Adam Posen Has a Warning on the Danger of Bidenomics

idea that you know, monetary policy. It's always challenging. It's always challenging when you have things like COVID, the war, etc. But we're also in a period in which fiscal policies, macro policies, trade policy, industrial policy, these things that we talk about on Odd Lots all the time, like how do central bankers deal with them?

very aggressive domestic investment plans right to climate semiconductors. It intersects with trade in a very big way, tensions with China, an attempt to move supply chains, particularly around advanced tech or clean tech on US shores, And so how that's going to work. How should economists think about it, How should regulators think about it? How should central bankers think about it? Is sort of like a huge question that hangs.

the administration has made. So let's have a conversation with Adam. Adam, thank you so much for coming on outlaws.

are potentially four big things. First, so much of this has been cloaked as rescuing the industrial sector and not so subtly buying the votes of angry white industrial workers who feel left behind in Wisconsin and Pennsylvania and West Virginia. And I understand that's need. I'm not sure it's going to work. I'd like to think there's other ways to

win an election. But the good news on that is several of the people who advocate this policy have now admitted, you know, even if it goes well, we're talking affecting a few towns several hundred thousand people, which matters, but

isn't going to make a thing. The second thing, which I'm much more concerned about, is whenever you create a government program that's about giving money to individual companies and you combine it with this trade policy, that's very much as the President keeps saying American made, American bills, American exports, buy America, buy America. That you end up creating what we used to complain about a lot in Japan and

Korea and China and Europe, these national champions. So you know, it may be that Intel or Micron, just to pick two. In the names that are out there are great companies with great tech, but you put them on the government payroll for billions of dollars, and you say that we want to make sure there's an American presence in this industry, American leadership in this industry, and they can end up taking you to town. And frankly, if Trump gets back in,

the corruption opportunities are horrible. Third thing is internationally, I'm hopeful that the Biden administration is realizing that they went a little too far in their anti trade rhetoric. We can debate how much trade has been fair or unfair and how much that matters, but in the context of what you said and the lean in, and again, I know you've talken about this with other people. You know, the US has been basically withdrawing from globalization for twenty

plus years. Everyone thinks, oh, globalization did us in, but we've actually since NAFTA, we've done almost no trade deals. We've cut way back on immigration, we take a lower amount of investment from abroad than we used to. And there's all kinds of blowback from this. There's foreign policy blowback, there's development blowback in the South, the global South, there's technology races, and so this sends up with these things like these subsidies races that we're having with Europe and

de facto with China. Now the final point. Sorry to go on so long, but the biggest thing is where I think the bid An administration is right is the US had to do something constructive on climate. I mean, it's an emergency. We weren't doing anything, or at least the government wasn't, and so they were trying to figure out a way. They couldn't do a carbon tax, they couldn't do a lot of things. This package of investments, as they call it, was supposed to get us some

climate progress, and it is. My worry is that it's going to end up being a repeat of what happened with COVID vaccines, which is the developing world, and even the relatively high income developing world, places like Brazil or Turkey are not going to get the access to this technology, or when we have good green technology, it's going to become a political football. Are you loyal to China? Are you loyal to the US and for saving the planet.

To put it bluntly, the most important thing is when we get good new green tech, it gets used and adopted as widely as possible. And this is where I've been particularly trying to engage with the Biding Administration's extent they of interest is to say, if you're doing this whole bundle of industrial policy and trade policy and nationalist policy, how do we make sure that the technology does get down that it's not like with COVID vaccines that you hoard it off for yourself and you make it a

political loyalty test. Do you buy from us or do you buy from them?

just didn't spend enough. So invest in universities, invest in R and D tax credits, invest in skilled immigration, invest in infrastructure of power grid and fiber and EV charging stations,

if that's how you want to go. The second thing is, and to be fair, the Bidministration and the Congress have done a little bit on this is to make it so that even if you're trying to get production at home for say a good reason like we need to have some semiconducting capacity in the US, manufacturing capacity in the US, you still leave it open that there's room

for competition from abroad. So you're trying to avoid the whole corruption and international backlash, or at least reduce those aspects by saying, Okay, if it turns out it's a German or a Korean or a Japanese company that has the good tech, you know, we're not going to prevent or discourage our people from buying it or discourage them from selling it. Here and again there are some loopholes like this whole leasing deal they made for electric vehicles

in the bill, that they could make. There's more things they can do. So anyway, to me, those two things, that a lot more of the public investment goes to general good and rather than specific company capacity, and that you make sure that there is competition, including international competition, for the industrial policy goals you have.

