Interview with Adam Posen (President of the Peterson Institute for International Economics)
Adam Posen has been President of the Peterson Institute for International Economics since 2013. He was a member of the Bank of England’s Monetary Policy Committee, 2009-12
Interview conducted 16th January 2025
Q. How would you characterise Bidenomics – what do you think its objectives were and how did it perform over four years?
I characterise Bidenomics as wishfully wrong, motivated by a very elitist view of politics despite all their inveighing against our common friends. To the degree that there was coherence to Bidenomics, it wasn’t what Treasury or the Council of Economic Advisers were doing on macro. That was just the small amount of policy that they were allowed to do. The mainstream of Bidenomics was led by the NSC, USTR, and others. Built on completely false premises, both economically and politically – that they wanted to be true.
I’ll get to the content in a second. But, in my view, the people who lost the Hilary Clinton campaign in 2016 – which obviously I was devastated by as well, given the alternative – could not accept that part of the reason they lost was because Clinton was an unattractive candidate. Part of the reason they lost was because Clinton was perceived, with some justification, as a warmonger. People underestimate how much Trump being seen as not trying to get our boys and girls into new battles mattered – not in Syria, Libya or wherever. So, they had to figure out something and they resented the Clinton-Obama economics crowd lecturing them and then being cut out of economic decisions.
They reverse-engineered this policy program labelled “trade policy for the middle class” or “building up and out from the middle class,” which basically meant doing nothing that required real legislation from Congress, nothing fiscally except spending more than the neoliberals said we could. It pandered to anti-China, anti-migrant, and anti-foreigner sentiment, and any benefits would take years to accrue or could be blamed on foreigners if they failed. They slapped an advertising label on these policies to fit those criteria. But underneath it all was a fundamentally flawed worldview.
They believed that macroeconomic and capital flow constraints didn’t exist and were just a wilful imposition by the neoliberals. They believed that other countries’ cheating – possibly China and no other country with any credible concerns – was having a material negative effect on the US. They believed that, whether for political or economic reasons, it was both useful and possible to try to pump up manufacturing employment. They believed they could bully Taiwan into moving production into the US, with no push back and no side effects. They bought, because they sincerely believed it and because it gave them hopes of political advantage, that there was this vast number of Americans who were suffering in towns and small cities that were being devastated. This world view is fundamentally untrue.
It doesn’t mean those people suffering shouldn’t be helped more than they now are but it’s just not the experience of the vast majority of Americans. Or rather, the young people, the skilled people, the healthy people have made the adjustment. So, you end up with local communities where some people are left behind. But this was a lie about the economy as a whole, a lie about its causes – in addition to its being a political dead end to think that pandering to those complaints and the anger that goes with it was going to lead to good results. So, it was a completely flawed and failed policy in every sense.
Q. If as you say a lot of this was politically rather than economically grounded, how would you then reconcile that with the economic outcomes that we saw during the Biden administration?
Let me give you a bit of nuance on that before I directly address your question. In the end, if you want to do a bunch of policies for political reasons, what matters is whether you win or not. They thought they were being clever, they thought they could buy off specific constituencies through performative actions and rhetoric. They thought they could get votes. All the polling evidence and all the actual voting evidence is that people were not voting on the basis of what they thought they were voting on. They were not responding to these supposed purchases of goodwill.
On the economics, they made the choice not to say: we have more progressive values than the neoliberals or the Trump people and therefore we are going to redistribute or prioritise differently. They chose to say: we do not accept the constraints or unintended consequences that are economic realities. So, it wasn’t just politics versus economics. It was not taking into account economic realities that ultimately undercut them.
Which gets us to why I think the US has done better. I think three things happened for the US to explain its out-performance compared to comparable OECD countries. The first and fundamental one is that, completely unintentionally and unexpectedly by anyone, the disruption of the labour market through Covid actually reallocated workers in an extremely efficient way. There was a very serious discussion about this in 2020: do you want to have for a lot of programmes subsidies, wage subsidies, keep people tied to their current jobs assuming that Covid is going to be temporary and we don’t want to put people through the misery of additional unemployment and churn and then they lose firm-specific human capital? They may lose seniority and other things that they don’t want. Therefore, the UK, Germany and France, everyone in Europe and to some degree Japan, Canada, Australia put in programmes to soften the blow. I thought that was the right thing to do. There were just a few knee-jerk right-wingers who disagreed.
