The economy is on a tear but how well it addresses the great challenges of our generation—inequality and competition with China—will depend importantly on the success of President Joe Biden’s industrial policies and how much inflation the Federal Reserve tolerates.
Consumers have lots of extra cash, and home sales are red hot. Airlines are booking middle seats, hotel occupancies are up, Disneyland and concert venues are reopening, and crowds are forming in Times Square.
The economy is expected to grow at its best pace since the Reagan presidency, but the global economy’s ability to keep up with America’s appetite is severely stressed. Supplies of the building blocks of what we buy—computer chips and rubber for cars, plastics for hospital gowns to packaging, agricultural commodities, lumber and more—are stressed, and the material prices paid by businesses are surging.
consumer products companies like Kimberly-Clark
and Procter & Gambl
e, automakers and others are raising prices. Inflation could well reach 3% by this summer.
Federal Reserve Chairman Jerome Powell predicts surging prices are temporary, but he has not offered convincing evidence to support this assertion. And the Fed is not accommodating Biden’s stimulus spending as freely as it did his predecessor’s deficits.
During 2020, the Fed printed enough money to purchase more than $3 trillion in Treasury, housing, state and corporate securities, whereas this year the pace is less than half as much. Consequently, the interest rate on bellwether 10-year Treasuries
is up significantly.
The pandemic and new collaborative technologies unleashed a workplace revolution but now cities are in for tough post-COVID adjustments—fewer commuters, more middle- and upper-class housing replacing commercial real estate, and less business-for-lunch venues and brick-and-mortar retailing.
To accommodate health risks in the workplace and political pressures to raise wages, we can expect even more automation on factory floors, in warehouses and at retail checkout. And a paradox of structural unemployment for those without sophisticated technology, medical, business or other professional skills alongside a booming economy.
The structurally unemployed need quick training and relocation assistance, but Biden’s community college proposals are aimed more at high school graduates. A displaced restaurant worker in New York City would be better served with access to a Department of Labor approved, private-sector-funded apprenticeship.
Only accelerated growth in technology industries can drive demand for more jobs and higher wages in law, medicine and more moderately paying service occupations. And in turn, reverse declining opportunities for lower-skilled workers making sandwiches, cleaning homes, staffing customer service lines and in warehouses.
We are talking 3% growth or more—a terribly illusive target.
Time to manage the yield curve
Powell is willing to endure prolonged inflation above 2% to find it, but he must better manage the 10-year Treasury rate, which powerfully affects mortgage rates, car loans and the capital available in equity markets for business investment and high-tech startups.
Managing the 10-year Treasury rate is as important as the Fed’s official monetary policy target—the federal funds rate. The time has arrived to announce a formal policy for yield curve management.
Biden recognizes Americans must up their game. Subsidies lavished on high tech in China, Korea and elsewhere translate into lost jobs in America making computer chips and 5G infrastructure but also jobs in law, business, medicine, restaurants, fitness centers, and dry cleaners.
Fewer jobs and downward pressure on wages for the lower half isn’t just about import competition, automation and monopoly power in labor markets the left rails about. It’s also about the Republican Party’s failure to recognize that industrial policy is not a moral failure but a response to the China challenge for global leadership. And the Democratic Party’s penchant to see every spending imperative as an opportunity to drive its agenda on climate change, sexism, racism and classism.
Without meeting China head on and without artificial constraints, neither the purity of free markets nor creating of the Peaceable Kingdom are possible.
Biden’s infrastructure plan would spend too little on roads and bridges and too much on the Green New Deal and other progressive causes but does get one thing right. Its support for R&D, manufacturing, internet access and semiconductors is spot on.
Only by continuing leadership in technology across the board—not in jobs count but in patents—can America have a big-enough pie to accomplish a just society.
Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.