Understanding Bidenomics, A Conversation With Brian Deese
Louis de CatheuExternal Member of the Editorial Team at Grand Continent
Understanding Bidenomics, A Conversation With Brian Deese
Louis de CatheuExternal Member of the Editorial Team at Grand Continent
Understanding Bidenomics, A Conversation With Brian Deese
There’s a new policy framework in town: Bidenomics. Just like Reaganomics 40 years ago, this word is meant to imply that we’re witnessing a systemic turn. As one of the key architects of the Biden administration’s economic policy, and a former official in Obama’s White House, what do you consider as the main changes that make Bidenomics?
You are right to start with the juxtaposition of Bidenomics and Reaganomics. Reaganomics was an economic philosophy that came up in the mid 1980s and has played a significant role in American economic discourse for the past 40 years. At its core there was the idea that government engagement in the economy was bad and therefore public investment was wasteful. That concept meant that we, as a country, disinvested in areas like Research and Development (R&D) and infrastructures.
One of the most important changes that Bidenomics represents is an unapologetic acknowledgement of the role that public investment plays in an economic strategy to try to both, correct for market failures and to lay the foundation for more strong and inclusive growth. It does represent a very significant change from the philosophical underpinnings of Reaganomics. Bidenomics has a more rational understanding of the productive and constructive role that the public sector and public investment can play.
Do you mean that previous democratic administrations, Clinton and Obama’ didn’t think public investment was necessary to develop the US economy? Isn’t there a breakthrough with the Biden administration compared to Clinton and Obama’ mandates?
I think the differences can be overstated. In the Obama administration that I served, the core economic goal and accomplishments of something like the Affordable Care Act was based on a philosophy that is very different from Reaganomics. Nevertheless, two things have really changed with Bidenomics. One is the political acknowledgement and acceptance of the ways in which Reaganomics philosophy has failed. Secondly, the world has changed : the acceleration of global inequality, the climate crisis, and in particular, the rise of China economically.
How has this change in economic philosophy become the platform of the Democratic Party?
Over the last decade, there was a lot of soul searching among progressive economic thinkers. We are expanding the box of economic policy objectives and toolkits. This process came to a head during the 2020 Democratic primaries which was an opportunity to look for constructive policy perspectives. There was a wide divergence and a deep and rich universe of ideas that were being propagated and subjected to the political process.
Out of that, over the course of 2019 and 2020 the team that was working for candidate Joe Biden and advising him — people like Ron Klain, Jake Sullivan, myself — worked together to craft what ultimately became in the summer of 2020 the announcement of the Build Back Better platform. The clearest articulation of the Biden administration’s economic philosophy lies in a set of 3 speeches that candidate Biden gave in the summer of 2020. It was a distillation of a lot of very creative and ambitious policy work.
How would you summarize his vision?
Biden’s own economic philosophy is shaped by his life experiences and his 40 years of policymaker experience. It is centered on workers’ lived experiences — it’s not solely about their economic leverage in the marketplace but how that translates in their lives. One of the President’s guiding principles in designing his economic strategy is that it should result in producing some degree of dignity for workers and working families.
That is what is behind the concept that the president refers to as “building an economy from the bottom up in the middle out”. It requires public investment in the core engines of growth, where alone the private sector was not going to sufficiently invest. It requires a more active government role in promoting competition in our economy. And perhaps most importantly, it required supporting clean energy and accelerating solutions to the climate crisis.
What are your historical and theoretical economic influences? Is Bidenomics a return of Keynesianism, with the Government trying to insure a permanent high level of employment by managing demand accordingly?
In the context of thinking about the economic strategy, there is an importance of Keynes since it is connected to the idea of moving the pendulum back from the extreme of a Reaganomics point of view and acknowledging the central role of public investment in overcoming market failures, across business cycles. There’s also an element of Hamiltonian American tradition of active government in market shaping.