So, you end up with US unemployment rates spiking to 22% and no other advanced economy gets even a fraction of that rise. I, and a few others, have started focussing on the fact that this turned out to be surprisingly highly beneficial for lower income workers. What happened was millions of them in the US either moved to larger employers: think of moving from Joe’s Diner to McDonalds or Pat’s delivery service to Walmart. We know from long-standing data that the same worker generally tends to be much more productive in a larger company. Especially at the low skill or low pay end because then you have some possibility of more human capital around you, opportunities for training and advancement. You have more physical capital around you. It’s more stable. There was this very large one-time shift of the order of 15% of the US workforce, of 10 million plus workers who had a sustained jump in productivity. You also had, not as big an effect, a continuing surge in new business formations.
The UK, Canada etc also had this surge of new business formation: initially when there’s a recession, people try to create a side gig or company so that if they are unemployed, they have something. But what happened in the US, I don’t think anybody fully understands this, I certainly don’t. But for whatever reasons we have seen a sustained rise in the rate of creation of small new businesses. That is also pro-productivity. It’s not wonderful for everybody – not all these [new businesses] become big companies. But, on average, if you have a bigger share of the workforce doing potentially entrepreneurial self-employment, it’s not a bad thing. These are very chunky numbers – 2 million people.
So, we’re talking somewhere between 10 and 15 million workers – 10% of the workforce – moves in a fundamental way to more productive jobs. Again, there’s a clear difference from the rest of the advanced, high-income world. Everyone else quite reasonably didn’t have this huge surge in unemployment and didn’t allow the reallocation. One of the newest things we’ve found is that two other patterns have emerged. One is that while people moved between businesses, they didn’t tend to move between industries. The vast majority, particularly of low-income workers who were forcibly unemployed or quit and then came back in, stayed within the same industry. That’s why I gave the hypothetical of Joe’s Diner to McDonalds. Interestingly this may be an indication that firm-specific human capital is less important than industry specific human capital or professional occupational human capital. If you think about the German labour market training model, that we were told in the early 1990s was supposed to be our model, that’s also part of it: you do your apprenticeship in a firm, you don’t necessarily stay with that firm but you stay in that industry.
This is not anti-Bidenomics. It’s saying there was this whole other channel that no one saw coming that led to a two-to-three year run of higher productivity growth for a large number of workers. It’s unintentional creative destruction for labour markets. And that along with a surge in migration allowed growth to occur without inflation.
Q. Is there any aspect of what you would call the Bidenomics strategy that was responsible for this labour reallocation?
First, there is some role for AI and platform IT companies adding to productivity. That probably does not explain a large share of the last 5-10 years. Second, we’ve seen another shift in the US. labour market. There are certain jobs for which you’re supposed to have a BA to be qualified to do the job. We’ve found there’s been a large surge in hiring of people with non-BA qualifications for BA jobs in the last few years. That again goes to the idea that running the economy this way led to creative destruction of artificial barriers, keeping people out of work.
Arguably, the most sensible part of the Bidenomics strategy is to run the economy hot, learning from what happened after the financial crisis. A bunch of us, including myself both in the UK and US, were saying, in 2008 thru 2012 that we should do more macro stimulus, don’t be so constrained. Run the economy hot to try to push people back into employment and so when they try to get back into employment there are opportunities. That was right. Whether that was distinctively Biden versus Clinton or Obama, or just that every reasonable person in the world learnt a lesson from 2009-12, I do not know. The Fed clearly has shifted a lot under Jay Powell.
Some argue that there really was no demand driven overheating inflation. I think it is just wrong. It was a mistake that the American Rescue Plan in 2021 included Congressional promised payouts even to people on high incomes and didn’t just focus on first responders in health and a short-term stimulus. To link it back to your fundamental question, which is how much Bidenomics was responsible, I think it’s very misleading to do the charts that a lot of people do saying look inflation went up and down on the same path across countries. If original conditions and the nature of the economy are different, the idea that you ended up with the same inflation result doesn’t say it’s all driven by the same thing. We had a fraction of the energy shock Europe had and Europe was nowhere near the unemployment shock we had. So, the idea that inflation goes up and comes down the same way in both, that’s just wrong! It is a fundamentally different process.
The broad bias that Bidenomics applied to monetary policy, but also short-term fiscal policy was that we were not going to repeat 2008-12. That was right. But that was also what basically every sane government thought. Even Steve Mnuchin under Trump was going to do something in terms of stimulus in 2020.
