What Does Bidenomics Look Like?

relief here in the United States of America. Hello, and welcome to Stephano Mix, the podcast that brings the global economy to you. And the sound that you heard was the sound of gods changing. Joe Biden will be US President in less than seven weeks time, and though the transition was in suspended animation for a few weeks, it is now fully up and running. We're starting to get a much clearer sense of who's going to be sitting

in the key post. What are these first appointments tell us about the new administration's economic priorities, and how on earth is he expecting to get round the fact that the Senate is likely to stay in the hands of Republicans so far loyal to President Trump. I can't think of a better person to ask about all of this

than Jason Furman. He's a professor at Harvest Kennedy School now, but he was head of President Obama's Council of Economic Advisors, and he's good mate with most of the new economic team. He's also just published a paper with Larry Summers calling for a revolution in fiscal policy, just as the incoming president considers his first budget nut We're also going to check in briefly on the new era coming for Britain on January one, as it fully leads the European Union

less than five weeks out. We still don't know what our brave new world's going to look like, but we can already say it's not going to be great news for the city of London. I'll be asking Bloomberg Financial Report to Veran Vagela how much financial business has already left the UK in all the uncertainties over breakit, and what's at stake if the trickle of jobs and money

out of London becomes a flood. But first, we are lucky to have this introduction to the incoming President's economic agenda from the Star economic reporter and columnist for Bloomberg Business Week Peter coy in Washington. Personnel as policy, the people of President elect Joe Biden has picked run economic policy are for the most part, centrist veterans of Washington.

Is picked for the most important job Secretary of the Treasury Janet Yell and the former FED chair who's an advocate of extraordinary fiscal support the count of the pandemic. Listeners to Stephanomics, may recall her pointed comments on that at the Bloomberg New Economy for him last month. The notion if the FED can do all that is required at this point to support the economy, UM is just wrong and the Fed is really pleading for fiscal relief.

I believe it's essential for Director of the National Economic Council. Biden is going with an Obama administration veteran, Brian Diese, according to people familiar with the matter, des is an executive at black Rock, the multi trillion dollar fund manager. X Obama official Cecilia Rouse of Princeton, said to be the first African American to lead the Council of Economic

Advisors the Office of Management and Budget. Biden wants near A Tandon, who worked for both Clinton and Obama, although Republicans are threatening to block her over partisan comments on Twitter.

Joe Biden ran for president as a healer and a bridge builder, and Bidonomics reflects that Biden hasn't fully embraced progressive causes such as the Green New Deal in Medicare for All, which could set him up for a battle with liberals like Congresswoman Alexander Occacio Cortez, who says the Democrats would have done better in the election if they had tilted further left. I think that it only has ever been radicals that have changed this country. Abraham Lincoln

made the radical decision to sign the Emancipation Proclamation. Franklin Delano Roosevelt made the radical decision to embark on establishing programs like social Security. That is radical. But Biden does plan to rejoin the pre Paris Climate Accord and says he'll slash carbon ambissions through jobs. Heavy investment must have beef up. Obamacare raised taxes on people earning over four hundred thousand dollars a year and raised the corporate tax

rate to one. Unless Dems win two Senate seats in Georgia next month, he'll struggle to pass as a domestic agenda, he'll have more leeway internationally acting to cool off the trade wars and create a united front of nations to take on unfair Chinese trade practices. There's nothing dramatic and biodynamics, but right now drama is the last thing most people want. Well, I'm really delighted we can talk about Bidenomics now with