Alexander Hamilton’s early economic approach that one can read in his essays and reports on manufacturing laid the groundwork of the idea that having a strong industrial commons in the United States was necessary in order to have important, durable, long term economic success in the global economy. There also had to be a willingness to use tools, both of subsidies and, in his case, of tariffs, in order to create market opportunities.
In the context of a deeply divided country, Lincoln held his second inaugural address in which he made the argument that building industrial capacity was an important part of bringing the country back together. Naturally, in the post civil war era, it led to important investments from land grant colleges to the Transcontinental Railroad. That’s an approach that one can trace through Teddy Roosevelt and Eisenhower as well. Ironically, up until 70 years ago, most of the data points in that historical arc occurred under Republican presidents.
Do you think the US needs a developmental state ?
What America needs to have is an explicit vision and strategy of how to build industrial capacity because private industry on its own isn’t going to mobilize the necessary investments to achieve our country’s core economic and national security interests. With the Biden industrial strategy, we have identified three broad areas where we believe that to be true: infrastructure, innovation and clean energy. Rather than accepting this as the natural fate of the free market, we engage in a strategic investment campaign to help to use public investment to crowd in private capital in those areas. In order to build our innovative capacity, we especially target areas that traditionally would not be defined as industrial policy, such as R&D and deployment. It is in traditional public infrastructure or in incentivizing privately operated infrastructure that lays the foundation for having a stronger industrial base in the US.
As part of this broad strategy, in some areas, the necessary policy tool is for the government to subsidize private capacity in a traditional industrial policy sense. For instance, this could mean investing in basic R&D for microelectronics, while providing grants to companies to build leading edge semiconductor factories.
But this is not principally about having the government pick winners and losers. The major part of the public investment across the three big pieces of legislation — the Infrastructure Investments and Jobs Act, the CHIPS and Science Act and the Inflation Reduction Act — goes into public infrastructure, R&D or long term tax incentives that are available to all companies. While in some specific areas — semiconductors, battery manufacturing — we do use industrial policy tools, it would be a mistake to understand the entire strategy as simply those interventions.
How did you build your industrial policy toolbox ? Could you describe it, especially the classification of instruments ? Were you thinking about the different tools and whether they would be more useful for one sector or another, i.e. semiconductors, hydrogen ? Is it linked to specific market failures ?
This question is of utmost importance, especially because it’s a new field in which policy makers are as of right now relatively inexperienced. We need more investigation into how to improve and build the policy toolkit.
With that said, it’s possible to classify the industrial strategy tool box in different areas.
The first one is focusing on support for R&D and applied research, i.e. deployment incentives for first of a kind technologies. It’s a traditional branch of government action on which we want to work on in order to make it more efficient and effective — especially in times where technology advances at breakneck speed.
The second one is about enabling physical and digital infrastructure improvements in order to increase the productive capacity of our economy. We fund traditional and innovative tools (roads, bridges, ports, airports, digital infrastructures). For example, the us has now put in place a public investment strategy to achieve a 100% broadband deployment. This strategy will be an important interplay between public incentives and private deployment as the broadband infrastructure will be in most cases privately owned and managed but accelerated thanks to public capital, particularly in terms of last mile applications.
The third area is about driving down the cost of deployable clean energy technologies at scale. The principle tool the us is now using in that regard is long term technology neutral tax incentives for companies to build clean energy capacity.
Finally, the fourth area of the toolbox is targeting innovative interventions that are designed to pull forward and scale markets where they face multiple barriers. Hydrogen is an example. the us toolkit now includes not only production tax incentives but also place-based deployment incentives alongside the kind of demand-pull incentives that have traditionally been used in the area of vaccines. The US is supporting the creation of hydrogen hubs where companies, innovators, and academic institutions work together on solving technology and deployment problems. Furthermore, since hydrogen customers are rare, the government secures the market thanks to its demand mechanism, by assuring that it will be a buyer or a guarantee of the offtake.