Q. Stripping out the US macroeconomic policy and the labour market adjustment, did other aspects of Bidenomics – the Inflation Reduction Act, the CHIPS Act and the Infrastructure Bill – contribute to US growth?
In terms of multi-year economic performance and the political backlash against inflation, everything else is secondary. But is it important? I think some reforms were positive and some were negative. Anything on the regulatory side that improved labour market bargaining power or improved enforcement and expectation of environmental regulations for the medium-term or that enhanced R&D and demand for tech in the US – all of those are on the positive side of the ledger.
And some of those are more Biden. The lack of ambition of Obama or Clinton on labour market regulation and bargaining power was a critique that I think was entirely fair and Biden genuinely tried to change that. Not being a climate change denier, which Trump of course is, and trying to make it credible that the US would do something green again, that was genuinely Biden.
Q. Would you say they were good for growth or the right thing to do anyway?
They were the right thing to do and mildly positive for growth. If they end up being a small negative, they could be more than an offset by other things. To me those fit under the heading of not denying economics but saying we have a different relative valuation of labour bargaining power or the relative valuation of climate and future generations. To me those were worth doing. How much they were distinctively Biden, I don’t know. But they were definitely more progressive, more interventionist and I believe legitimately in a positive way more than what Obama had done. But I don’t believe they moved the needle very much on growth.
Q. But are you more negative about the other aspects of Biden’s industrial policy?
They put so much emphasis on the IRA and the CHIPs Act. They said it embodied the ideological programme that I set out at the start. Various people at the Treasury and other advisers tried to push back at parts of it. This part I think is just wrong – on intellectual grounds and I think it’s been demonstrably wrong politically as well. Ultimately they were spending a huge amount of money – when there were other things you could have spent it on, including general R&D, educational training and so on – in order to make technology, particularly green technology, less accessible to everyone, the US and the rest of the world. They’re restricting supply, they’re putting restrictions on sales, they’re increasing the price, they’re telling people specifically not to buy from China. The end result of this is that the green transition has slowed because we don’t have cheap solar panels. The rest of the world also doesn’t have cheap solar panels because we’re making them harder to get from China.
This cascades through a whole bunch of technology. It’s a negative supply shock. In a new technology there’s very large positive spillovers with its adoption. They had this notion they could calibrate various trade-offs. This was seen, obviously, in this careful ineffective calibration of the Russia oil price. This was seen in the decisions about how much subsidy was enough to get the Koreans or Taiwan’s chips here, but not enough to overdo it. They completely missed the big picture.
To be fair, the Treasury and the CEA in the Biden administration, tried to express but failed to get any traction: if you’re worried about supply chain exploitation and abuse of market power, what you want is diversification. So, if we don’t want China to be the source of our pharmaceuticals – we can debate that – then it’s good to have as many possible reliable sources outside of China and they don’t have to be in the US.
What they didn’t understand – as progressives they should understand – is that they are creating a ‘too big to fail’ moral hazard in these American based companies who then exploit it. Boeing, Intel, these companies are taking untold billions of subsidies, but they don’t have any more loyalty to the US and to the American worker than their counterparts in banking did in 2006-2008. So, by advocating that you have to subsidise national champions, all you’re doing is making it more likely that those protected domestic national champions get to exploit American workers and rip off American households and present the American taxpayers with a bill. I find this absolutely outrageous. The idea that the economics and law folks on the left, who were supposedly antitrust, didn’t see the enormous damage they were doing by privileging and protecting these too big to fail American companies is awful. On the straight economics, this to me was a betrayal.
Q. Did industrial policy strategy have a regional place-based impact which was positive?
No. First, it didn’t work politically or economically. We haven’t seen a huge out-performance of the places that have benefited [from place-based policy]. Second, it shouldn’t have been expected to work. I know that there are places in the UK that are still suffering 40 years on from the loss of shipbuilding, mining and the auto industry. The same can be said about part of eastern Germany, parts of southern Italy, not to mention parts of Appalachia and Midwest here. These are really sticky effects. I don’t think we should give up trying to help the individuals there. But going in with any expectation that you’re going to simply, by spending money, turn this around is for locations is, I think, contrary to all experience. Compensating the losers as such doesn’t work either economically or politically. This is a huge gap in our policy understanding and we need new solutions. But the idea that this place-based stuff was going to work on any timeframe was just contrary to all evidence and experience.
