On this episode, we’re sharing one of our favorite conversations from another podcast produced by the Watson Institute: ‘The Rhodes Center Podcast,’ hosted by political economist Mark Blyth. Mark recently talked with economist and Brown professor John Friedman about 'Bidenomics': what it is, what it isn't, and what it can tell us about our precarious economic recovery.

You can watch the video of John and Mark's full conversation here.

You can subscribe to the Rhodes Center Podcast here.

You can learn more about Watson’s other podcasts here.

[MUSIC PLAYING] SARAH BALBWIN: From the Watson Institute at Brown University, this is Trending Globally. I'm Sarah Baldwin. If you follow the news, you've probably learned a new word in the last few months.

SPEAKER 1: So, Bidenomics

SPEAKER 2: Bidenomics.

SPEAKER 3: Bidenomics.

SPEAKER 4: Bidenomics is really two things.

SPEAKER 5: Everyone's talking about it, I don't know, it's funny, no one expected there to be a Bidenomics.

SARAH BALBWIN: You've probably also come to realize that it doesn't quite have a set definition. So how should we think of Bidenomics? What is it? And just as important, what is it not? To answer these questions, this week we're actually sharing an episode from another show produced by the Watson Institute, the Rhodes Center Podcast.

It's hosted by political economist and Rhodes Center Director Mark Blyt. Mark had economist and Brown professor John Friedman on the show to talk about the recent twists and turns of our economy, as a pandemic continues to loosen its grip on our lives without quite letting go. They cover a bunch of topics, income inequality, inflation, the role of the Fed and how politics affects economic policy, to name a few. But they started with that pesky new word, Bidenomics, here's Mark.

MARK BLYT: Welcome John, lovely to see you again.

JOHN FRIEDMAN: Thanks, so much for having me on again Mark, it's always great to be with you.

MARK BLYT: So let's get started with this one. I sent you a piece from the Financial Times, they have a newsletter that's done by a chap called Martin Sandbu, and he was talking about this thing called Bidenomics. And his basic thing here is he thinks this is quite a shift, this isn't business as usual, this isn't even Democrats spend a little bit more than Republicans. This is a different way of thinking about the economy.

And the argument seems to be, at least in Sandbu's reading of it, and other people's reading of it, is that there's a new way of thinking about the economy now, that we can more fundamentally change, if you will, the growth trajectory of the whole economy. How much productivity we can produce et cetera, can actually be augmented by high levels of government spending.

So first of all, what do you think of the argument and do you think that's what we're actually doing? How do you read Bidenomics?

JOHN FRIEDMAN: So I think it's completely right that this is a huge change in what Democrats are proposing to do, and what the government kind of actually might do. Although I think this is less of a change in fundamentally how we think about the economy, because my sense is that Democrats have been basically wanting to do these types of things for a long time.

You go back to the Obama administration, many of the proposals that seem to have a good chance of getting enacted now or have gotten enacted as part of the COVID relief plans, were things that people talked about as being on their wish list. It's just because the politics of the moment were very different, they never really happened. And even, they weren't really part of the front line proposals.

And so I think what's basically happened is the Democrats have decided that they're not going to negotiate against themselves anymore. And rather than spending a lot of time trying to be bipartisan about it, which was, I think, largely the strategic aim both of the first two years of the Obama administration by choice, and then, of the latter six years of the Obama administration by necessity. They're just putting out what they want to do and going for it.

MARK BLYT: But do you think-- let's assume you can get it through Congress. So we fund the relief bill and then there's the American families bill, is it useful to think that this type of spending at this type of scale really can change, if you will, the plot of outcomes that the economy could follow, that this will lead to higher productivity and higher wages without generating inflation? Is that reasonable from your point of view?

JOHN FRIEDMAN: So I think that a lot of the spending is going in areas, both in terms of physical infrastructure and in terms of social investments, that do seem to have a lot of evidence that there's a great deal of payoff. And so, whether that's upgrading, again, the physical infrastructure or the digital infrastructure, whether that's investing in kids in terms of having a higher standard of living, higher quality education, getting people to for instance be more likely to go to college.

I think those are all things that there's really a ton of evidence behind, that they do in fact lead to both higher outcomes at the individual level, and also faster productivity growth from a social level. I also think though that there has been an increasing focus on combating income inequality. And so some of the spending is also just trying to redistribute a little bit, so that we try to have both, less disparities in the moment, but also produce more balanced economic growth going forward.

And I think a lot of-- to the extent that it's not just about investment, I think a lot of the focus is trying to reverse that trend, not in that they're trying to limit economic growth, but create growth that's more balanced.

MARK BLYT: So from an economist perspective then, what would be the argument that says that, if we make society more equal, that's going to lead to more balanced growth. What do those words actually mean if you unpack them?