Inevitably, we need to learn a lot and we need to be rigorous and disciplined about learning as much from failures as we do from successes going forward.
There is some criticism about industrial policy. There is the risk of government capture and “business welfare”. Thomas Piketty warns that this industrial policy might increase inequality as it’s about giving taxpayers’ money to companies. Is that taken into account in your industrial strategy and its financing ?
These are salient potential concerns and we should have significant humility in the risk of either that poorly designed interventions end up unnecessarily subsidizing companies or exacerbating inequality, or both. In designing the US strategy, we tried to focus on a set of ways of trying to mitigate those challenges.
Number one, the government should always be arm’s length. The risk of coziness between the government and key company counter parties goes hand in hand with the risk of corruption. Oftentimes, CEOs might criticize the work of the government. And of course, there are instances worthy of critique when the government is too bureaucratic or too slow. But in the industrial policy context, there can be greater risk when you hear CEOs praising the government’s work. When such a thing happens, that’s the moment in which one ought to start worrying. We had this philosophy during the Obama administration when working on restructuring the auto-industry with General Motors and Chrysler. We always thought that if there ever was a moment where those companies’ management teams found us really easy to work with, we probably were doing something wrong because the objectives shouldn’t be exactly the same. One ought always be concerned about coziness.
Secondly, the government has an obligation to be clear about what the public purpose objectives of the policies are. They should explicitly address the potential for increasing inequality. We’ve done that with regards to the Inflation Reduction Act in building into the tax credits a bias toward investing in parts of the country that were economically distressed and that had been reliant on traditional energy for sources of economic growth. With respect to the industrial strategy interventions, we explicitly designed them to encourage investment in parts of the country that have been left out of previous economic expansions. The government is intervening in an effort to try to achieve a broader public purpose.
2 ½ years into Biden’s mandate, what is your assessment of his administration’s achievements in terms of Economic Policy?
So far, my assessment is that it is defying expectations. We are witnessing extraordinary progress that many thought was impossible or implausible. However, the most consequential impacts are yet to come and the story has yet to be written. I have a lot of humility about the degree to which any of us can sit here and predict the future, but in terms of the progress to date, I would say it looks very good.
At the macro level, the US has the strongest economic recovery of any developed country. Over the past year, inflation has moderated more quickly than in most industrialized economies, while real wages for most working Americans have turned positive. This has come as the U.S. labor market has sustained historically strong gains – with the unemployment below 4% for seventeen consecutive months and labor force participation among working-age Americans is at its highest rate in more than two decades. On top of this, we are at the beginning of a significant investment boom in the United States. Real manufacturing construction investment has doubled since the end of 2021.
All of those trends bode well for the longer term potential of this recovery to break us out of a low growth, low investment, low wage equilibrium and towards a higher growth, higher wage, higher productivity equilibrium. In some sense, this was the core goal of Biden’s agenda.
What will be the main challenges for a second term? Isn’t the American national debt one?
We designed the industrial strategy and the three pieces of legislation with the fiscal challenges of the country in mind. In the case of the Inflation Reduction Act, the investments were more than offset by changes in prescription drug spending and tax changes. If I may say, this is a model for how to think about doing fiscal policy when making strategic investments. It results in more productive capacity in the economy and more deficit reduction across time.
That said, three broader economic challenges for the second term remain. First of all, the administration must effectively implement and scale the pieces of legislation in order to continue achieving these broader economic outcomes.
Secondly, we must find further possibilities for expanding capacity and supply in the US economy. Currently, too much US economic commentary just admires the challenges we face rather than promotes affirmative policies that could address them. There are many policies that traditionally have been bipartisan that should be at the core of how to sustain our economy’s improbable recovery – from expanding the supply of affordable housing to expanding supply of labor by getting more parents and women in the workforce and reforming immigration.
