Commentary on Political Economy

Saturday 12 February 2022


 Can Democrats See What’s Coming?

Feb. 12, 2022

Janet Yellen, the treasury secretary, is speaking out in favor of a liberal, “modern” version of supply-side economics.

Janet Yellen, the treasury secretary, is speaking out in favor of a liberal, “modern” version of supply-side economics. Credit... Andrew Harnik/Associated Press

Ezra Klein

Opinion Columnist

If you had to distill the ambitions of the Democratic Party down to a single word, you might well choose “Denmark.” But “France” would also work. Or “Germany.” Any Western European nation, really, with the social insurance options many of us envy: universal health care and affordable child care, to name but a few. Much of modern American liberalism is designed to close those gaps, to build here what already exists there.

I hope to close those gaps, too. But what about building here what does not already exist there?

Over the past few years, social insurance programs did much to ease suffering, but it was mRNA vaccines that did the most to protect human life. And this points toward a place where American liberalism could dream bigger dreams. Most liberals can list the programs they want the government to create or expand. Fewer can name the five technologies they want the government to finance or the five scientific challenges they want to see it mobilize to solve. But technology is central to how we make the future look different from the past. To leave that to the market, or to think it apolitical, is abdication.

In an important speech at — sigh — Davos, Janet Yellen, the treasury secretary, began building a framework for those questions. The Biden administration, she said, was pursuing a “modern supply-side economics.” She argued that the economy isn’t growing as it could because it doesn’t have enough of what it needs. We need more workers, we need more roads and bridges and airports and broadband, we need more scientific breakthroughs — oh, and we need a stable climate, too. And to get all that, we need government.

That’s a change. Supply-side economics has traditionally been the redoubt of Republicans. They, too, said the economy didn’t have what it needed to grow as it could. But they believed the problem was too much government, and too little private capital and dynamism. The rich needed more reason to work. The poor needed more punishment if they didn’t work. Corporations needed more reason to invest. Their prescription followed logically: tax cuts for the rich, spending cuts and work requirements for the poor and a bonanza of financial and environmental deregulation.


Yellen is arguing that even where Republicans succeeded, they failed. The growth we’ve had in recent decades isn’t an unalloyed good. Too much of it has gone to the rich and too much of it has rewarded those who are accelerating a climate crisis. “We aren’t just focused on achieving a high top-line growth number that is unsustainable,” she said. “We are instead aiming for growth that is inclusive and green.”

Yellen’s speech attracted more attention from Republicans than Democrats, perhaps because Republicans better understood what she was trying to do, and what it would mean if she succeeded. Kevin Hassett, who served as chairman of President Donald Trump’s Council of Economic Advisers, responded with a blistering screed in National Review calling Yellen’s speech “one of the most serious policy threats to the future of our economy launched by a treasury secretary.”

Hassett’s piece was, in places, bizarre. He worked himself into a lather over Yellen’s use of the word “modern,” which he said is now “a weapon wielded by cancel culture’s activists.” Odd. But Hassett is fixated on the word because he’s trying to argue that the Biden administration is in thrall to Modern Monetary Theory, a complex and controversial economic framework that holds, among other things, that the government can spend what it wants because it can print money to pay its debts. Yellen doesn’t believe in MMT, and the policies she’s proposing are paid for by the tax increases she’s proposing — which Hassett must know, because he decries those very tax increases later in the piece.

My worry is rather the opposite: that the Biden administration’s supply-side agenda is stuck in the past and not yet imagining the future.


In her speech, Yellen gave three examples of the new supply-side economics, all of them drawn from Biden’s floundering Build Back Better agenda. First, increasing the supply of workers “by making it easier for working-age parents to participate in the labor market.” She pointed to a few policies that fit: expanded prekindergarten, paid leave, subsidies for child care, subsidies for elder care and a bigger earned-income tax credit. Good ideas, but hardly unfamiliar.

Second, making workers more productive. Here, she name-checked investments in community college, in worker training, and in broadband, ports, basic scientific research, rail and renewable energy infrastructure.

Finally, Yellen talked about Biden’s tax agenda, and in particular, the effort to impose a global minimum tax. That would raise U.S. tax revenues, which could finance more investments, and push companies to compete based on production and innovation, rather than by gaming tax systems.

Part of the problem here is Yellen is trying to fit her modern supply-side economics to the existing Build Back Better agenda. Ben Harris, her assistant secretary for economic policy, said as much. “The idea was to be forward-looking,” he told me. “The second part driving it was that there didn’t seem to be a good organizing principle of what Build Back Better was designed to do.”


Harris is right about that, and I think it’s a more damning observation than he intended. Build Back Better is a grab-bag of longstanding Democratic proposals jammed together into a superbill designed to evade the filibuster. Or maybe I should say: That’s what it was. But Build Back Better is, at this point, a dead letter. Senator Joe Manchin’s opposition forced Democrats back to the drawing board. The silver lining is that they now have the opportunity to design something that does have a good organizing principle.

But that will require resolving two fundamental tensions in how Democrats conceive of not just what the economy needs but what the government can do to help, and how to know when what the government is doing has hurt.