JOHN FRIEDMAN: So I think there are a couple of different aspects to it. The first thing is that for too long we've not utilized all of the resources that we could, in terms of the people, in this country. Because there are barriers preventing people from various backgrounds from achieving all that they could achieve. Let me give you one example. If you ask who grows up to innovate in our country, key driver of economic growth, it will not surprise you that these are mostly kids, if you look back to how they were doing when they were in school, they were pretty good at math.

What I think is more surprising and more troubling is that even among the children who did really well in math, say when they were in elementary school, children from white families, children from rich families and children who are boys are much more likely to grow up to innovate than kids from any of those other backgrounds. And if you were able to raise the patenting rate for just kids who did really well on the math test, for all those other groups to equal that of rich white men or boys coming from rich white families, you would more than quadruple the innovation rate in America.

And so, that's just one example of how having more broad based growth and really tapping into a broader set of resources that we have is not just about normatively trying to redistribute resources in society, it's about helping us to grow faster.

Now, that's an imaginary world, but clearly raising wages is part of this. So this is a very important component to both growth and also doing something about inequality. But the worry that we see in the press all the time now is the I word, inflation. So is it possible, in your view, to grow wages, to increase real wages, without hitting an inflationary limit? Are we in a slightly different world or a bigger, more different world than we thought?

JOHN FRIEDMAN: So yeah. I think inflation is a key thing to think about at this moment, but it's worthwhile breaking it into a couple of parts. So the first thing is that we need to separate inflationary worries in the long-term from the type of inflationary spikes maybe that we might see over the next four to six months. So over the next four to six months, everybody is going to want to go on vacation.

So you know what, going on vacation is going to be quite a bit more expensive, because we can't build new hotels, we can't put together more live shows, we can't dramatically increase the number of places you can sit and eat on the beach. But I think that's something that's really passing. This is really driven by two facts, one, everybody's been cooped up and not able to get out and enjoy life in a social way for the past 15 months, because of the pandemic. And so there's tremendous pent up demand to do that.

And second, people haven't really had a lot to spend money on over the last 15 months, the savings rate in this country has been higher than it's been for four decades. And so there's all that demand, there's a lot of money to spend, and so, I do expect to see a big rush of spending on this stuff over the summer. But that's going to pass, this is not going to last more than six or nine months. And then, more or less we'll get back to where we are.

MARK BLYT: Just backing up what you said before we went on, there's a Cleveland Fed study that just came out looking at the components of inflation exactly as you're saying. And if you exclude lumber, which just went through a huge boom and bust, it was actually exactly what you're talking about, the outliers and the trend, it was airline tickets, computer peripherals, auto parts and used trucks.

That's what was driving the spike, take them out and it's still pretty much flat.

JOHN FRIEDMAN: Yeah. You see more generally coming out of the pandemic, there are supply chain disruptions. It takes a long time if you want to order a computer right now. You want to order some furniture, there are huge delays there. But these things are issues that will work themselves out over the next year. I don't see those as being long-term threats to the economy.

MARK BLYT: But let me go back on this one a little bit, right. So I told you this story before and I want to bring it in so everyone can get a piece of this one. Because I'm sure that many people are sitting there thinking the same thing. So when we talk about inflation, we talk about PCI, personal consumption expenditures, we talk about [? CORE, ?] all this sort of stuff. Very technical, what's in the basket, what's not?

But for the experience of a great many people, they tell me all the time, every time I say inflation's not going up they go, tell me another story. Housing is going, rents are going up, medical expenses have been going through the roof for a decade, college costs more and more. So the large ticket items that people actually have to buy are going up, how do you explain to them that inflation really isn't going up, when the felt experience of rising prices is part of many people's lives?

JOHN FRIEDMAN: So part of what's going on is that, as we talked about before, wages of very highly educated people, who are at the top of the income distribution have been going up very quickly. And so a lot of the services that people buy that depend on the labor of those very highly educated people, that's been going up quite a bit. So you think about health care, that's one thing, doctors are making a lot more than they used to. With health care also it's not so much that prices go up, it's that we just spend more and more. We do more stuff over the years.

Now, it's a separate issue, how much of that stuff is worthwhile? How much of it should we be cutting back on? But we do lots more scans than we used to, and it's not necessarily that the scan itself is more expensive, it's just that many more people are ordering scans. Another aspect of this is that when you talk about goods like housing, housing is very expensive in certain metro areas. But that has nothing to do with the demand in the economy, that's almost entirely driven by the fact that these cities make it incredibly difficult to build.

And so for instance, if you compare, there's are some cities like Chicago, not that you can't find an expensive place to rent in Chicago, but rents there have remained much more reasonable than rents say in Manhattan or the San Francisco Bay Area. Why is that? It's because Chicago has been willing to build more houses, more tall buildings as more people have wanted to move into the area. Whereas New York and San Francisco have not.

