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Treasury Secretary Janet Yellen offered a fresh description of the Biden administration’s economic policy approach Friday, casting it as one that borrows from — but improves upon — the Ronald Reagan-era conservative emphasis on supply-side economics.
“Our new approach is far more promising than the old supply-side economics, which I see as having been a failed strategy for increasing growth,” Yellen said in a speech to the World Economic Forum’s virtual Davos Agenda. “Modern supply-side economics seeks to spur economic growth by both boosting labor supply and raising productivity, while reducing inequality and environmental damage.”
Yellen’s attempt to redefine Biden’s economic agenda places it in terms that both credit and criticize concepts popularized under Reagan, the Republican president during the 1980s. It comes as Biden’s signature economic program, the 10-year tax-and-spending plan known as Build Back Better, remains stalled because of the lack of support from Republicans and a small number of moderate Democrats.
“‘Modern supply-side economics’ strikes me as a new label for Keynesian economics with an emphasis on government spending on investment in labor supply,” said Peter Hooper, global head of economic research for Deutsche Bank ag and a former senior Federal Reserve economist. “There are some good arguments there, but I don’t see it as a totally new economic paradigm.”
Yellen contrasted the long-term Build Back Better proposal with the $1.9 trillion pandemic-relief bill Biden enacted last March. That 2021 program was “similar to the ‘Keynesian approach’” of past fiscal stimulus programs, Yellen said.
‘Not Sufficient’
The supply-side economics touted by Reagan and his acolytes called for smaller government, low taxes and less regulation — all aimed at encouraging growth through private-sector investment.
“It is, unquestionably, important to properly implement regulation and maintain a pro-growth tax code,” Yellen said. “But they are not sufficient and can often be overdone.”
In particular, that over-emphasis, Yellen said, has left the U.S. under-investing in areas like infrastructure, education and workforce development — hurting growth and driving economic inequality.
She pointed to the struggle of businesses to find available and sufficiently skilled workers to fill a record number of job openings.
Tax Policy
“Potential GDP in the United States is constrained by a declining labor force,” she said. “And with few exceptions, productivity growth has been sluggish since the late 1970s.”
Criticizing generations of Republican moves to lower federal tax rates, Yellen said that “significant tax cuts on capital have not achieved their promised gains, and deregulation has a similarly poor track record.” She added that “this approach has deepened disparities in income and wealth by shifting the burden of taxation away from capital and towards labor.”
Such concerns explain the Biden team’s proposals to boost the tax take from the wealthy and corporations — to provide more funds for education, training and child care that would raise skill levels and enable more women to work, Yellen said.
White House National Economic Council Director Brian Deese backed Yellen’s new description of the administration’s economic policy, underscoring that Biden’s focus is “how can we expand the productive capacity of the economy.”
Semiconductor Bill
Deese, speaking in an interview with Bloomberg Television Friday, also pointed to optimism about passage through Congress of legislation to bolster U.S. competition with China. That bill is a major priority for the Biden administration and would provide nearly $52 billion in grants and incentives for the semiconductor industry amid a global chip shortage.
“We’re confident we can get that done here in the short term,” Deese said.
The Build Back Better plan is much broader, including health-care and childcare support that could encourage more Americans to rejoin the labor force. Although the U.S. unemployment rate has tumbled, to 3.9% in December, the proportion of Americans age 25-54 — considered in their prime working years — who are employed or looking for work has failed to extend a partial rebound. At 81.9%, it’s well below the peak of 84.6% in 1999.
“While the final details of a package continue to be discussed by the administration and Congress, the core of Build Back Better counters these trends by making it easier for working-age parents to participate in the labor market,” Yellen said.
(Adds comments from White House economic director starting in paragraph before ‘Semiconductor Bill’ subheadline.)
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