LONDON \u2013 US President Joe Biden has set out to emulate Franklin D. Roosevelt by spending huge amounts of money, something that FDR avoided doing until World War II. This threatens to trigger the sort of inflation that wrecked Keynesian economic policies in the 1970s.<\/p>\n\n\n\n
Since January 2021, the Biden administration has spent or committed to spend $1.9 trillion<\/a> for immediate COVID-19 relief, $2.7 trillion<\/a> for investment and business support, and $1.8 trillion<\/a> for welfare and education. This amounts to $6.4 trillion, or nearly 30% of US GDP. The $1.9 trillion already delivered through coronavirus spending will tail off, leaving $4.5 trillion, or about 20% of GDP, to be spent over the next ten years.<\/p>\n\n\n\n The spending will be financed largely by US Federal Reserve bond purchases, with tax hikes coming later. But will it represent the biggest mobilization of US public investment since WWII, or rather an inflationary splurge?<\/p>\n\n\n\n We don\u2019t know yet, because we have no accurate way of measuring the output gap \u2013 the difference between actual and potential output, or, roughly, the amount of slack in the economy that can be absorbed before prices start to rise. The International Monetary Fund predicts<\/a> that the US economy will be growing above potential by the end of this year, and that European economies will be close to their potential. This signals inflation ahead and the need to reverse deficit finance.<\/p>\n\n\n\n Against this static view is the belief \u2013 or hope \u2013 that government investment programs will increase the US economy\u2019s potential output, and thus enable faster non-inflationary growth. Much of Bidenomics is about improving the workforce\u2019s productivity through education and training. But this is a long-term program. In the short run, so-called supply-side \u201cbottlenecks\u201d could drive inflation. There is thus a palpable danger that an overambitious agenda gives way to abrupt policy reversals, renewed recession, and disillusion.<\/p>\n\n\n\n There is a steadier course available, but the Biden administration has ignored two radical suggestions that might make its life a lot easier. The first is a federal job guarantee<\/a>. Put simply, the government should guarantee a job to anyone who cannot find work in the private sector, at a fixed hourly rate not lower than the national minimum wage.<\/p>\n\n\n\n Such a scheme has many advantages, but two are key. First, a federal job guarantee would eliminate the need to calculate output gaps, because it would target not future demand for output but present demand for labor. This in turn underwrites an unambiguous definition of full employment: it exists where all who are ready, willing, and able to work are gainfully employed at a given base wage. On this basis, there is substantial underemployment in the United States today, including among people who have withdrawn from the labor market or are working less than they want.<\/p>\n\n\n\n Second, the job guarantee acts as a labor-market buffer that expands and contracts automatically with the business cycle. The 1978 Humphrey-Hawkins Act<\/a> in the US \u2013 which was never implemented \u2013 \u201cauthorized\u201d the federal government to create \u201creservoirs of public employment\u201d to balance fluctuations in private spending.<\/p>\n\n\n\n These reservoirs would automatically deplete and fill up as the private economy waxed and waned, creating a much more powerful automatic stabilizer than unemployment insurance. As Pavlina R. Tcherneva<\/a> of Bard College says<\/a>, a job guarantee \u201ccontinues to stabilize economic growth and prices, using a pool of employed individuals for the purpose rather than a reserve army of the unemployed.\u201d No \u201cmanagement\u201d of the business cycle, with its well-known political risks, is involved.<\/p>\n\n\n\n The second radical idea is the economist Vladimir Masch\u2019s compensated free-trade<\/a> plan. America has lost millions of manufacturing jobs so far this millennium, largely owing to offshoring of production to cheaper labor markets in Asia. The counterpart of this has been a structural US current-account deficit averaging about 5% of GDP.<\/p>\n\n\n\n One of the Biden administration\u2019s main objectives is to rebuild US manufacturing capacity. While the COVID-19 has fostered a conventional wisdom among all deindustrializing countries that they should reserve \u201cessential\u201d procurement for domestic manufacturers, Biden\u2019s \u201cMade in America<\/a>\u201d efforts echo former US President Donald Trump\u2019s \u201cAmerica First\u201d approach. But Biden\u2019s plan to rebalance US trade by means of tax subsidies for domestic producers, trade deals, and international agreements, rather than tariffs and insults, is vague and unconvincing.<\/p>\n\n\n\n In a world of second-best options, the Masch plan offers the quickest and most elegant way for Biden to secure the balanced trade that he wants. The basic principle is simple: any government in a position to do so should unilaterally set a ceiling on its overall trade deficit, and cap the value of permitted imports from each trading partner accordingly.<\/p>\n\n\n\n