1/ A thread. Underlying the differences between neoliberalism and Bidenomics that I wrote about this week wsj.com/articles/how-b… is a different weighting applied to macroeconomic and microeconomic policy...
2/ If you accept the neoliberal default that macro can’t help when all capital and labor are employed, then microeconomic policy must be designed to use those inputs as efficiently as possible. But Bidenomics assumes we're almost always below potential …
and thus it’s okay to pursue microeconomically “inefficient” channels to raise demand (universal transfers, UI bonuses, high minimum wages, etc) because we are still going to end up with higher employment and incomes...
4/ To paraphrase Tobin, it’s okay to scatter Harberger triangles around if there’s an Okun gap to fill. (btw, when I attribute this to Bidenomics, it's a shortcut - I don't necessarily mean team Biden itself)
5/ Consider climate policy. We need an additional $2.5 trillion in capex over 10 years, almost all from the private sector, to reach net zero, pursuing the most efficient path possible. Some progressives instead propose $10 trillion of public spending to accomplish same thing.
6/ It's inefficient to spend 4X as much $ to achieve same result, but if we have >$1 trillion of slack in the economy, that’s a feature, not a bug. It echoes Keynes’ suggestion we bury money in bottles and pay people to dig them up, except we also get a low-carbon economy.
7/ But if the permaslack view is wrong and supply constraints start to bind in a few years thanks to stimulus and vaccinations, then microeconomic inefficiencies become costly...
8/ Work disincentives, equity overlays, and subordination of optimal economic policy (carbon price) to the politically doable (green subsidies) lead to bottlenecks, crowding out, inflation, etc. In summary, when the Okun Gap is filled, those Harberger triangles start to matter.
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