Why America’s economic policy muddle matters

The writer is an FT contributing editor and writes the Chartbook newsletter

Economic policymaking in the US, the most important economy in the world, has a kaleidoscopic quality. At the start of the year, the world was fixated on the Federal Reserve, interest rates and banks. Shake the kaleidoscope and a few weeks later national security adviser Jake Sullivan is declaring the new Washington consensus around active industrial policy and Treasury secretary Janet Yellen is laying down an economic path to avoid war with China.

A few weeks after that, there is another shake of the kaleidoscope. The world holds its breath over the debt ceiling and the votes of left and rightwing politicians deciding whether the US will pay its bills.

The Dutch economist Jan Tinbergen, in the heyday of mid-20th-century technocratic optimism, laid down the rule that we need one distinct and independent policy instrument for each separate target of policy. That implies an overarching intelligence that assigns policies to targets.

In the US right now there is no such overarching intelligence. Monetary policy, industrial policy and fiscal policy are not only assigned to different targets, but follow entirely different logics. The Fed pursues technocratic fine-tuning. Industrial policy is strategic. Fiscal policy is ideological.

There is none of Tinbergen’s unified technocratic intelligence here. Nor should one dignify this mess by reference to the wisdom of the 18th-century founders and the principle of the division of powers. The kaleidoscope is driven by the twisted logic of a profoundly divided society and a polarised political class.

If you wanted reassurance you might say that this incoherence in US policymaking isn’t new and that America has muddled through, and the world along with it. But the risks of disaster are real and so too are the risks of more mundane miscalculation. 

Even though a default has been avoided after the Senate approved a deal this week between the White House and congressional Republicans, the levers of fiscal and monetary policy in the US have now been firmly pushed in a recessionary direction. Although industrial policy brings benefits for some, the overall thrust of Washington’s new protectionism does not lower costs but raises them, at least in the short term. Little wonder that professional forecasters continue to expect a recession for later in 2023. 

If that is avoided, the more fundamental issue is whether such an incoherent policy process can possibly produce answers to the growing mountain of long-term problems thrown up by the age of polycrisis.

Many Americans will simply shrug and say let the politicians compete to devise policy robust enough to withstand the buffeting of partisanship. For the rest let us rely on innovation, technology and entrepreneurship to deliver the goods. For the well-situated in American society that may work, but it is a very limited vision.

If private entrepreneurship were self-sufficient, it might be promising. But it is a myth that private innovation lives off its own resources. In fact, it depends on public goods such as world-class government-funded research universities, and those are cash-starved and under threat. 

If American society were actually made up of robust, well-equipped individuals and families, then a Darwinian social model might not be a recipe for dramatic inequality and dysfunction. But, in fact, a large part of American society is profoundly ill-equipped for the modern world and urgently needs help. Americans, and most of all American children, pay the price for the callous dysfunction of Congress. What gets cut are the programmes that not only help those in need, but help to ensure a collective flourishing. Shameful infant mortality and life expectancy figures tell the story. 

If the US were an isolated small state whose finances were of no general interest, the rest of the world would not need to worry about the fiscal brinkmanship of its politicians. But it is not; it is the anchor of the world economy. The slightest tremor on Wall Street reverberates around the globe.

If the US were a post-nationalist state with no military footprint, one could allow its domestic dynamics to be a national curiosity. But it is not. It is the largest military superpower the world has ever seen.

So the egregious failures of banking regulation, the rampant bellicosity, the unilateralism in economic policy, the lack of societal solidarity, the irresponsible partisanship and reality-defying ideology that makes President Joe Biden a socialist, must be taken seriously.

The team around Biden are no doubt doing their best. They think they can confront America’s domestic and global challenges with a clever blend of industrial policies.

That may be the best option available. But for the sake of context it is worth reminding ourselves that the original Washington consensus of the 1990s and 2000s actually had a solid base within the American political class. In light of conditions today, the idea of a “new Washington consensus” floated by Sullivan a few weeks ago is nothing short of hallucinatory.

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