As I watched Jerome Powell, the chair of the Federal Reserve, facing some tough questions before Congress last week, my mind went back to October, 2008, when the Maestro himself, Alan Greenspan, the former Fed chair, went up to Capitol Hill and conceded that he had “found a flaw” in the economic model he had carried in his head for roughly half a century, and which he had used to justify his support for financial deregulation and other conservative policies, such as tax cuts. Greenspan’s admission, which came shortly after Congress reluctantly agreed to bail out Wall Street following the collapse of Bear Stearns and Lehman Brothers, represented an epitaph for a certain way of thinking about the economy. Far less clear at the time was what sort of model would replace the one that Greenspan, during his almost two decades at the Fed, had done a great deal to promote.
Almost thirteen years later, the answer to that question is still up for grabs. Recently, in composing a preface to a new edition of “How Markets Fail: The Rise and Fall of Free Market Economics,” a book I wrote about the great financial crisis, I was struck by how many of the issues raised back then remain pressing now—from insuring a durable recovery after a deep recession to confronting glaring inequities, to balancing urgent spending priorities with long-term concerns about the budget deficit, to dealing with right-wing populism and an increasingly rogue Republican Party. In some policy areas, things have changed a lot during the past decade, but, in others, the legacy of the past hangs heavily over the present. In words attributed to Antonio Gramsci, an Italian Marxist whom Mussolini imprisoned on trumped-up charges during the nineteen-twenties: “The old is dying, and the new cannot be born.”
One welcome change, exemplified by last week’s initiation of monthly cash payments to tens of millions of American families with children, is an eagerness on the part of elected Democrats to challenge old shibboleths about spending and incentives. A decade ago, as the economy was struggling to recover from the financial crisis, some senior officials in the Obama Administration embraced the idea of trimming the growth of government spending and reducing the budget deficit, even as they resisted Republican calls for bigger cutbacks. Today, the Biden Administration and its allies on Capitol Hill are pushing for more than four trillion dollars in new spending over the coming decade. This is on top of the $1.9 trillion that was contained in the American Rescue Plan, which Congress passed in March. Almost all of the proposed spending is targeted at serious and long-standing market failures, such as climate change, an inadequate social safety net, and a shortfall of investment in America’s biggest asset: its young people.
In another significant development, Powell’s Fed, unlike some of its predecessors—Greenspan’s included—has adopted a fairly relaxed attitude to the prospect of higher federal outlays and debt. The new approach to spending extends beyond budgetary arithmetic. A decade ago, many Democrats still paid lip service, at least, to the idea that giving more financial help to poor families would undermine incentives to work and save. This framework had a long history. In the nineties, President Bill Clinton promised to “end welfare as we have come to know it,” and then followed through on this pledge by imposing work requirements and time limits on welfare recipients, as well as shifting responsibility to the states, which led to a sharp fall in the number of people receiving assistance. Misplaced arguments about incentives also played a role in the American failure to build out a broader social safety net, including a “child allowance” system of cash payments, which many other advanced countries adopted to reduce child poverty.
One important factor in overcoming this history was research by economists—including Janet Currie, of Princeton, James Heckman, of the University of Chicago, and Hilary Hoynes, of the University of California, Berkeley—which showed that, over the long term, government interventions targeted at early childhood generate high returns for the individuals concerned and for society at large. The prioritization of real-world results over a priori theorizing marked an important advance in economics, and it is no coincidence that the Biden economic team is heavily populated by empiricists. But, to make the monthly child tax-credit payments a reality, it also took years of political effort, two upset Democratic Senate victories in Georgia, and a President willing to prioritize a costly anti-poverty initiative. For that last one, Biden deserves special credit.
Even now, though, the future of the revamped Child Tax Credit program isn’t assured. The cash payments authorized in the American Rescue Plan will run out at the end of the year. What happens beyond that depends on the outcome of two big spending proposals: a bipartisan physical-infrastructure package for six hundred billion dollars of new spending, and a $3.5 trillion social-infrastructure plan, which Democratic leaders are aiming to pass without G.O.P. support, through reconciliation, and pay for by raising taxes on corporations and the wealthy. In all likelihood, the social-infrastructure bill will provide some longer-term funding for the new monthly payments. Whether it will cover their full cost—about $1.6 trillion over ten years, according to the Washington-based Tax Foundation—isn’t clear yet.