Many Democrats still fear the dreaded specter of “industrial policy” — of government picking winners and losers, and wasting money or reputation on bad bets and patronage. That pushes them to extremely general goals: more workers, or more research, or more broadband.

But that fear is now matched by a horror of where markets are leading us — into climate crisis. Here, the Biden administration gets specific. It names the technologies it wants and the kinds of infrastructure we lack: better batteries and more electric car charging stations and cheaper solar panels and next-generation geothermal and nuclear technologies.


Yellen doesn’t see this as a tension. The government’s role is to step in when markets fail, and climate change is a market failure. “There are areas where you can say the private sector doesn’t have sufficient incentives to engage in applied research we need and that would easily pass a cost-benefit test,” she told me. “Environmental economics is one clear example of it.”

But is climate change truly such an exception? Take the pandemic we’re living through now. The private sector doesn’t have the incentive to build and maintain the vaccine manufacturing capacity necessary to inoculate the world against rapidly evolving strains of a pandemic virus. Nor did it have reason to stockpile the masks and tests and assorted other materials we needed.

“What we need is market shaping, not just market fixing,” Mariana Mazzucato, an economist and the author of “Mission Economy,” told me. “The usual mantra for the mainstream is if the state tries to do more than fix market failures, it’ll crowd out business. It assumes business already wants to invest. That’s not true. In most of these bold areas, business often is risk averse. We need to see the crowding-in effect, not just the crowding-out effect.”

Alec Stapp, co-founder of the Institute for Progress, had a formulation here that I liked. “This isn’t about government controlling the means of production,” he told me. “It’s about government controlling the ends of production. Deciding what we are producing toward, what we are building for.”


Beyond the climate provisions, the ideas that brush closest to that vision aren’t in Build Back Better. They’re in the United States Innovation and Competition Act, which Chuck Schumer, the Senate majority leader, shepherded through the Senate with 68 votes, and the COMPETES Act, which is the House’s version of the same bill. The proposals — which still need to be merged, passed again by both chambers and sent to Biden — authorize between $250 billion and $350 billion to reinvigorate American semiconductor manufacturing, rebuild critical supply chains, finance regional innovation hubs across the country, and much more. Too much more, to be honest. The bill ballooned to over 3,000 pages in the House, and is stuffed with errata. (Though I’m glad the House added support for admitting more high-skilled immigrants, which is the single easiest way to build our supply of talent.)

“Part of the thesis of COMPETES is yes, we’ll do cutting-edge science research,” Representative Ro Khanna, a key backer of the bill and the author of the new book “Dignity in a Digital Age,” told me. “But we’re also going to pay attention to production and commercialization. We need to be a nation of producers. And that was one of the biggest obstacles: This sense of, are we diluting pure science? Are we making it too industrial and too commercial?”

These are strange questions for politicians to agonize over. They reflect the long sweep of antigovernment rhetoric in America. Picking winners and losers means picking some losers. Venture capitalists can brag about their failures, but bureaucrats are flayed for them. That the Obama administration funded Solyndra is canon. That the same program threw a lifeline to a struggling electric car manufacturer named Tesla is trivia. Democrats have run scared from accusations of big government for decades, and so they continue to try to show that they will leave the market to its magic, the scientists to their beakers, and confine government to cushioning the blows or looking after the children.

I think we underestimate how different the present is from the past, in this respect. The Biden administration promised a “wartime effort” to fight Covid, but that’s not what we’ve seen. “With the World War II emergency, the response to the problem of not enough capacity to build bombers was that the government decided to build 10 more aircraft plants for every one that existed,” Mark Wilson, the author of “Destructive Creation: American Business and the Winning of World War II,” said. “The same was true for aircraft engines and aluminum and all kinds of other things.”


When I asked Wilson how the Covid mobilization compared, he sounded almost sad. “I haven’t been particularly impressed with the government’s imagination, or the speed and size of the response,” he said. But he also thought it was predictable. “The New Dealers or World War II builders are dead and gone. My lifetime has been a story of a shift toward another sensibility of economics and politics, where that kind of aggressive government building is looked down upon as backward and inefficient. There’s been an ascendance of thinking markets can solve the problem more quickly.”

But if Democrats don’t always admit how much government can do to help, they also don’t always admit how much it can do to hurt. The market would build more housing if local zoning czars would let them. Companies were clamoring to sell more rapid tests earlier, but the F.D.A. wouldn’t let them. All across the country, nuclear and solar and wind projects are being tied up in red tape.

You can go too far with this, and Republicans often do. The frustrating truth of regulation is there’s no one position you can have on it. Good regulations are good, bad regulations are bad. But bad regulations are hard to unwind, and they’re often unseen.

This is a view Yellen shares. “In some cases, regulation can have costs that greatly exceed the benefits,” she told me. “I’m no expert on housing, but in many localities, it seems the restrictions on local zoning make it extremely hard to build affordable housing and keep prices high. There certainly is some effort in the administration to convince states and localities to ease regulation to increase the supply of affordable housing.”

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