Biden's break from neoliberalism to invest in the middle class could create 'the mother of all economic booms' - an economic commentator explains why

·6 min read
Joe Biden
President Joe Biden delivers remarks about vaccinations, in the State Dining Room of the White House, Tuesday, April 6, 2021, in Washington. Evan Vucci/AP

On this week's episode of "Pitchfork Economics," Nick Hanauer and David Goldstein talk with Anusar Farooqui, who writes probing analytic essays about economic policy on Substack under the pseudonym Policy Tensor.

Farooqui researches and thinks deeply about some of the most complex systems shaping our world today, and he's not afraid to take big swings on bold predictions. One such prediction in a recent essay, "The Making of the Mother of All Economic Booms," caught Hanauer's attention

In the piece, Hanauer says, Farooqui "argues that the Biden administration is making a really profound break with the last 45 years of neoliberalism, and that that break is going to create probably the biggest economic boom in collective memory, probably since the '60s."

If Farooqui is right, the consequences of that boom would be world-changing. Hanauer explained that it would "absolutely create the kind of broad-based growth and benefits that should both transform the economy and also potentially transform politics, which is an even more important achievement."

The pandemic's economic impact

Farooqui says that it's now common knowledge that we've seen a slowdown in growth and an increase in income inequality in the decades since the broad global adoption of trickle-down economics as the dominant economic theory.

"What I think has happened, which is the main thesis in that essay," he explained, "is that elites in the United States today, and technocrats in particular, have come to the conclusion that the only way to stop the political instability which was revealed in 2016 is to restore broad-based growth," in the form of huge public investments in infrastructure, in support programs, and in policies that will broadly improve the lives of the American people.

"Public investment has been declining, and is really low by historical standards," Farooqui said. So now, the Biden administration needs to show positive economic progress in a way that can be empirically proven. In other words, the Biden administration wants you to be able to see big improvements to the American middle class with your own eyes after the next infrastructure bills have passed - and before next year's midterm elections.

Biden's approach to the economy

The fact that President Biden, who was largely very mainstream throughout his career in the Senate, happens to be the messenger for this economic theory, Farooqui said, is "very pleasantly shocking, I must confess."

So what has happened to the economy to bring Biden around to this idea of investing deeply in everyday Americans? Farooqui believes that the last 40 years of neoliberal constraints on the economy, in the form of deregulation and tax cuts, have basically hamstrung global economic growth by taking power away from the sectors of the economy that actually produces things.

"All of the great industrial firms are responsible for the mid-century productivity growth" of the 20th century, he said. That productivity was "responsible for the growth of the American working class and the achievement of middle class standards that was the envy of the world."

But when neoliberalism took root, "the private equity firms went in and really created a market for corporate control." With their newly unfettered financial might, the equity firms forced industrial companies to "disgorge their services to finance and to essentially move away from an investment in long-term productivity growth and towards the short-term model where you borrow money from the bond market and you do some [stock] buybacks or something."

"Where bankers used to wait on the industrial firms' CEOs," Farooqui explained, "it was now the CEOs who were reporting to the financial analysts - and this relationship of power between Wall Street and industry is crucial to why dynamism vanished from the manufacturing sector."

Rather than creating products and services that appealed to customers, the sole purpose of every large company became a devotion to increasing shareholder value, creating an "hourglass economy" in which "income growth stalls for the bulk of the population" while wealthy shareholders and CEOs increase their fortunes exponentially.

"So the sheer number of jobs disappear for high school graduates, and this is devastating for working class families," Farooqui continued. "These depths of despair, beginning at the turn of the century, are a huge story, because those depths of despair are the single best predictor of the swing towards Trump in 2016 - it's really the pain of working class America."

Investing in the middle class

The primary argument against these big investments in the American middle class is that it might set off a "macroeconomic instability of some kind," which has been "baked into people's minds from the '70s," when inflation skyrocketed, Farooqui says.

But when you accept that "inflation is globalized" and not directly tied to the Federal Reserves' decision to print more money, as Modern Monetary Theory argued, "you get to a place where you can be freed from the old rigidities that prevent a decisive action on the main challenges of the day."

Does that mean that the tumultuous boom-and-bust economic cycle that we've seen over the past 40 years, in which most millennials have lived through three major economic crises, is the result of neoliberalism's economic stagnation?

Or as Goldstein asked Farooqui, "are you implying we could have had an economic boom all along over the past 45 years? None of the dislocation, none of the inequality, none of the slow growth was necessary or unavoidable, had we not had this swing towards neoliberalism?"

"Absolutely," Farooqui said. "I'm absolutely certain of that. For example, the Fed could have always run the economy really hot. That could have meant that low-skilled workers' wages, middle-skilled workers' wages, people with high school degrees - their wages would have grown at the same rate as college graduates' salaries, and professional class salaries, which have exploded."

Many pundits have predicted that we're on the verge of a once-in-a-lifetime economic boom. But Farooqui's claims take that idea one step further: He argues that we could potentially see a once-in-a-century realignment that wipes out the old thinking and sets the table for a new understanding of how the global economy works.

While many futurists love to make wild predictions of what the world will be like in a decade or two, the change the Farooqui is foretelling is right around the corner. We won't have to wait very long to discover if he's right or not.

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