Thirdly, we need to make sure that we take action in the context of a sustainable long term fiscal picture. The most immediate issue on the horizon for policymakers is 2025 because many of the tax provisions that have been put in place by the Trump administration in 2017 expire in 2025. That was by design – as a way to understate the true costs of the tax cuts Trump put in place. Thus, 2025 will be a moment of reckoning on the future of the US tax code. It’s evident that we have long term fiscal challenges. We need tax reforms that raise more revenue and create a more sustainable tax system going forward. Luckily, there are plenty of ways to do so, all while continuing incentives for economic growth. Policywise it’s doable. Politically, the challenge is obvious.
What should be the future of the US tax code ? Are you thinking about increasing the income tax ? What about introducing a wealth tax as Elizabeth Warren and Bernie Sanders have been advocating for?
I have many ideas but we might as well start with two. First, we need a more sustainable corporate tax base in the United States where we are raising levels of corporate tax as a share of our economy that are more consistent with the share that corporations have contributed historically, without eroding our corporate tax base. We should start by ratifying the OECD agreement on a global minimum corporate tax which would help to stem tax evasion globally. We also must set a more realistic corporate tax rate which has been cut too low by the Trump administration.
Then, we also need a new framework in which very high income people in the United States pay a reasonable tax rate. While multiple ideas are being discussed, I have a preference for a hybrid approach, as the Biden administration proposed and labeled a “billionaire minimum tax”. That approach taxes very high income earners in a way that recognizes that most of their income is being generated by unearned assets and wealth.
We will need to do more, but by starting there, otherwise the American people won’t trust us on having a remotely fair tax system.
The Inflation Reduction Act created a lot of uproar in Europe and in other parts of the world, where it was derided as a protectionist move. Do you understand and interpret this reaction?
Having worked with many of my European counterparts, I understand their concern. Over the course of the six months after the Inflation Reduction Act (IRA) was passed, we made significant progress in separating rhetoric from policy in order to really explain what the policy was about and where we could work together to find appropriate solutions going forward.
Towards the end of the Obama administration, in the context of the Paris Agreement negotiations, I worked very closely with many European counterparts on climate change. For decades they have urged us — sometimes criticizing, sometimes pleading — to increase our ambition on clean energy and climate. There has always been a widespread recognition that the American model would need to look different. European leaders were understandably telling us that we first had to put in place a durable framework for climate ambition to be then able to work together on advancing it. That’s what the IRA represents.
The more we separate rhetoric from policy, the more clear it becomes that practical ways to collaborate and work together exist. Biden and Von der Leyen’s statement, the agreements between the United States and Japan, between the US and Canada, and then culminating in June in the G7 crystallize that all of these countries commit to collaborate in order to accelerate climate ambition and work on more resilient, clean energy supply chains. The IRA provides a historically unique basis for new partnerships.
What could be the concrete array of collaboration between Europe and the US?
While several arrays exist, in the immediate term, the opportunity to collaborate on critical minerals and materials is significant. The US has already agreed to try to reach an arrangement by which the EU would be eligible for the subsidies under the Inflation Reduction Act in the space of critical minerals. Beyond the IRA as well, the imperative for the European Union and the United States to work together aggressively and think forward to future vulnerabilities in the critical mineral supply chain is of utmost importance.
Could there be a European-American initiative towards developing green technologies in the global south? Do you agree with Jake Sullivan, who hinted at such an initiative in his discourse at the Council of Foreign Relations?
Definitely. Public investment strategies designed to massively accelerate the cost reductions of deployable clean energy technologies are perhaps the most important and significant undertakings to help the high emitting developing market economies deploy clean energy at scale. It’s something that many have not understood about the IRA and the corresponding actions by the European Green Industrial Plan. That’s why it’s wrong to perceive the IRA from a purely transatlantic competition on subsidies perspective. It will contribute to reducing the cost of deploying clean energy in India, Indonesia, Brazil, South Africa and across the African continent. Indeed, it could reduce the cost of deploying clean energy in the global South by $150 billion. It might be more significant than any other politically feasible intervention over the next decade. It’s not sufficient but it is absolutely necessary. We now need to move forward with how all of the G7 countries can collaborate together and use their domestic investment initiatives to accelerate the adoption of low cost clean energy technology in the global South.