And so in some ways this is largely a problem of our own making, that's not about overall economic growth or stimulus, it's just about the fact that if nobody lets you build a new building in San Francisco and lots more people want to live there, then we're going to bid up the prices of those houses.

MARK BLYT: Another way that I think about it is, again, going back to the inequality we've been talking about earlier and we could also mention the so-called key-shaped recovery, right? Where those with assets have done really, really well in the pandemic, them and those dependent on the wages have done less so. If you build up 20 to 30 years of asset portfolios that are a concentrated at the top, then you can turn housing into an asset class.

And that's essentially what we've seen, and I try to explain to people that lots and lots of people with money and asset, bidding up the price of assets may have deleterious effects, but it's not an inflation. An inflation is a rise in the general level of all prices, which seems to be rather different. But you can understand why people get torn between the two, between their personal experience, and then, what we are trying to say about the economy overall.

Let's talk about employment and the recovery coming out of COVID. So what do you think is happening there in terms of, are we going to really boom back, will we see a very large increase in wages or is it more partly depending on where you are and kind of the distribution of life chances?

JOHN FRIEDMAN: So what we've seen in the last 15 months is that the economy as a whole recovered really quite quickly. People were back spending something that was a little bit below where they were before by last fall. And as a result of the recent stimulus payments, we've actually been running at higher spending levels than we were before the pandemic started for the last three, four months now.

That's translated into almost a complete recovery for high wage workers. And people talk about a V-shaped recession that comes down very quickly, and then, goes back up very quickly. That's exactly what we saw for high wage workers. The situation looks entirely different for low wage workers though, who experienced a much deeper fall at the beginning of the recession. Now there was then pretty fast recovery until that same point at the beginning of the summer, but we've basically then flatlined from then for the last really 10 months.

If anything, almost getting a little bit worse as you came out of the holiday season. And so I think the disparity between the fact that spending is just going gangbusters, but still there aren't low wage jobs coming back. I think it's been a real-- it's not really something we've seen before, and it's been a real contrast. Especially what you see you look around there are For Hire signs everywhere, businesses everywhere are hiring.

The number of new jobs being posted at this point, especially for low wage workers, is something like 60% higher than it was in normal times. And so we're really suffering a huge crunch on the labor front. And I think it's hard to believe that something is going on other than these workers being kind of quite reticent to come back to work. Now maybe that's because they are continuing to be scared of the health consequences, right?

Many of these are in-person service businesses, where as restaurants reopen, as clinics reopen, you're going to be interacting very closely with a lot of people. So health concerns could be one thing, but as vaccination rates have grown we haven't really seen those employment rates come back up nearly as quickly. So another possibility is that the very large unemployment insurance payments are, at this point, still keeping people out of the labor force. There's been some estimates suggesting that that's part of what's going on.

And then a final possibility is that as the labor force returns, the demand for new workers is just in a little bit of a different place from where they started. And so, partly what's going to have to happen is that we're going to need say more people working in Amazon warehouses, fewer people working in mainstream businesses. And it's just going to take a little bit of time for the economy to readjust.

One really striking finding that we saw in the data last year is that there were unbelievable differences in employment rates. Even looking between neighborhoods in the same city. Even among people who had the same job previously. So you take a chain restaurant like Chipotle, if you were in midtown Manhattan, that Chipotle was closed and hasn't opened in 12 months.

If it was in an outer borough in New York, it might have actually never closed, and it reopened pretty quickly. So that worker at Chipotle in the outer Boroughs, maybe they were out of work for a little bit, but they came back very quickly, employment rates returned quite quickly. And that worker who got laid off from Chipotle in midtown Manhattan, right at the beginning of the pandemic, it's not just that original Chipotle hasn't come back, that worker is still out of work, here we are 12 months later.

And so those kind of really sharp disparities suggest that the standard, very rapid reallocation that we like to think about happening, that's just not occurring right now. And the again, whether that's because it's being held back because of unemployment insurance, because of health concerns, because people just aren't looking for jobs in the new places, I think that's not really clear in the data.

But what is clear is that we're really seeing a huge crunch on the low-wage employment market. Now I think one silver lining of that is that's going to push up wages at the bottom of the income distribution, which is a good thing. And I think the question that's going to arise as we go forward is, can we sustain that once people get back into the labor force more generally?

MARK BLYT: So the tone into the framework in which all of this is happening, if you talk to people in financial markets, they're getting a little bit weirded out, not just about the possibility of inflation, but the fact that the Fed has changed its role in their opinion. So the great line from the nineteen-fifties from a Fed chairman called McChesney Martin was, "My job is to take away the punch bowl when the party gets going."