areas of the Midwest. Should is the point of accelerating domestic manufacturing to maybe placate you know, several hundred thousand white men in the Midwest by reinvigorating that but there is another school of thought and that I find interesting, which is that no, actually manufacturing is really important. Complexity is important, ability to produce advanced goods is an important

aspect of being a rich country. Is that false? Do we just have this sort of like false nostalgia for the benefits of having a manufacturing economy?

of it. That you know, there was this sort of golden era when a person without a high school diploma could make a really good living in a plant, and that plant would employ lots of people in one place and they could depend on the job and so on, and this created a community and all this and the point of calling it nostalgia is and meaning that's a bad thing is threefold. First, that really only applied to

a small number of people. I mean, even at its height, you know, manufacturing share of employment in the US, I don't think ever got much about thirty percent, and that was in the immediate aftermath of World War Two, and obviously there were people, women, people of color who didn't have equal opportunity in that space as other people. But anyway, so there's still a lot of people. And even now it's thirteen percent of employment, it's still a lot of people.

But just to say it was never, ever, ever going to be the engine for everybody. The second thing is to say that there is a bias in that that under plays just how adaptable a lot of Americans, white, black, female, male, everybody has been, you know, moving around the country. Immigrants who come here, but people who moved in the great migrations from the South to the North for manufacturing and then out of the North and back into the South and to the west, but also communities that came back up.

We think about, you know, Charlotte, North Carolina is a financial center, Durham is a technology center. It's this whole area in North Carolina that, you know, several decades ago was tobacco. And Pittsburgh everybody always cites it because it's amazing. Pittsburgh is now a health center and many other things, and it's not steel anymore, and so there is this sort of bias towards not understanding the change is part

of economic life and it's actually good. But the third thing, which is where I guess it gets a little more controversial, is for some people, and I think this was much more true of Trump's and some of the people who supported him, there's this sort of idea that macho tasks of large hot metal or big heavy things you can drop on your foot is just somehow more.

it is just weird. And so sorry, Joe. Your big point, which is the more important one, is can we survive if we don't have a vital manufacturing sector.

of stuff at the higher end with fewer people. And so in a sense we can debate that question you raise, but it's also it's just not even a realistic question. So like, look at the semiconductors. Yes, it's true we did not take into account, and I say we, I mean everybody did not take into a count just how dependent certain kinds of semiconductors were on This obviously exposed

very specific set of plants in Taiwan. But the fact is there's a huge number of components of semiconductors, including the ones made by TSMC and the ones made by Samsung and Heinex and others, that are dependent on American technology. They're dependent on American design technology, they're dependent on American intellectual property, they're dependent on American components, and it's the

low end stuff the US doesn't make anymore. So in theory it's a good question, but in practice it's not one we even have to fax.

because of some perverse government incentives. That happened organically. I mean you would have things where our multinational company, the CFO, on an earnings call or whatever, would say and we're going to cut costs fifteen percent next year, and somebody working in a plant four levels down says, oh my god, I got a memo. I got a cut cost twenty percent. And they figure out, oh, if I ordered this from Korea or this from Mexico, I can get it cheaper.

And over time that works and you realize, oh, there's a whole group of companies down there in Mexico. Maybe I can do some more from them. It just developed organically. And during COVID with Peterson's who tried to look more into this, and we discovered it really was that way that I'm not going to name them, but we would talk to major global manufacturing companies and say, we just want to do research, we just want to understand what you're supplyshing is. And the response we kept getting was

we don't really know. It just sort of grew up and we're just now figuring out where it all is. So anyway, that doesn't mean it's still valid. I don't want to do a double negative. It's still valid for the government to say, you know, in certain critical industries, the interests of the society, the economy are not being taken account by all these decentralized decisions. But it's worth

remembering that even if that's right. By creating resilience, what you're essentially doing is you're saying, I'm taking out a costly insurance policy, I'm building redundant capacity. I'm buying something that's more geopolitically safe but more expensive because remember, there was a price reason why it was done the way it was done. There was a reason stuff was being produced in China not Mexico. So it may be worth it, and this is the thing I tried to argue in

the past. It may be worth it to do that from a societal perspective, but we shouldn't pretend that it's going to be short term beneficial for productivity or profits, because what you're doing is you're buying insurance. You're spending money against a bad outcome. The other point, just echoing something we were talking about a minute ago, is the international side. As an economist, and when you talk about resilience,

the issue is diversification. It's not necessarily reshoring domestic I mean, it gets a little confused, because if you decide China's a strategic rival or worse, then maybe you don't want China, but or you may want to distinguish friends for friends shoring.

