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14 November 2023

Bidenomics is not working

Clintonomics was the last successful US economic policy blueprint - and it worked politically for the US and many other countries that tried it. It worked for Tony Blair and Gordon Brown. The main planks of Clintonomics were macroeconomic stabilisation, global trade liberalisation, welfare reform, and economic deregulation. The latter went too far. But as package, it worked.

Bidenomics is not working politically, not even for Joe Biden. The latest New York Times and Siena College poll of swing states shows Donald Trump beating Biden in five of the six most important swing states. The whole thrust of Bidenomics had been to re-empower the rustbelt economically. But the rustbelt states are trending towards Trump.

Jake Sullivan, the US national security adviser, cited the reversal of the hollowing-out of the US industrial base as the first goal of Bideonomics. This talk resonates loudly in the political echo chambers of the European centre-left. Rachel Reeves, the shadow chancellor, hailed what she called an emergent global consensus in favour of a stronger industrial policy, a more active state, and the “friendshoring” of supply chains away from China. 

Apart from the $550 billion strong infrastructure investment and jobs act, there is not much from the Bidenomics agenda that would work for the Labour Party, or anyone else in Europe.

The hollowing-out of industrial bases has gone on for several decades in the UK in many western countries, with the exception of Germany and Japan. It was the result of trade liberalisation and economic specialisation in-industrial sectors like finance. 

Germany is a cautionary tale of the political consequences of what it takes to support industry against the odds. Germany needed cheaper gas, for which it sold its soul to Vladimir Putin. The result were the Nord Stream gas pipelines in the Baltic Sea, the causes of much political friction even before Putin's invasion of Ukraine. The Russian pipeless and reliance on China were a price Germany paid to secure its industrial competitiveness. They also had to introduce painful supply side reforms to suppress wages. 

The single most important policy of the Biden administration, also admired by Reeves, is the inflation reduction act. It is not about inflation at all but about luring foreign companies into the US with large subsidies. Its priority is on technologies that reduce carbon emissions and to improve healthcare. The estimated total cost is about $300bn in a decade. 

The counterpart to these programmes has been a massive fiscal expansion. The combined fiscal stimulus during the pandemic by the Trump and Biden administrations came to 5 trillion dollars. The latest IMF World Economic Outlook put this year's US deficit at 8.2 percent of economic output, with projections of more than 7 per cent for both 2024 and 2025. 

Clintonomics and Bidenomics constitute exact opposites: macroeconomic consolidation versus deficit spending; off-shoring versus re-shoring; de-regulation vs re-regulation. 

But the most important difference is that Bidenomics cannot be exported. We cannot all successfully lure each others' businesses away from each other with massive subsidies, and expect to be better off. This is, globally, a zero-sum game.

If the UK and other European countries tried to play the same game, they would lose out. Post-Brexit UK would be better off reaping the benefits of its specialisations, rather than emulating someone else's economic models. 

Mercifully, Reeves is not emulating the Biden's administration's irresponsible macroeconomic policies. The US is in a unique position to run large deficits because of the dollar's role as the leading global currency. It is not a cost-free policy though. It will keep inflation and interest rates higher for longer. It works for now. But most importantly, it only works for the US.

Under Clinton, George W. Bush and Barack Obama the US acted as an anchor to the rest of the world by absorbing the savings surpluses of the globalised economy. Bidenomics, by contrast, is a beggar-thy-neighbour policy, very similar to the competitiveness-based economic doctrines of Germany and China. The UK has always been a mini-version of the old US. It has been running current account deficits, and specialised in services, such as finance and high-tech areas, like vaccines and fintech. The UK was not nearly as obsessed with its competitiveness as Germany was. 

The core of Bideonomics is re-industrialisation - the bit that Reeves is keen to emulate. This is easier said than done. Industry requires high-skilled labour, trained in specialised industrial processes. Where do these people come from? 

The Germans know a thing or two about what it takes to ensure a flow of qualified staff for industry. Even they are struggling. Now they are trying to emulate one specific part of Bidenomics at massive cost - the semiconductor subsidies. The chips and science act passed by in Congress last year has been a $280 billion programme to reshore production of semiconductors, artificial intelligence, robotics, and quantum computing. Germany started to subsidise chip makers too: €10 billion went to Intel, and €5 billion to Infineon. Never before has a German government subsidised a single industry by so much in such a short period of time. A better response to a supply chain squeeze would have been to diversify your suppliers, as opposed to spending billions to get them to produce in your country.

Whatever happens in the 2024 US elections, it will not fundamentally alter the course of US economic policy. Much of Bidenomics is a filtered continuation of what Trump had started in 2017: the trade war against China and the industrial re-shoring through tax incentives. The reason these policies are not exportable to other countries is because they are directed against them.

Clintonomics and Bidenomics reflect two contrasting philosophies of economic policy, the Globalist versus the Mercantilist approach: win-win versus win-lose. For a mid-sized, open economy like the UK, Clintonomics worked. Bidenomics is pure poison. 

The column first appeared in the New Statesman.

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