You mentioned Indonesia, whose government wasn’t very happy with the IRA as it perceived it as a threat to the development of its battery and EV sector since these sectors received some Chinese investment and because Indonesia doesn’t have as of today a free trade agreement with the United States.
This question allows me to talk about the implementation of policy. There are two challenges: (1) China and Chinese supply chains; and (2) the structure of the IRA and of the free trade agreement.
On the latter, the US administration has shown an appetite and openness to work with friends and partners in order to build arrangements. In the context of the Indo-Pacific Economic Framework for Prosperity, this administration is in fact working with the Indonesian and Vietnamese governments so as to find a high standards approach enabling greater partnership.
This is a separate issue from the Chinese one towards which there is a shared recognition that part of the overall effort needs to be a diversification since, as of today, the global economy is still dependent on a dominant, single supplier of either inputs or finished products from China. It will be challenging in many ways, but luckily there is a consensus of the G7 members regarding the need to approach it.
Isn’t derisking a risk for the green transition, because China has invested in green technology for more than a decade?
Indeed, there is a risk — but what’s the alternative? Creating more diversification in key sectors of economic and/or national security rationale is of utmost importance. We must do so in ways that are grounded in the realities of the global economy. It’s about derisking and not decoupling. The latter is neither feasible, nor advisable.
If we want to achieve this diversification goal, we and our European counterparts must acknowledge that it will require extraordinarily creative and aggressive economic diplomacy. The IRA and the Green Industrial Plan are necessary steps into that direction, but they aren’t sufficient. We must double down on using tools of economic diplomacy to create constructive supply agreements to encourage development in other economies and jurisdictions. This multi-year project is achievable but we must be clear-eyed about the magnitude of the economic challenge in front of us.
It is going to be very challenging to build the supply of critical minerals necessary in the world, without relying 100% on China. But there is no alternative. We need to diversify.
The European Union is now partially replicating the IRA through a Green Industrial Plan. It has adopted a Chips Act. What is your perception of European industrial policies?
I encourage my European counterparts to pursue this type of strategy. While we should keep a front of mind avoiding debilitating subsidy rates, in the area of clean energy, there is much more opportunity than constraint in having respective investment strategies.
At the same time, I very much recognize and empathize with the fact that the European system at the EU level and at the member state level operates very differently and has particular constraints — fiscal, legal and otherwise. Naturally, European strategy differs much from the American approach. That said, in the context of the US economy, we are learning that the simpler and more automatic the policy supports is, the more private capital is encouraged to crowd in.
Do you see any interest from European progressives toward Bidenomics? To go back where we started, In the 1980’s, Jean Marie Le Pen said “I am the french Reagan”. Do you think in a few years politicians will say “I am the french (or german) Biden”?
In the last 15 years of working in economic policy in the United States, I’ve learned to have humility about making predictions about my own political system. Therefore, I won’t make any projections about French or German internal politics.
The American strategy derives from the basic economic intuition of the need of having durable industrial strategies that build capacity, particularly in the area of clean energy, while reinforcing cross border economic opportunities. This idea is definitely picking up momentum in capitals — in Europe and beyond. Thus, this philosophy is both economically and politically sound, as it brings to life the opportunity to create new coalitions and strange bedfellows. We can implement a new set of economic policies while also bringing to life durable political coalitions. For instance, two of the three pieces of legislation that form the backbone of this industrial strategy were passed with bipartisan support, Republicans and Democrats. Some of the most outspoken proponents of the building back of the US semiconductor capacity are prominent Republicans. For the past two years, we’ve managed to make progress in the United States by building coalitions, different from prior economic coalitions, in order to address the economic and national security realities of the global economy.
Louis de Catheu, Understanding Bidenomics, A Conversation With Brian Deese, Aug 2023,
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