Jason Furman. Jason, a bit of scene setting first. How does the economy that presidents led Biden's inheriting now compare with what faced President Obama in two thousand and eight. You had a massive recession then, and unemployment was a similar rate, but it has a very different feel at times now. Yeah, well, it's definitely thanks so much for

having me on. When President Biden takes the oath of office in January, the unemployment rate will be similar to what it was when President Obama took the oath of office in January two tho nine. There'll be a huge difference though, which is that in two thousand nine, the unemployment rate was rising and the worst days of the economy were ahead of us. This time, the unemployment rate is very very likely to be falling over the course of one maybe not completely healing the economy. But certainly

the better days will be ahead, it seems obvious. But what are the what are the big economic priorities that he faces. The biggest economic priority is getting the virus under control, much of which involves the distribution of vaccines. But we can't wait for the vaccines to be distributed, so testing encouraging social distancing, which is implemented at the state level um in the United States. But second that

getting the virus under control won't be enough. You know, if you get the virus under control, a restaurant can open, you still need people to be able to afford to eat in the restaurant, and so supporting demand, supporting job

creation through fiscal measures is critical. And then finally, even if people can afford to eat in restaurants, and I'm obviously using this as a metaphor um, there's still a lot of reallocation of labor people that lost their jobs, people that need jobs for new employers, new industries, um. And that reallocation process can sometimes take years to play out. We heard a little bit earlier from Peter Koy about

some of the individuals who have come in. Obviously some of them, many of them very well known, to you and in indeed too to Stephanomics, the likes of Janet Yellen. But overall you probably know many of them better than we do. What what should we take from this from these people coming in? Yeah, so I'm friends and have worked with all seven of the people that have come out as key members of President Biden's economic team. I'm really thrilled about all of them. They're diverse in terms

of you know, gender, ethnicity, race and the like. UM, they're all very focused, especially though on labor issues. UM. Janet Yellen is a macro and monetary economist, but a lot of her focus, and she's going to be the Treasury Secretary, is on labor markets and how they function. The Council of Economic Advisors, which is what I used to run. All three of the economists there are focused

on labor, the first time that we've ever seen that. UM. You'll have Brian Diese as the Director of the National Economic Council. He'll coordinate the economic policy making. In his case, his biggest focus is climate change, and you're going to see I think climate change not just as an environmental issue, but very much integrated into the thinking on economic policy as well well. I guess at the that's a critic would would say that this is a lot of retreads

from the Obama and Clinton administrations. And I would have phrased to there's people with a lot of experience, but even you know, we have her, we've heard the likes of alex Andre Okay, of course, there's say you know, there's a need for more radicalism. In fact that you know, the Democrats should have been more radical in their approach to the election, and they might have done better if times have really changed. Is it right to have a

team of people who were in past administrations. Absolutely, you want people who are experience, You want people who can get things done. The Biden administration is never going to say, oh, we don't want to do blank on climate change. It's going to be Congress that stops them. They're not going to say we don't want to go, you know, too far on labor markets and wages. Congress is going to be the break there. So I don't think any of these advisors will be a constraint on the ambition of

the Biden agenda. And you want experience people to understand what you can get done without Congress. You are incredible people like Janet Yellen, they can help persuade Congress to take the steps that need to be taken. I want to talk a bit about Congress because that's obviously a potential roadblock for all of us. But I want to get onto your paper with Larry Summers because it goes directly to not just the Biden agenda, but that of

every other industrial economy. Right now, there's been a lot of debate that we've talked about, actually on cephonomics, quite a lot about the changing balance between monetary and fiscal policies since the global financial crisis. And I guess the justifications for that is, you have interest rates at record lows.

We've seen central banks go as low as they can go repeatedly, and people had said already fiscal policy is going to have to play more of a role, and then this year you saw that happened with a vengeance. You've had this enormous amount of spending and borrowing by industrial countries, maybe around up to twent of GDP borrowing

extraordinary numbers. The reaction of many people to that, including the UK Chancellor very recently in his Spending Review, has been that we're kind of lucky to get away with this borrowing. We shouldn't expect to repeat it, and we should actually be looking to cut borrowing as soon as we can, once we have we have a vaccine, once we have a recovery after this crisis. You say, in a sense the opposite, you're saying, it just calls for

a revolution in the way we think about borrowing. So just take us through that a little bit, your augument with Larry Savis. Yeah, so I think we don't want to focus on the debt. That's the wrong measure to look at. You want to look essentially a debt service, what you're paying each year on the debt, and compare that to where your economy is. Interest rates are incredibly

low right now. There are a lot lower than the growth rate, something that Olivier Blanchard, who was president of the American Economics Association his presidential address, noted necessitated a profound rethinking of fiscal policy. Now. You might think interest rates are lowes temporarily, but they were incredibly low in

December before COVID struck our economy. And if you look at financial market forecasts in the United States, for example, the FED thinks it's going to raise rates eventually to two point five percentage points, that itself would be quite low. The market doesn't believe them. They think the Fed is only going to get rates up to something like one point four percentage points. And so you do see policymakers around the world sometimes talking about, you know, this won't last.

