Forty years ago, President Ronald Reagan and Federal Reserve Chairman Paul Volcker oversaw a root-and-branch restructuring of the U.S. economy.
Today, Joe Biden and Jerome Powell are trying to do the same thing—only in reverse.
In the Reagan-Volcker regime change, power in the economy shifted from the government to the market and from labor to the owners of capital. The emphasis was on efficiency, not equality, and on promoting supply, not demand.
Monetary policy was put in charge of managing the economy and reining in inflation, while fiscal spending took a back seat. And the new priorities became entrenched—at least until now.
“The parameters of the economic system and of public policy went through profound changes at that time,” said Paul McCulley, the former Pacific Investment Management Co. executive who now teaches at Georgetown University. “We’re fundamentally going through exactly the same thing now.”
As the U.S. emerges from the pandemic, Biden is reasserting the role of government spending and taxation in the economy—first with the $1.9 trillion relief bill approved in March, and now with proposals to spend more than $4 trillion on public investments and programs aimed at lower and middle-income families, like child care and paid leave. He outlined the latest plan in an address to Congress late Wednesday.
To help pay for them, the president has set his sights on the owners of capital. He’s calling for higher taxes on capital gains, corporations and the wealthy. Biden has also championed labor unions, openly backing the failed effort to organize workers at Amazon’s warehouse in Bessemer, Alabama.
“Biden is more pro-union, more pro-redistribution, more pro-social welfare state, more pro-government spending in an uninhibited way than arguably anybody we’ve had since LBJ,” said Peterson Institute for International Economics President Adam Posen. He was referring to former President Lyndon Baines Johnson, whose Great Society programs in the 1960s expanded health care and lowered poverty.
‘Very Benign’
The Fed under Powell has undergone a regime change as well. Gone is the focus on capping inflation, the cornerstone of the Volcker Fed. Now the emphasis is on avoiding the deflation that has bedeviled Japan for decades.
Rather than trying to offset the ultra-expansionary thrust of Biden’s policies, the Fed is amplifying them, as Powell again made clear to reporters on Wednesday. It’s keeping interest rates near zero—and as the government’s budget deficit widened, the Fed bought up trillions of dollars of the resulting debt.
Powell, whose term as Fed chair is up for renewal next year, is also all-in on Biden’s bid to lift labor’s share of the economic pie and spread the benefits of a hot jobs market to Black Americans and other groups that have historically been left behind.
There are dangers in the paradigm shift that Biden and Powell are engineering. The economy could overheat and bring an unwelcome resurgence in inflation.
“The risks of inflation are really picking up and the Fed is acting in a very benign manner,” said economic historian Michael Bordo, a professor at Rutgers University. He sees a danger that the Fed “gets co-opted so much” into backing the administration’s agenda that it loses the inflation-fighting credibility won by Volcker.