Leave a comment

Welcome to the Post-tweezer Economy

If there’s one thing the White House and its critics seem to agree on, it’s that the Biden administration’s approach to economic policy—which it has branded “Bidenomics”—is a sharp break from how things have been done for the past several decades. “Forty years ago, we chose the wrong path, in my view,” Joe Biden said at an event in July 2021. But what exactly was that wrong path—and what is Biden’s economic team trying to do differently?

In the 1970s, policy makers faced a conundrum. The long postwar boom seemed to have sputtered out. Inflation was rising while unemployment remained high—a combination that mainstream economists had previously thought impossible. Political leaders were under pressure to figure out what was holding back the economy.

A group of economists from the University of Chicago believed they had the answer: regulations. According to these theorists, the ideal economy was one in which money and goods flowed smoothly according to the laws of supply and demand. But regulations on American business introduced friction into the gears of capitalism, stifling economic growth. To get the economy growing again, leaders needed to remove those regulatory obstacles. Call it tweezer economics: Pluck out the inefficiencies clogging up the market, and growth would come roaring back.

But the turbo-growth promised by the Chicago-school intellectuals never materialized. And so, in perhaps the most overlooked element of his economic agenda, Biden has thrown out the tweezers. Instead of trying to generate growth by removing micro-inefficiencies, his policies target growth directly through aggressive spending, creating a high-pressure macroeconomy. It’s an ambitious experiment. If that pressure can force businesses to step up their own competitive game and run more efficiently, Bidenomics could best the old order on its own terms.

The ’70s crisis was very real. Many observers on both the left and right blamed the situation on microeconomic conditions: Workers weren’t productive enough, and businesses weren’t growing enough. In the version of the story that took hold on the right, the culprit was a body of regulations that prevented corporations from running at maximum efficiency. An overreaching federal government had empowered favored groups—labor unions, consumer advocates, environmentalists, and racial and ethnic minorities—to get in the way of free-market capitalism.

For the Chicago intellectuals, the worst offender was antitrust policy. In 1958, the economist George Stigler wrote that businesses that reached a dominant position should be presumed to have done so because of their superior efficiency, because competition “sifts out the more efficient enterprise.” The tough antitrust enforcement of the ’50s and ’60s interfered with this process, he argued, prosecuting the very firms that contributed the most to economic growth. Corporations should be left alone to merge and grow large, lest government kill the geese that laid the golden eggs.

The economists Michael Jensen and William H. Meckling extended tweezer economics into a new realm. In 1976, they famously theorized that “agency costs”—the conflict between executives, who managed a company, and shareholders, who owned it—were holding back corporate efficiency. Executives, they argued, would rather go golfing than work to generate value for shareholders. The solution was to put shareholders in control. Executives should be paid in stocks, rather than flat salaries, to align their incentives. Combine that idea with looser antitrust law and there would be an active competition for control of corporations, especially via hostile takeovers. This, Jensen later wrote, would generate “large benefits for shareholders and for the economy as a whole.”

Another key drag on the economy, according to observers across the political spectrum, was the growing rebelliousness of the American worker. Armen Alchian and Harold Demsetz argued that workers needed bosses to protect themselves from their own free-riding inclinations. For businesses to function efficiently, bosses must be able to intensively monitor workers for shirking, and to fire them unilaterally if they were caught doing so. An obvious implication was that labor regulations—above all, laws protecting the rights of labor unions—had to be curtailed.

These ideas, and others like them, were behind many of America’s key economic policy changes since the ’70s. Stigler’s theory of the efficient monopolist eventually conquered both the judiciary and the executive branch; after Ronald Reagan took office, enforcement dwindled and corporate mergers soared. (This was the focus of Biden’s “wrong path” comments in 2021.) In corporate law, Jensen and Meckling’s doctrine of shareholder primacy is now virtually sacrosanct. Finally, the authority of employers over workers has expanded dramatically.