Their forecasts have been wrong for the last couple of decades. On interest rates. Markets are sending a very clear signal and there's um I think some very fundamental economic reasons why global saving has increased, the demand for investment has declined, and so equilibrium interest rates are lower. We need to think about fiscal policy very very differently in that world. How would it affect the way we decide whether a

government's public finances are in decent shape. So these days, you know, we economists at Bloomberg or others, we look at the debt rates, you debt relative to GDP. You're suggesting we should just look we should look at the cost of that debt. Presumably we should also look at where spending or where borrowing is going to because you want it to actually be supporting economic growth. So how do we judge whether we're spending money on the right things?

In this environment, right, So if an economy has excess unemployment and an interest rate around zero, you can spend money on anything and it would be good for the economy. So if you just do the famous canes digging holes filling in the holes, that will help. It's way better to instead of digging a hole and refilling it to build a highway, to do something for telecommunications, UM, for

clean energy M or the like. Then, as we look over the medium term M, what Larry Summers and I recommend is that you look at real debt service as a share of GDP UM. It's real debt service you're ajuting for inflation him because inflation is eating away part of your debt. You want to count that against interest UM.

In the United States and most other UM of the major economies right now, real debt services currently around zero because inflation is offsetting interest and it's projected to rise, but to rise very modestly, and even a decade from now still be quite low by historical standards. So that would be the measure I would look at to decide

if we were worried. And then finally, in terms of spending, it's going to vary from country to country, but at low interest rates, there are a lot more public investments that actually repay themselves. Um. They cost money upfront, you get higher wages, a stronger economy later on, and so it doesn't actually cost you anything, and you don't want to think of it as costing you anything. Um. In the United States, investments and children meet that criteria, education,

some infrastructure, research and development. I don't think you want to think about paying for something when the bigger danger we have is that we won't do enough of it. You know, some people listening to this will say, hang on, I've heard arguments about this before, and they used to get trashed by some economists. And because it sounds a bit like a sort of liberal or progressive version of voodoo economics. You know, we used to be told by some on the Republican side that you could gain tax

revenues by cutting tax rates. Um. In effect, it sounds like you're saying we can save money by spending more of it. Is that really the world we're in with interest rates at this low? Yes, it is. And the difference is that the what I'm talking about comes out of over hundred peer reviewed economic research papers, many of

them written in the last decade. They were summarized in an important and synthesizing important paper by two of my colleagues at Harvard, Nathan Hendron and Ben Spronkeiser, went through rigorous peer review process and ended up in one of the top economic journals, the Quarterly Journal of Economics, and UM they found this part of this is because of a revolution in economic research where you can use large scale administrative data to follow large numbers of people over

long periods of time. And so we can now look at people that received preschool education, that received nutritional assistance, that received healthcare as a child, look at them thirty years later, and we see they're more likely to be working, to have higher wages, to be healthier, not to be in prison, um and the like. And that evidence is

is just increasingly powerful. Just because I know some people listening to this podcast will have a bit of whiplash from hearing your argument, because we only last week had Charles Goodheart and Managed Product talking about why inflation was going to go up and rates interest rates were potentially going to go up not immediately but over sort of five year ten year time frame because of the reversal of demographic changes that we saw or at least a continuation,

so we now have if we have a rising dependency ratio everywhere. Their argument was that you would start to have inflationary pressure and wages go up, and that this could change all of those expectations and forecasts that you just talked about in the financial markets, and that rates would end up being much higher and inflation would end

