Did prioritizing demand over supply constraints improve economic outcomes?
Core argument: Furman argues the $1.9 trillion American Rescue Plan far exceeded need, since U.S. GDP was 3 percent below pre-pandemic forecasts in the fourth quarter of 2020 and roughly $650 billion in stimulus would have filled the hole.
Furman summarizes his position as follows:Biden’s economic philosophy emphasized demand over supply. It considered concerns over budget constraints overstated and placed its faith in predistribution as a way to change the trajectory of the macroeconomy. Ultimately, this post-neoliberal ideology failed to seriously reckon with budget constraints and “crowding out”—when a surge in public-sector spending causes the private sector to invest less. Inflation, unemployment, interest rates, and government debt were all higher in 2024 than 2019. From 2019 to 2023, inflation-adjusted household income fell, and the poverty rate rose. Despite signing into law a $500 billion infrastructure bill, skyrocketing costs of construction have left the United States building less than it was before the law’s passage. Overall domestic industrial production remains stagnant. Compared with other developed countries, the United States saw a post-pandemic recovery that was about average in terms of real GDP growth versus pre-pandemic forecasts. Ultimately, Biden’s post-neoliberal ideology did not take tradeoffs seriously enough. Truly building back better will require not giving in to the post-neoliberal delusion.On the American Rescue Plan, he notes:
The recovery began in mid-2020 before Biden entered the office and much, if any, of the American Rescue Plan funds had worked their way through the economy. Real GDP growth was a strong 5.6 percent in the first quarter of 2021. The unemployment rate was around six percent and falling. The $1.5 trillion of excess savings that Americans had accumulated was waiting to be unleashed perhaps obviating the macroeconomic need for yet another large stimulus bill.[Nevertheless,] the Biden administration moved aggressively, proposing a $1.9 trillion American Rescue Plan. With U.S. GDP three percent below pre-pandemic forecasts as of the fourth quarter of 2020, an additional $650 billion in stimulus—about a third as much—would have been sufficient to fill the hole in the economy. Around $900 billion was intended to support households. But by December 2020, monthly real compensation per capita was only about two percent below its pre-pandemic trend, and the gap was closing rapidly. Closing this gap would have cost less than $100 billion. Despite state and local revenue having fully recovered to pre-COVID levels by the end of 2020, state and local governments nevertheless received around $500 billion more in the stimulus package.
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On inflation, he concludes:
Real GDP could not have gone up much more than it did given the constraints on the capacity of the economy. The excess took the form of higher prices. Beginning in 2021, the country experienced the most sustained inflation since the early 1980s—rising by about 20 percent over four years. The overheating of the economy coincided with a second round of budget deficit increases—resulting from front-loaded spending tied to the infrastructure act, the CHIPS and Science Act, and climate bills, plus executive actions by Biden, such as student loan relief. Biden’s defenders argued that the causes were external. However, by late 2022, oil prices had fallen to where they were before Russia’s invasion of Ukraine, but inflation remained elevated. Real consumer spending on durable goods in the United States rose nearly 30 percent, with no equivalent bump in countries that did not provide continued stimulus checks. Global supply chains were mostly able to accommodate the U.S. increase in spending, in part through large increases in imports. U.S. ports processed 19 percent more cargo by volume in 2021. These were not supply dislocations but a huge demand shock stemming in part from the Biden administration’s decision to provide another round of stimulus checks. Factors such as consumer tastes and supply chains determined where price increased, but they did not drive the overall average price increase. Had it not been for the large infusion of cash and the Federal Reserve’s delayed response to the emergence of inflation, higher goods prices would have led to cutbacks in services and lower price growth without much of an increase in overall inflation. Instead, inflation migrated from goods to services, where it remains elevated to this day.On the effect of Biden’s policy on wages, Furman argues:
Biden hoped that a hot economy would benefit workers, especially those with low incomes. Unfortunately, the theory proved unsuccessful. Heating the economy did give workers more leverage to demand higher nominal wages, but it also gave businesses more leverage to raise prices, undercutting the gains of many ordinary Americans. Inflation-adjusted wages have barely increased above pre-pandemic levels, and the entire increase in real wages took place in 2020; on net, real wages have fallen since January 2021. From 2020 to 2024, average real wage growth for workers in every income group was slower than it was from 2014 to 2019. Rapid real wage growth, especially for low-income workers, began in 2014, when the unemployment rate was around six percent, but diminished dramatically when the unemployment rate fell below four percent in 2022. That makes it hard to argue that Biden’s policies contributed much to real wage growth.On infrastructure, he reports:
Infrastructure suffered a worse fate than real wages. More than half the funds in the Bipartisan Infrastructure Law went to highway and bridge projects, prompting a spike in highway spending that rose 36 percent from mid-2019 to mid-2024. But the costs associated with construction, increased even more, leaving real infrastructure spending down 17 percent over the same period. In fact, the amount of federal investment in highways during every year of the Biden administration was lower than in any year from 2003 through 2020. Biden’s putative building boom was in reality a building bust.On manufacturing and crowding out, Furman claims:
The manufacturing revival has also run up against the problem of crowding out. The CHIPS Act appears to be succeeding in shifting advanced chip production to the United States. But these same policies, coupled with other fiscally expansionary policies, have driven up the prices of materials and equipment, wages for construction and factory workers, interest rates for entrepreneurs hoping to borrow, and the value of the dollar, all of which have made it harder for nonsubsidized manufacturing to prosper. Policymakers should not fool themselves. Industrial policy has not led to any net job creation. Factory construction has more than doubled in the last five years. But other indicators, such as investment in industrial equipment, have not risen, suggesting that manufacturing may continue to stagnate.