But ultimately what you care about is diversification. And so if you have one plant in the US and it's hit by a local flood, or it's taken over by a terrorist group within the US, or it's corrupt, the same way a corrupt company appears in a different country and it produces substandard products, and you haven't diversified from that, you're still in trouble. So these are the cautions I would put in.

behind the set of policies. So there were people with legitimate concerns about China, and particularly from the point of view supply chain resilience, but also the national security. There are people with overhyped, crazy concerns about China, fearing Chinese students,

I think to an excessive degree. For example, there are people who were very concerned about resilience coming out of COVID and the way you said, there are people who were very concerned about the left behind post industrial communities. There were people who were you know, you go down the list. There were so many reasons for this policy, and so you know, so for someone like me to be arguing against it, this is in some way sort

of silly because it's overdetermined. Right, There's a thousand reasons why they're doing this. When we talk about China specifically, I have a new article out in Foreign Affairs, and I argue we should be thinking to put a bumperstick on it more in terms of suction than sanctions. That she and the Communist Party have messed up their economy by being interventionists in people's faces, not just politically in

a way they hadn't been for decades. That I mean, obviously the Communist Party, the leaders ruled China, but there was a what I called a no politics, no problem deal that you see in a lot of autocratic societies.

But now zero COVID comes along and everybody has to study she thought and all these other things, and the average Chinese person is spoot. Anyway, the upshot of this is, I think we need to worry less about containing China in the economic sphere, except for some very specific national security technologies. You can make a case I think it's more that let she put up barriers, put up interventions in his society, Let us and the other allies attract

capital and people an investment out of China. This worked against the Soviet Union, this worked against the ashes in the thirties. I'm not saying there's gonna be wholesale exodus of millions of people, but you want that positive sort

of suction pressure on she and the regime. And then what usually happens is, as we saw in the Soviet case, and as we saw in various other places, the leader in Latin America, the leader puts up more and more restrictions because he gets worried about the money and the people leaving, and he worries about the attractiveness of the alternative. And the more he and his party put up restrictions, the more the people want to leave. And I think that's the kind of dynamic we should be leaning into.

If we can use that phrase.

And are they boosting? You don't really hear as much about that now. The story is much more while they're really doing a great job investing in domestic battery makers and domestic car makers, and they have this airline aviation company Comac that's gonna might eat into Boeing and Airbus, and it's much less concerned about pure like they're competing us because they're too cheap, and more like, actually they're really getting good at certain high tech things. Is there

concern that's legitimate? Like maybe less about the currency level, but is there concern that we should have about Look, they're investing in their domestic champions, maybe we need to respond to them.

both Democrat and republican, Democratic and republican had listened to US and others and done something about the yuan undervaluation. But to be fair, the Chinese government leadership basically around the time of the financial crisis two thousand and eight nine stopped undervalue in the yuon. They at least stopped intervening actively to push down the yuon very much. So that is, in essense it mattered, but it was Competing

on cheap is different than competing on quality. You're absolutely right, and so now the issue is competing on quality, and there I think it's less about fair unfair than what are the risks you know, throughout history, business history, modern business history, including competition within the US, you know, intellectual property, theft, reverse engineering, getting around people's trademarks has always been a factor, and the Chinese corporate sector probably certainly was worse on

this in some ways. But I think you put your finger on it that it's more a question of investment. Now we in the US have been the envy of the world in commercial terms for decades because our investment system, for all our problems, for all what happened in two thousand and eight, in the run up to two thousand and eight, we do a better job of financing tech than anybody else does. And the Chinese have leapfrogged over the Japanese and the Europeans to become our closest rivals

in doing this. But we've also seen huge disaster for them in which they've admitted to in their semiconductor industry that they spend billions in US terms, billions to develop this high end semiconductor industry for the last several years, even before the most recent conflict, and they had ended up admitting it didn't pay off at all. And they've jailed a bunch of people for corruption, and we don't know how much what was actual corruption versus just punishing

poor performance. You know, So just because they throw money and stuff doesn't mean they're there. So long wind the answer to say, you're right, they've shifted from competing cheap on trying to devalue their currency to competing strategically in some industries. I still think our allocation of capital is better and higher return than there. But there are definitely

things we should be doing to invest. Going back to somethings Tracy and I were saying a minute ago, invest in training, invest in skilled workers, invest in infrastructure, invest in protection of intellectual property, invest in standards that can help us get ahead.