up being much higher. What do you what do you say to that, you know, we could just we could completely change our way of looking at fiscal policy just in time for for the world to go back to more like it was, say in the nineties seventies. So my view on fiscal parts see is that there is not a timeless truth here. You can't look into some theory like modern monetary theory and say deficits are never a problem, nor should you have some theory that deficits

in debt or always a problem. Um. You need to base it on empirical evidence about the economy, about interest rates, about the overall macroeconomic situation. You can have all sorts of theories about interest rates rising. That's not what financial markets think. That's not been the trend um for several decades. That certainly might happen. And so you know, Larry, and I suggest you should be worried if real debt surface

rises above two percent of GDP. But I wouldn't jump right up to two percent of GDP and say we're fine. In fact, if you look at the program we recommend UM, it would still keep interest payments about one percent of GDP, about half of the margin that I think we should be at. So yes, leave some room for error, be somewhat prudent, But right now, the bigger risk is that we don't do enough, not that we do too much deficit reduction. Okay, so back to the real world. None

of this is going to happen. Surely if the Republicans remain in control of the Senate for the first years of the Biden administration. Could you think anyone on that side has has read your paper? Are you expecting them to come on board? You know, I certainly hope that this is a set of ideas that Democrats and Republicans in Congress takes seriously. I'm going to make an effort to try to get them out there and discuss them

with people UM at a more practical level. I was in the room many times as Vice President Biden was negotiating with Senator Connell, who is currently the majority Republican majority leader of the Senate Um. The two of them have a good wrapport with each other, pretty transactional negotiating style. That may not be enough to get anything done, but I do think it's the best shot at getting something done in divided government, and there's certainly some areas like infrastructure,

which do generate interest from both political parties. Well, that's a voice of optimism that is also a voice of experience, a rare treat Jason Ferman, thank you very much, thanks for having me m. I might have hoped to be telling you finally this week about a deal between the UK and the European Union to cover the period when transitional arrangements stop and the UK in January is fully,

entirely actually out of the European Union. And as this podcast was being put to ben on the third of December, there was still no deal to be seen. So much so predictable, you might say, we've learned that I'm picking a nearly fifty year old marriage between two very complicated modern economies was always going to be tough. But if you step back, what's odd when you think about it, is not that the negotiations have been going down to

the wire, but what exactly is causing the trouble. The three big sticking points, as the EU negotiator Michel Barnier confirmed this week, are still the leving playing field for business, access to British fishing waters, and how the overall agreement is going to be enforced. What has not been front and center in any of these negotiations, it seems it's been relations between the City of London, the financial services industry that's so important to the UK economy, and the

European Union itself. Critics say the city in fact got thrown to the lions a long time ago in these Brexit negotiations, and meanwhile, a lot of money and jobs have been exiting London as a result. Varen vaguela Bloomberg Finance reporter, has been totting up the impact so far and read a piece about it this week. I mean, how much business has gone from the city now as a direct result of Brexit? Is it? Is? It a

lot more than we might initially have expected. So e y and the report last moment said that seven of seven thousand, five hundred Roles and one point two trillion pounds in assets have already moved, and it says that this is just the beginning. Obviously, if the transition period ends in a matter of for four weeks and then we could see the toll really really rise. We know

a few other things such as equity trading. About thirty of that business in European stocks is done in London through London and based trading venues, and that's also at risk of moving on jan four. Is it more than we might have thought when the referendum happened. I was sitting in JP Morgan and a little bit closer to this and at the time there was a feeling that actually banks were going to still find London very attractive. Overall, the impact so far has been far less than some

anticipated around that time. Post six the referendum, the CEO of London Stock Exchange over times every year Role said that, you know, hundreds of thousands of jobs would leave the city and clearly that hasn't come to pass just yet. It's a much smaller magnitude so far. And part of the theory at that time was the clearing business in derivatives clearing a multi trillion dollar market would potentially moved

to Europe. Now hasn't happened. But what's at stake? I mean, if the city did gradually lose its status as one of the world's great financial hubs, what's at stake in terms of the economy. The problem with these BRESA negotiations is a lot of focus has been on the trade talks and industries like fishing. But in the UK, finance makes up about seven percent of the economy and more than a tenth of all tax revenue employees more than a million people. So the City of London is really

