This interview was edited for clarity.
In early June, Professor of Economics John Friedman spoke with Mark Blyth, director of the William R. Rhodes Center for International Economics and Finance at Watson, during a virtual event titled Bidenomics and Beyond. Friedman, who is teaching this summer’s Master of Public Affairs Statistics for Public Policy course, explained how the Biden administration’s fiscal policies will affect interest rates, inflation, stimulus spending, unemployment, and more.
Below is an excerpt from that conversation. View the entire event on the Watson Institute’s YouTube channel.
MB: A recent Financial Times newsletter considers Bidenomics a shift away from business as usual, and changed policy – including high levels of government spending – can fundamentally change the entire economy’s growth trajectory. How do you read Bidenomics?
JF: This is a huge change, though the Democrats have been wanting to do this for a long time. Now, they’ve decided they’re not going to negotiate against themselves. Rather than be bipartisan… they’re putting out what they want and going for it.
MB: There’s been lots of government spending and more called for. Are these initiatives useful investments? Will they lead to higher wages and higher productivity without inflation?
JF: There’s lots of evidence that investments in children have great payoffs, with higher individual outcomes and faster productivity. Over the last 40 years, our economic growth has been increasingly skewed – people at the top of the income distribution have more than tripled their income since 1980, while median income has only grown 15 percent. Bidenomics’ goal is to create more balanced growth.
MB: More balanced growth: how would we do that?
JF: The college premium [the discrepancy between college graduates’ lifetime average earnings and those of high school graduates] is now higher than its been for a long time. However, for too long, we’ve not used all of those college-educated resources, because barriers prevented people from achieving all they could. For instance, children from richer families grow up to invent new things at a much higher rate than children from poorer families, even who share the same high ability in math. If we could raise the innovate rate for children from poorer families, as well as for women and underrepresented minorities, we could more than quadruple U.S. innovation. Tapping into broader set of resources would help us grow faster.
MB: What’s the employment situation, especially for low-wage workers?
JF: During the last 15 months, the economy as a whole recovered quite quickly. There’s been nearly a complete recovery for high wage workers– their employment fell very sharply in March and April 2020 and then recovered quickly by July 2020. The situation is entirely different for low-wage workers; we’re only now starting to see low-wage employment numbers tick up.
Demand for new workers is in different places than before – Amazon warehouses rather than Main Street small businesses. One striking finding from last year is the unbelievable change in unemployment rates in a city’s different neighborhoods: a Chipotle in midtown Manhattan remains closed while another Chipotle on Long Island or Queens may have closed briefly, if at all. Those midtown Manhattan Chipotle employees may still be unemployed. We’re now seeing higher job vacancies, though, which may pull more workers back into the labor force and also raise wages.
MB: Urban and rural recoveries have been very different. Will that divergence shrink or grow?
JF: Those communities experienced the pandemic in very different ways. Increasingly, high-wage, high skilled jobs are located in big urban centers; that trend drives this divide. Although the pandemic enabled remote work, I don’t believe we’ll see hedge funds located in Nebraska versus New York City. In the last 100 years, we’ve grown faster when we gather very smart people together to develop something. The divergence is likely to grow, so making sure growth is balanced geographically is another huge challenge.
MB: Do investments in the American economy do enough to address social mobility and inequality or do we need tax reform?
JF: We have to pay for some of this spending, we can’t borrow for all of it. Of Biden’s proposal to impose higher tax rates on wealthy individuals and corporations, we’re now understanding that this may impose less of a cost than we thought 40 or 50 years ago. Justifying higher tax rates helps redistribute some funds, but broader regulatory changes – eliminating non-compete clauses, strengthening antitrust policies – could ensure more broad-based economic growth.
MB: What if the Senate won’t approve Biden’s proposals? What will happen if the Democrats lose the House or Senate in the midterms?
JF: In the past six months, we’ve spent or have committed to spending enormous amount of money. Even for the current proposals, though, these bills are politically too big to fail; even if they cannot be passed in a bipartisan fashion, there are opportunities for reconciliation this year and next to pass things on a party-line vote. Of course the Biden administration won’t get everything they have proposed, and they know that – in some cases the proposal is out there not to enact a new law but to satisfy the progressive wing. Of course if the GOP takes back control of either the House or Senate in the midterms, we’ll see much less spending going forward. Everybody becomes a fiscal hawk in opposition.