Q. Part of the logic that the Biden administration was pursuing was if we onshore some of the manufacturing it might not lead to that many jobs, but it might actually lead to innovation in a more transformational sense then we’re traditionally used to – not over 4 years but over 10?
Your characterisation is exactly right. The TSMC plant in Arizona has succeeded but some other projects haven’t. We need really thorough micro studies about how many spillovers they have and what form of lottery ticket we need, how many losses on plants that don’t work justify one that does work. I think that’s all research that needs doing. But there is a very strong case that it’s not going to move the needle in any meaningful macroeconomic trend impact.
Let’s say we have Tesla, the TSMC plant and say batteries where we started producing some in the US. Those are all meaningful. The batteries are the moonshot. If you can genuinely make a breakthrough in battery technology, a general-purpose technology. that could fundamentally shift the dial. But now we’re back into the long-standing world of R&D and whether these really expensive lottery tickets are worth paying for. You want to buy a few lottery tickets because the potential payoff from contributing to a general-purpose technology improvement is beyond anything else you can do. But it’s still one in a 1,000 or one in a 10,000 shot, maybe at best one in 500. It is inherently a risky endeavour.
But going back to the IT revolution with fibre optic cable, the mainstream argument, which I largely believe is right, for why the US surged ahead wasn’t that we had the companies doing the innovation. It was that we had a corporate ecosystem that adapted to use technology. And the argument for why Europe, and to a lesser degree Japan and UK, fell behind the US was because, even though they could get this stuff from anybody and had good scientists, the useful new technology wasn’t as widely and quickly and creatively adapted and adopted. So, the bulk of the evidence is that your big gains come from lottery tickets to gather new technology and then adoption and spread of that technology. Neither of those rely heavily on the extent of your domestic manufacturing base. There could be new evidence, new research, new ideas. But that is my understanding of the world up to this point.
Q. What are the right and the wrong lessons that UK and European policy makers should draw from the Biden experience?
Sadly, the positive role of labour market disruption is not transferable because you don’t want to put people through that if you don’t know what’s going to work and what’s the right scale so I’m not suggesting that. You can look at specific policies such as breaking down the need for paper qualifications for jobs versus not, although I think the UK is better on that in some ways than the US to start with. You can look at specific things like the opposite of place-based policies: how to make it easier for workers to leave a given employer and given location. But the UK is better on those than your average continental European economy, so that’s not a great source of help.
There’s affirmation that premature austerity is a mistake, whether that was Bidenomics or that anyone rational would have done it.
And then I believe Europe and the UK should be leaning into the empty gap created by the US and China being bullies and pushing self-sufficiency economically. When Ed Miliband was talking about the UK becoming an energy leader on this and that prior to the UK election, my reaction is lean in instead towards what you’re good at. Take advantage of the fact that the US is leaving hundreds of thousands of Chinese students out of its education system. Your solutions are somewhat contingent on your history of politics, your institutions, your starting point.
For the UK, being a more international, rule of law, English speaking, technologically advanced, democratic, property right respecting, on good terms with the US but not a client country presents a lot of opportunities. Do not fall into the Bidenomics trap of assuming that it’s costless to try to promote nationally headquartered companies because, as again UK experience has shown, you end up potentially making them exploiters of the government and the people. You want international competition.
I’m sorry if my meagre recommendations disappoint you. But it’s consistent with my view that the good stuff that has happened over the last few years has been some combination of unforeseen changes and long standing reasonable macroeconomic policies. It wasn’t the Biden team’s work. There were a couple of things they did that were good and there were a couple of things that didn’t matter for growth but were good distributionally. But ultimately, it’s these bigger forces. The fact is the US can keep screwing itself up in unbelievable ways, but there’s some underlying thing that keeps us resilient. I don’t get it!
If you had asked me in January 2021 about the fact that we were letting our unemployment rate go to 22% while the UK had a peak below 8%, the idea that we were allowing 15% of the workforce and their families to go through that and you asked me what was going to be ahead I would have said that the US was going to fall way behind. These are fundamental structural things, and discretionary policy just does not have that much effect.
Q. Looking back on Bidenomics over the last four years, what is the one real positive and the one thing to avoid?
The one real positive is avoiding austerity, running the economy hot and leaning into the fact that workers and households are more resilient and more adaptable than we sometimes were. The one big negative is pushing on self-sufficiency instead of diversification – spending government money on public things is better than spending public money on private things.
ENDS