Apparently, economists love Scrabble. Throughout the pandemic, they have described the path of the US economy with letters. If drawn on a graph, an L-shape indicates free-falling growth. The V shape? A sudden rebound. There was even a crushed U, or Nike swoosh, used to indicate slow recovery. Alas, the winning entry, it seems, was a K.
The K indicates a glaring inequality. The letter’s upward shot represents Americans who thrived during the coronavirus, increasing savings while working from home. On the other hand, its strong downward course illustrates the deterioration of the fortunes of others. For proof of their predicament, look no further than April’s dire jobs numbers.
If a K represents the US economy, which letter best describes its economic policy?
This letter, it seems, is an X.
The upward run of the X reflects attempts by fiscal and monetary policymakers to maximize growth. At around $ 5.9 trillion, President Biden’s total budget plans, including American rescue plan which passed in March and the proposal American employment plan, are designed for a sustained expansion of the US economy. At the same time, despite May’s lukewarm indication of a future tightening, the Federal Reserve pledged on easy terms and to keep interest rates low. The Fed will maintain its asset purchases, at least predictably, and pretends he wants inflation above its 2% target. Fed Chairman Jerome Powell has said this position will last “as long as it takes” for a full recovery.
This American economic policy pursues growth.
But then there is the downward race of the X. This represents the country’s regulation and trade policy. Both constitute a counterweight to the stimulus policy. A decade after the global financial crisis, and despite the deregulation efforts of the last administration, US banks are still constrained by onerous principles. Their capital and liquidity needs are high; their ability to take credit risk is low. The appointment of vigilant Gary Gensler to the Securities and Exchange Commission does not suggest either an administration on the verge of slackening on the banks.
Meanwhile, since 2016, US trade policy has done nothing but disrupt postwar economies of scale. President Donald Trump’s trade with China and escalating tensions with the European Union have been costly here. Just like its prices on foreign steel. The Biden administration will undoubtedly try to appease tired allies. But he remains suspicious of China and has not given up on the mercantilist approach of the previous administration. That might change later, but for now it looks like America First has just become Buy American. All in all, the banks cannot fully release credit in the US economy, and the nation cannot reap the full benefits of foreign trade. The supply chains of goods abroad and the supply of credit within the country are limited.
This US economic policy is slowing growth.
On the one hand, the expansive upward stroke of the X-shape makes sense. It was born out of the fight against the pandemic, in the hope of repairing decrepit American infrastructure, of fighting structural racism, which economist Dana Peterson
calculated has cost the US economy $ 16 trillion since 2000, and the dangers of future climate change. President Biden also draws a straight line between budget spending and competition with Beijing. Although Biden was described As an anti-Reagan, this strategy is taken directly from The Gipper’s Soviet-focused playbook.
On the other hand, the restrictive downward stroke of the X also makes sense. It is the product of the financial crisis of 2007, after which the G20 insisted on stricter financial regulation. And this is the result of the strategic and economic drawbacks of a hyperglobalized world. Clearly, the ideas of purely efficient markets and indisputable trade integration, which prevailed before 911, are gone for good. No one claims otherwise.
The result of contradictory meaning is confusion. In addition to pulling growth in opposite directions, US economic policy tackles global issues while apparently becoming more isolationist. It is also trying to save various markets from pandemic-related collapses while ushering in a period of greater government activism. Indeed, some commentators predict the Wholesale retirement of the market economy. At the heart of porn is a whole new American dilemma. Protecting the country from free markets, with a tough economic policy, can stifle the reality of free markets. But, also, and in the context of foreign interventionism, doing nothing could also prove disastrous. This is before even considering the strategic imperative to develop new capabilities, including artificial intelligence, that can protect or challenge open societies.
So there you have it, a K-shaped recovery and an X-shaped economic policy. The result is very strange. America’s international economic presence, a strategic need in itself, is in tension with its national economic model. Reconciling the two, if possible, is now Uncle Sam’s 21st century challenge.
Edward Price, former UK economic officer, teaches political economy at the Center for Global Affairs at New York University.