In short, the Chicago school got virtually everything it asked for. Big firms grew bigger, corporations prioritized their stock prices above all else, and private-sector unions were all but wiped out. But 40 years of tweezing out the inefficiencies allegedly holding back the economy did not revive the growth rates of the pre-stagflation era. The U.S. economy grew an average of 4 percent a year from 1948 to 1973. During the crisis years, from 1974 to 1979, it grew more slowly, on average only 3 percent a year. Then came the tweezers, and growth didn’t budge. From 1980 to 2007, it plodded along at the same 3 percent rate of the crisis years, before falling off a cliff after 2007—all the way down to 1.6 percent from 2008 to 2020.

Instead of prompting a return to growth, the policy revolution has made itself felt in other ways. The death of antitrust enforcement, far from unleashing dynamism and investment, may have held them back. The shareholder revolution helped hollow out the American industrial base and transfer massive wealth to financial engineers. And although the labor movement was defanged, the hoped-for productivity explosion never happened.

The post-tweezer era is just a few years old, but it has already scored some early successes. Most important, growth recovered remarkably quickly from the pandemic recession.The economy returned not only to pre-pandemic trends but to pre–Great Financial Crisis trends as well, suggesting that the prolonged pain of the post-financial-crisis recession was avoidable.

Biden’s first big legislative accomplishment was the $1.9 trillion American Rescue Plan Act of 2021, which unleashed a fiscal fire hose onto the U.S. economy. That law was followed by more legislation that went beyond merely increasing spending. The 2022 Inflation Reduction Act steered investment specifically toward fighting climate change. The law eschews the tweezer of, say, carbon taxes, which leave decisions to the wisdom of the market, in favor of direct federal interventions. For example, while previous policies relied nearly exclusively on the tax code to support investments in zero-carbon energy projects, the IRA contains provisions allowing nonprofit utilities that invest in zero-carbon power generation to obtain federal grants.

The IRA, along with the bipartisan CHIPS and Science Act of 2022, also aims to reduce regional inequalities by directing investments to left-behind rural and deindustrialized areas. That is a decisive break from the Chicago-school faith in letting capital flow to wherever it can generate the highest returns. Projects also get extra credit if they have labor peace agreements, prompting some employers to proactively reach labor contracts with unions in order to be the winning bidder on federally backed projects. These measures have already aided unions in wind-turbine and electric-bus manufacturing. Finally, in a departure from Jensen and Meckling’s doctrine of shareholder primacy, the IRA includes a provision to discourage companies from funneling cash to shareholders in the form of stock buybacks, steering them to reinvest in their businesses and employees instead. In other words, the government is investing with the sorts of “strings attached” that the ’70s generation blamed for inefficiency.

Some critics have questioned the wisdom of trying to satisfy too many constituencies with stimulus and infrastructure policy. They point out that the sometimes conflicting goals of unions, environmentalists, and the companies receiving federal funds may gum up and needlessly complicate policy implementation. In other words, by pursuing too many goals, the administration may meet none of them satisfactorily. That’s a real risk—but the Biden administration seems to be betting that some additional inefficiency is a cost worth paying if it builds new constituencies in support of pro-growth policy. If the administration can bring benefits to unions, environmentalists, and rural voters, it might assemble a lasting political coalition behind its vision of green growth.

The inverse is also true, of course. The post-tweezer revolution could all very easily fall apart. By many metrics, the U.S. economy is in spectacular shape—but voters continue to say they’re miserable. If Bidenomics isn’t popular, it’s unlikely to last. Meanwhile, the administration’s efforts to break up corporate monopolies are running into a buzzsaw of hostile judges steeped in Chicago-school doctrines. The Federal Reserve, in its effort to fight inflation, is stymieing new investment in housing, green energy, and more, by making borrowing more expensive.

Yet the new model holds great promise. For nearly half a century, the government gave corporate America the hands-off policies it preferred, hoping the wealth would trickle down. Now the government is letting strong overall growth set the foundations for more efficient businesses. Corporations are being forced to use capacity more effectively to keep up with demand—and, thanks to a historically tight labor market, to vigorously compete to attract workers. If macro policy can not only generate overall growth but also compel firms to be more efficient, we might discover that the trade-off between economic strength and social welfare was never really a trade-off at all.

Source link

Leave a Reply