As I mentioned, the US has actually been withdrawing from globalization rather than grappling with it for many years, arguably twenty or twenty five years, and whether or not the US has been withdrawing the existence of China, and even if they behaved well, the existence of one point four billion people who are capable of participating in the world economy matters. It's not going to disappear, and they have a right to make a living, even if their leadership

doesn't have a right to do everything they do. So the danger, which we've seen come true over the last few years, particularly under Trump, but somewhat continued under Biden, is to scapegoat foreigners, scapegoat China, not even clear for what, given how well the US economy has been doing in a lot of ways, but to just create this sense of we were cheated, we were played for a sucker, we should be the bully. To some degree, That's what

Trump and Lightheiser and others have said. And I worried that some of the things the Biden administration said and did in the first couple of years, particularly things Besser tie the US Trade Representative is done on the trade front, is like that. It echoes. I mean, they independently tie and others believe this, but you know, neoliberal trade liberalization destroyed our economy. Again, it's not clear that economy has

been destroyed. Some people have suffered, but that happens all the time, and that has to do with the fact that in our society we have a very miserly welfare state, and if our society would give a better welfare state, fewer people would suffer. But anyway, I am hoping that between the some feeling for reality and the foreign policy realities as well as the economic realities, and just some willingness to be open to basic fairness and evidence, the

Biden administration is going to stop going direction. I don't expect them to tomorrow lift the tariffs and sudden they become free traders. We saw this in Secretary Yellen's speech a couple months ago, into a lesser degree, somewhat grudgingly, but still there. In Jake Sullivan's speech. They're two big economic speeches, which I know you've discussed.

What's the way this goes bad? Or what are the scenarios in which okay, we have yeah, all this investment does not yield what people hope and what does that look like to you?

the first disappointment, is that the end of the world. No. Second, as I've tried to say, and building on what you and Tracy who were just talking about, is I think the international repercussions become real. I think if the Biden administration doesn't say okay, we've gone far enough in this direction, or the Trump people come back in and go further

in this direction, you start getting retaliation. So we're already in a bad situation where there's this subsidies competition between US and Europe and China, and then to some degree some other countries are going to try to play, but they can't compete, and so it ends up like a really bad version of Boeing Airbus. Right, So, yeah, it's

good to have two companies producing planes. It's also not good that they both get enormous amounts of government subsidies, in part because the other guy gets the other company gets good enormous amounts. It'd be better if we basically did arms control and took it down equal amounts of reducing the subsidies on both sides, and made a deal to keep that from going. And that starts being real big numbers. I mean that starts being in the tens and hundreds of billions. I mean that's real money that

could be used for other things. Third thing, mentioning what you were saying, since we're at Jackson all is the inflation risk. So Chair Palell in his speech was perceived a slightly hawkish, more hawkish than expected. I think he was about where I expected him to be, but a tiny bit less hawkish than he should have been that given where our labor markets are, which is wonderful, there is still a risk that we could see a resumption

of inflation, an acceleration of reacceleration of inflation. And you know, there's a lot of chattered right now on Twitter about different charts and things, but the but the main point is it's not what's important to remember is it's not under heard of in US experience, in other high income economies experience that you go through a disinflation, you get most of the way there, another shock comes along and inflation reaccelerate.

and it could just be an everyday shock. You know, gas prices go up or suddenly because these investments in chips production start creating much more demand than we expect, you end up with inflation sooner and Sharper and the cher Peal talked about that the idea there's this what he calls a nonlinear Philips curve, right that if you're close to a very full employment and there's a recent history of inflation, inflation may increase faster than you look.

So that's another risk, and that would not be good going into the election. That would not be good in the past.

