regulatory agencies is a completely sincere, completely non-cynical worldview that promoting high nominal wages is a path to national prosperity. The moves to implement stricter rules on au pairs or create stricter rules for agricultural guest workers don’t have any particularly clear interest group angle. They’re just small moves that drive up the cost of child care and food.
To be clear, it is the Fed that determines inflation over the longer run. But if the Fed sets its policy tools at a position likely to generate 6% NGDP growth, then the enactment of new regulatory measures that raise costs will temporarily shift that nominal spending from output to prices. Yglesias believes that this policy mistake may ultimately cost Biden the election.
The Trump campaign is also advocating policies that could lead to higher costs, such as a 10% tariff on all imports and the expulsion of undocumented workers. Trump also opposes YIMBY policies to allow the construction of apartments in suburban areas. But voters tend to focus on the record of the president that is currently in office, not the campaign promises of the challenger. And Trump benefits from the fact that inflation was relatively low during his tenure.
Because I am less Keynesian than Yglesias, I am much more skeptical of Biden’s early policy initiatives. But I do understand the Keynesian model, and thus I can easily understand why Yglesias has become increasingly frustrated with Biden’s approach to policymaking. Keynes believed the free market worked reasonably well as long as there was adequate aggregate demand. By 2022, the economy had recovered from the Covid recession and inflation had become a major problem. In that sort of world the rules of classical economics apply—industrial policies have real opportunity costs. It was time to focus on efficiency. In November, we’ll find out if Biden must pay a price for ignoring the advice of one of the Democrats more insightful pundits.
PS. In my view, the classical rules always apply. It’s always a good time to focus on efficiency. Thus I believe the Biden administration went off course long before 2022. Yglesias pointed me to a Ezra Klein essay from April 2021:
Biden has less trust in economists, and so does everyone else. Obama’s constant frustration was that politicians didn’t understand economics. Biden’s constant frustration is that economists don’t understand politics.
Multiple economists, both inside and outside the Biden administration, told me that this is an administration in which economists and financiers are simply far less influential than they were in past administrations.
Obama was re-elected against a mainstream Republican. Biden is trailing in the polls against one of the most unpopular politicians in American history.