critical too to the UK economy. So there is a lot at stake and it's surprising, surprise a lot of senior executives in the City of London, but it hasn't been more focused from the UK government on finance and forging away to make sure that critical industry is safeguarded. I mean, it's obviously it's one of the things that we've talked about again and again around Brexit, which is

that you know, you have an advanced, modern economy. It's probably it's the first time in sort of that I can remember where that a decision has been made that really put other things ahead of business interests and economic interests. That decision to leave the EU. There was no question I think in anyone's minds that there would be a negative impact. You could have a debate about whether it be large or small, but there had always been a

concern about the economic impact. And it's just interesting that the government has not tried to offset that or work against that in defending the city in these negotiations. They seem to be quite happy to have the city be an emblem of this putting of sovereignty and other issues of national control ahead of you know, what is our

most important business. But just on that point you mentioned equivalence, we should probably just sayflee what that is and why it matters, you know, absolutely so with the big banks in London for for for decades, JP Morgan, Goldman, Sachs and other Wall Street lenders have established big, big operations in London to do trading business, markets, businesses, and they were able to serve EU clients like a French fund manager or a Dutch pension firm for their hedging and

trading business from London. So London really grew to be this fantastic financial center global financial center. Now, of course, after the UK leaves EU or leaves the transition period in a few weeks time, it will lose all the passporting rights of those firms were enjoyed to service for the European firms. So the back, the fall back is equivalents, which is in essence, the European Commission determining that the

UK's rules on finance as robust as its own. Now de facto, the UK's rules on finance are as robust. The UK wrote many of the rules when it was in Europe. Its influenced that the way those rules evolved. But the problem is that equivalent is a political decision, a series of political decisions. It's a byzantine patchwork whereby the European Commission determines in different areas such as the investment services, clearing and about forty other areas that the

UK's rules are as robust. It's a gift of the European Commission and it's being used as a political tool in the negotiations to make sure that Europe gets what it wants. Just thinking about sort of the global implications of this for those who are not sitting in the UK, if is there another big European city that's going to come through this as a as a competitor, not just to London, but to New York or is it is it?

Is it New York that's likely to benefit because there's no single place that combines all of the things that London has. Now, it's an interesting question because I think nobody's saying in all of this that London's days and numbered. It has obviously a lot of advantage still like it's the lat English language, it's legal system, and I say it's it's built up the rules in many areas of finance.

It attracts a big talent pool. So a European city like Paris or Frankfurt, which are vying with London for more business, isn't likely to overtake London anytime soon or perhaps perhaps ever. Um some of the trading venues in London has has split their European presence now between Amsterdam and Paris. Um some of the banks have big operations now in Frankfurt. So always seeing is a sort of fragmented future for finance in Europe. But many people still

think that London will dominate. It's always reinvented itself. We talked about how the Big Bang in the nineteen eighties from Margaret Fatch's time, was a big impetus for the city of London and made it a huge share trading hub. London is always that was the deregulation where they got rid of a lot of rules that actually made a lot of us banks want to prefer London for some things because of the reduction of rules exactly. And this is maybe a good analogy with what we may may

see in a post Brexit era. It's always looking at increasing competition, making rules better for the end user, and that ultimately makes London very attractive or has done well. We will wait and see. You. You referenced that era of thatcher Right deregulation in the opening to your piece that the golden age of the City of London began with a big bang. It's ending with a whimper. Well maybe not, we'll find out over the next few years. Veron Vaguela, thank you very much, Thank you, thanks for

listening to Stephonomics. We'll be back next week with more on all things economic, and remember you can always find us on the Bloomberg Terminal website, app or wherever you get your podcasts. You can also get a lot more news and analysis from Bloomberg Economics by following at Economics on Twitter. This episode was produced by Magnus Henderson, with special thanks to Peter Koy, Jason Furman, and Vien Vaguela. Lucy Meekin is the executive producer of Stephonomics and the

head of Bloomberg Podcast is Fancesca Lego. Five