Similar questions hang over many other costly Democratic priorities, including reducing greenhouse-gas emissions to net zero by 2050, guaranteeing child care and paid family and medical leave to all Americans, expanding Medicare, beefing up home care for the elderly, and making community college free. Even with $3.5 trillion to play with, fitting in all these programs isn’t easy. Last week, Jim Tankersley, of the Times, reported that Democratic leaders are planning to “advance as many new spending programs and tax cuts as possible, but also allow some of them to expire in a few years to conform to the limited tax and spending appetites of moderate senators. . . . The hope—and gamble—is that the programs will prove so popular that a future Congress will keep them alive.”
This political maneuvering is taking place in a financial environment that, in some ways, evokes the aftermath of the great financial crisis. In 2009 and 2010, Americans were furious as bailed-out banks rebounded with remarkable alacrity, repaid their government loans, and started paying big bonuses to their star traders. Today, the good times are once again rolling—at least for Wall Street. Just last week, JPMorgan Chase, Goldman Sachs, and Morgan Stanley between them announced more than twenty billion dollars in profits during the three months from April to June. “The pandemic is kind of in the rearview, hopefully,” Jamie Dimon, JPMorgan’s chief executive, said, after the release of his firm’s bumper results.
What Dimon didn’t say was that, just as in 2009 and 2010, the Wall Street bonanza owes a great deal to the largesse of the Fed, which, in contemporary American capitalism, plays the role of a kind of fire brigade, putting out conflagrations with its fire hose of money. In the months after Lehman Brothers collapsed, in 2008, the Fed pumped about $1.25 trillion into the financial system through a series of emergency lending programs and asset purchases. Since the start of the coronavirus pandemic, the central bank has outdone itself, expanding its balance sheet by more than four trillion dollars, largely through purchases of Treasury bonds and mortgage securities—a policy known as quantitative easing. While the avowed (and worthy) aims of quantitative easing are to bring down interest rates and boost interest-sensitive spending, it also acts as rocket fuel for the stock market. Even after Monday’s drop in the market, the S&P 500 index has risen by more than thirty per cent since February, 2020. Because the richest ten per cent of households own more than eighty per cent of all stocks, they have benefitted greatly. And the ultra-rich have benefitted most of all: Jeff Bezos’s Amazon stock, for example, has appreciated by more than eighty billion dollars.
To be sure, some of the rise in the stock prices of Amazon and other tech giants over the past seventeen months has been driven by economic changes that are likely to endure, particularly the shift to remote work. Still, the Fed’s response to the pandemic has undoubtedly accentuated wealth inequality, which was already extreme. In recent decades, it almost seems as if the best thing that can happen to the rich is for something to drive the economy into a ditch and prompt the Fed to turn on its money spigot. Such is the upside-down logic of a world in which the ownership of financial and industrial capital is so lopsided.
Having rejected an annualwealth tax of the sort proposed by Elizabeth Warren and Bernie Sanders, Biden isn’t proposing anything radical enough to drastically alter the huge wealth disparities that have built up over generations. Still, according to the Tax Foundation, the corporate and individual tax hikes contained in the White House’srecent budget proposalwould reduce the after-tax income of the top one per cent of households by roughly five per cent and increase the after-tax income of the bottom twenty per cent by a similar proportion. If these changes were kept in place for a prolonged period, they could help restore some semblance of equity and balance to the American economy. Already, though, some congressional Democrats—including Senator Joe Manchin, of West Virginia—have balked at elements of the Biden tax plan, meaning that there is a good deal of uncertainty about what sort of spending bill the Party will be able to pass through reconciliation.
With votes on advancing the two big spending measures expected before Congress goes into its summer recess, and new doubts emerging about the prospects for agreement on the infrastructure package, the next couple of weeks could be key. From a macro-political perspective, the justification for the ambitious Biden agenda is that, after four years of Donald Trump, and a second Presidential election in which Trump gained more than forty-six per cent of the vote, it is imperative to demonstrate to the wider public that the game isn’t rigged for the élites, and that the federal government can deliver tangible benefits to working Americans. Only by accomplishing this objective will it be possible to build a new social bargain on which democracy (and non-predatory capitalism) can rest more securely. One may quibble with elements of this strategy. But, after a week in which it was revealed that thechairman of the Joint Chiefs of Staff fearedthat Trump was planning to execute a coup earlier this year, the thought of its failing outright is almost too dire to contemplate. What’s at stake is much more than dollars and cents.