In just a few years, the economic policy conversation in the United States has been fundamentally transformed. Neoliberalism, the Washington Consensus, market fundamentalism - whatever you call it - has been replaced by something quite different.
In macroeconomic policy, the fear of debts and inflation paved the way for tendencies towards excessive stimulation of the economy and relativizing risks to price stability. When it comes to taxation, the tacit agreement of a global race to the bottom is outdated - the establishment of a global minimum rate for multinational corporations is in vogue. Industrial policies, which were not even allowed to be mentioned in polite society until recently, are making a big comeback.
And that's not all. While deregulation and flexibility were once buzzwords in labor market policies, now there is only talk of good jobs, easing the imbalance in bargaining power, and empowering workers and unions. Big tech and platform companies were once seen as a source of innovation and consumer benefits; now they are monopolies that need to be regulated and probably broken up into smaller companies. Market politics dealt with the global division of labor and longed for efficiency; now all dedicated to resilience and securing domestic supply chains.
Some of those changes are certainly a necessary adjustment to the shock of covid-19. They are also perhaps inevitable reversals of a long period of rising inequality, economic uncertainty, and concentrated market power in the US economy. But credit also rightly goes to President Joe Biden, who brought a fresh economic team to Washington and supported new ideas, despite criticism from the old staff.
The model of market fundamentalism that has shaped economic policies in the US and most of Western Europe since the Reagan-Thatcher revolution in the 1980s had an intellectual pedigree. It developed in academic halls, while it was popularized by public intellectuals such as Milton Friedman.
This time, academic economists are largely lagging behind. Although free market enthusiasm has grown among economists, there are no programmatic ideas in the style of Keynesianism or Friedmanian conservatism. Politicians who expect complete solutions from economists instead of temporary patches must be sorely disappointed.
However, it is clear that the change in sentiment is having an impact on economists. For example, at the annual meeting of central bankers in Jackson Hole, Wyoming in late August, a select group of academic economists from MIT, Harvard, Northwestern and the University of Chicago presented analysis which shows why a short-term spike in inflation can be a good thing. When wages do not fall as easily as they rise, structural change can be facilitated by higher wages in parts of the economy that experience growth in demand. Although this may push general inflation over the threshold set by the central bank, the solution may still be desirable, in the sense that it allows for the harmonization of relative incomes in different sectors.
Similarly, David Ottor of MIT it says Recently, the labor shortage in the US, which many employers complain about - vacancies are not being filled, because there are not enough workers willing to accept the jobs on offer - is actually a good thing. The problem, he argues, is that the American economy produces too many "bad" jobs with low pay and few benefits. If workers have become more demanding and picky during the pandemic, employers should adapt. Finally, balance and productivity require not just more jobs, but more quality jobs.
The virtue of academic economists is that they clarify the contingent nature of current policy priorities in the US. Thus, the Jackson Hole study, for example, shows that temporary inflation is an acceptable solution only under certain conditions: sectoral adjustment is triggered by changes in consumer demand, wages cannot fall, and monetary stimulus does not hinder structural changes by excessively increasing profitability in sectors that should are reduced. In developing countries, by contrast, wages are very flexible in informal employment, while the expansion of modern sectors is hindered by supply-side constraints. Under such conditions, monetary or fiscal stimulus is less likely to be effective.
And yet, there is a risk that other countries will misunderstand the changes in the US and that their politicians will blindly copy American solutions, ignoring the specifics of their own situation. Especially developing countries, which do not have enough fiscal space and have to borrow in foreign currency, should be careful not to rely excessively on macroeconomic stimulus.
The real problem in many developing countries is that the traditional model of export-oriented industrialization has lost ground pogon. Creating good, productive jobs requires a different development model, with an emphasis on services, the domestic market and the expansion of the middle class. Market or government failures that block the expansion of more productive employment opportunities in services can only be addressed by structural solutions.
A review of economic policy in the corridors of the Washington economic bureaucracy is indeed welcome. But the lesson that other countries should learn from this is that economics, as a social science, does not offer the same recommendations for different circumstances. While changing circumstances and political priorities in the US are creating new solutions, other countries need to consider their own specific problems and obstacles.
(Project Syndicate; Peščanik.net; translation: M. Jovanović)
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