And it seems to be the case now that the current Fed chairman is working with Yellen at Treasury to make sure that the party keeps going. How do you think about this change in the sort of the policy framework that we're using? Is this significant or is it not?

You go back to the early 90s and the vise chairman of the Fed Alan Blinder, who's now a professor at Princeton. He was basically thrown out of his job for stating in a speech that the law requires the Fed to think both about inflation and unemployment. Right? It was so taboo in that era and I think that has completely changed at this point. Now, why has it changed? I think partly it's about the experience coming out of the Great Recession.

Where we had incredibly sluggish recoveries across the developed world, and people had many, many worries about inflation and still those worries never materialized, and we never even hit our target. If you have a 2% inflation target, we've been below that for the last 10 or 15 years or something like that. And so I think what people realized is that, first of all, from a real effects perspective, having that hard of a line on inflation was really having strong effects in terms of holding back economic growth, especially in a way that maybe increased the unequal growth.

But second, I think people are realizing that we can maybe push a little bit more, or you're trying to push a little bit more on keeping interest rates low. And fine, maybe inflation will get up to 3%, 3.5% but they seem confident that it's not really going to get beyond that. And certainly taking a step back, if you look at the broad data, there's no evidence that having inflation, say at 4% versus 2% or 1%, there's no evidence that that's harmful.

MARK BLYT: Another way is in thinking about debt sustainability. So for a long period of time the standard answer was, if you get too much debt you'll hurt growth and eventually you'll go insolvent, and go bankrupt. And now very mainstream and very respectable people in your profession like Olivier Blanchard and others have started to say, well, hang on a minute, let's look at this empirically.

And it seems to be the case that we're rethinking the whole notion of fiscal sustainability. Is that ultimately courting a problem? If you basically say to politicians, you know what, you don't really have to worry about inflation as much as we thought. And honestly, you don't really have to worry about debt as much as we thought either. Has that got, this is going to end badly written on it at some point?

JOHN FRIEDMAN: So it's clear that you can't borrow an enormous sum of money infinitely, right? But I think there are two things. The first thing is I think that there's the point that Olivier Blanchard and others have made, is that when interest rates are very low, which they have been for-- real interest rates have been declining for the last 25 years, and are now often below 1% for what governments can borrow. The carrying cost of, say like 100% debt to GDP ratio, it's 1% of GDP.

Like that's just not that big of a deal. And so I think people are recalibrating what they think of as sustainable levels of debt. Now, the second thing, of course again, just because you can get to 100 or in some cases 200 at some point. I don't know what the limit is, but at some point you're going to reach a point where things start to become unsustainable. I think there was a worry in the past that the gap between sustainability and unsustainability would be like a flip of a switch.

It's not that some things would kind of gradually start to go wrong, but that like one day you'd wake up and overnight borrowing costs had quadrupled, and nobody wanted to lend anymore and suddenly you just flip into a regime where no one wanted to lend money. And of course, if you're worried that that's going to happen, not only do you not want to get to that point, you don't want to get anywhere close to that point.

On the other hand, if you think that, well fine, interest rates may start to go up, we may start to crowd out a little bit of investment in the private sector, but things are going to be much more gradual. And because interest rates are so low, kind of by definition, investment in the private sector can't be that profitable to begin with. I think you're a lot more willing to push it out towards the boundaries.

And you say, well, does going to 100% debt to GDP ratio, is that going to start to make things go wrong? Well, I don't know, but probably if they do start to go wrong, they're not going to go wrong sufficiently fast that we won't be able to realize that, and put a brake on it. And so, I think again, people are just much, much more accepting, not only of high debt levels but of being more aggressive in pushing towards the limits of where we can go.

I think this was a Keynes quote he said, "When the facts change, so do my opinions. What do you do sir?" And so, I think we have to be empirical about this stuff and there's no orthodoxy about it. Right? If it turns out that having inflation at 3% as opposed to 2% is not that big of a deal, then, we should reevaluate these trade-offs.

MARK BLYTH: That's a great place to end it. Always a pleasure John, great conversation.

JOHN FRIEDMAN: Thank you, Mark.

MARK BLYTH: Bye bye.

JOHN FRIEDMAN: Bye now.

SARAH BALDWIN: This episode was produced by Dan Richards. Our theme music is by Henry Bloomfield. Additional music by the Blue Dot Sessions. I'm Sarah Baldwin. If you liked this episode, subscribe to the Rhodes Center Podcast wherever you listen. In it Mark Blyt and his guests unpack some of the world's most pressing economic issues in ways that are clear, concise, and amazingly jargon free. We'll put a link in the show notes. We'll be back soon with another episode of Trending Globally. Thanks.