I mean, that's real central banker psyche. Look. I think the starting point has to be it is very awkward, and I've experienced this directly in the room for central bankers to talk about fiscal policy, because ultimately, if you're an independent central bank, which essentially all the free market countries have, the deal is politicians can complain about you, but they don't or your policies ideally not about you, but they don't interfere in part because you don't go

out and lecture them on what's not your responsibility. If you're a central banker, so your responsibility is monetary policy in some parts of financial stability, and that's it. You're not supposed to be lecturing on physical policy. And in developing countries or countries where governance is not those not the same thing, but where governance is not as strong. You sometimes find central bankers feel they have to talk about fiscal policy and budgets and irresponsible policies, and it

gets very awkward, very quickly. So you don't want to do that if you don't have to. But as you're saying, there has been a shift towards more activist fiscal policy. And it's one thing during COVID, like you said in twenty twenty, you don't know what's going to happen. The world's facing a pandemic. You've seen unemployment spike, you've seen all kinds of things. And I think, frankly, somehow the Congress and the Trump administration and by administration did largely

decent policies in the emergency. I mean, maybe Secretary Manuchen. I don't know who to credit, but they really did do basically good policies for twenty twenty and twenty twenty early twenty one. The issue is going forward from here. We're looking at a world where there's likely to be sustained increased public spending in all the major economies, so China seven, including US, people are spending on industrial policy

and the subsidies, wars and investment. People should be spending on direct green investment to try to get some better traction on climate. People unfortunately, should probably be sending more in defense given the tensions, given the behavior of Russia and the tensions with China. And you start adding all these up, and then all the stuff that our friends of the Peterson found AI, which is separate, but the cousins of ours so to speak, you know about demographics

and long term sustainability issues. You know you're seeing potentially one and a half two maybe even three percent average higher public spending over the next several years of GDP S or three percent GDP. That's a big number and no prospect that I see that the taxes are going to be raised to cover most of it. So that's a world, it's very challenging for central banks and how do you fit that in? And you say, so, what

was it like in the room, what was being discussed? Well, it's interesting that last year actually there was much more heated discussion and much more about this issue of could the Fed and others have raised sooner more aggressively given what the fiscal policy was in the first quarter of twenty twenty one. Could they have adjusted more? Should they have adjusted more? And then if and getagopine from the

if raised this somewhat in her remarks last year. If there is this green transition, which includes a lot of spending even just to adjust the economies, how should central banks react to I'm phrase it all is a question because partly there are no easy answers, and partly because there's no anything close to a consensus yet in the central banking community on this. There's a little bit too much of well, we can't talk about that, that's not our job, but they're going to have to confront it.

What I will say is, so far this year, the discussions that I've heard are mostly about, in a sense, the questions of how this plays out into long term interest rates and how this plays out into productivity growth, and those are the most important things for are central bank to think about for the long term. But they don't quite capture the political economy of this difficult game. And yeah, I wish I knew how to manage it.

enough workers of that, or Japan got older faster. Since we all basically slowed down at about the same time the same amount, it's probably something to do with what's global, which is technology and the grim news about that is that puts you back in the world of the famous Robert Solo, the idea of what's called exogenous growth, that we don't really control it. So what I've always said is what you want to be doing is having the

government by really expensive lottery tickets. You're you're invest in universities, you invest in promising technologies, you invest in infrastructure. There's no guarantee you're going to get the next big thing, as Michael Lewis puts it at the other end, but it increases your chances. And this is like one of those good lotteries where there's only one thousand tickets. They're really expensive, but if you win, you win big, and

that's the way to think of it. So then the question is, is the specific kind of spending they're doing on semiconductors and things like that the best kind of lottery ticket. I don't think so it can't hurt. But I'm I'd much rather have them investing in broader technologies than the specific industries.

world will become more peaceful. As with most things in social science, it's actually the reverse. It's not that if you do good things, good things will result. It's if you do bad things, good things won't saw. It's sort of the Obama don't do stupid bleep version of social science. So there's no guarantee that when we did trade liberalization that China was going to become this wonderful, peaceful, democratic place.

There is a very high likelihood that if we have escalating barriers and sanctions and restrictions and hostilities in the economic sphere, that it will spill over and pump up hostilities in the military sphere. So you can argue quite reasonably, don't oversell the benefits of trade to peace and democracy, but you shouldn't undersell how much active economic conflict in spiral control and cause other geopolitical issues.

be part of the transport specific partnership, et cetera. Is like, we just keep getting screwed, right, and these trade deals and the pushbakers like, actually the economy has been all right, We've had our problems, but the idea that like, we've been getting screwed by free trade, right.

I'm sure this one will be debated. In fact, I know this will be discussed because I first even came across Adams article in the Oddlots discord Discord dot gg slash odd Lots. Listeners are in there talking about these things twenty four to seven a day. Go check it out at twenty.