Interview with Karen Dynan (Harvard University, Assistant Secretary of the Treasury for Economic Policy under President Obama)
Karen Dynan is a Professor of Practice in the Harvard University Department of Economics and at the Harvard Kennedy School. She previously served as Assistant Secretary for Economic Policy and Chief Economist at the U.S. Department of the Treasury from 2014 to 2017. From 2009 to 2013, she was vice president and co-director of the Economic Studies program at the Brookings Institution.
Interview conducted 21st January 21, 2025.
Q How do you characterise “Bidenomics”? What do you think its objectives were and how do you think it performed?
It’s been characterised in many different ways, depending on who you ask. It’s grounded in traditional economics to some extent, but there’s definitely more of a focus on inequality, mobility, and fairness than in previous administrations. That has manifested in various ways.
To start with how the economy unfolded under President Biden, it was a truly remarkable recovery from the economic disruptions associated with COVID. He deserves significant credit for that, although there were many other contributing factors. The recovery was remarkable both because the macroeconomy came back so strongly and because household-level outcomes were incredible, given the magnitude of job loss in early 2020.
I’ve done some work comparing household-level outcomes to those after the Great Recession. That was a very different crisis caused by different things, but it’s truly remarkable to see how sound household finances remained this time around. In many ways, outcomes were stronger after the COVID disruption than they were before, and the “before times” were already quite robust.
That was all pretty amazing, but it turned out there were costs associated with the policy choices used to fight the COVID downturn.
Let me talk about that aspect of “Bidenomics” before getting into the administration’s longer-term approach—like industrial policy. The first major economic policy change under President Biden was the American Rescue Plan. That package was partly shaped by the Biden Administration and partly by Congress. It was very generous. I had a paper that came out through the Peterson Institute for International Economics a couple of months ago that explores this. If you look at the amount of support in that package, it was more than enough—quite a bit more than needed—to fill what we thought was the hole in the macroeconomy.
It’s fair to say that the package overdid it with fiscal stimulus. I want to stress that it did many important things to foster household economic security in tough times, and there were non-economic political considerations that shaped it. But when all said and done the fact that it overfilled the hole in the economy turned out to have some very negative consequences. One is that it costs a lot of money, so we have higher government debt now, which will create problems down the road. Just as important, in my view, is that it was a major contributor to the post-pandemic surge in inflation.
There’s been debate over the causes of the post-pandemic surge in inflation, but I think it’s just wrong to say, “it happened globally, so we can rule out country-specific policies.” The drivers of inflation were very different in the US versus Europe. In the US, the big fiscal stimulus was a major driver. Idiosyncratic supply shocks also came into play—like the semiconductor shortage partly owing to bad decisions by automakers and other manufacturers in 2020—but by mid-2021, it was clear that the breadth of the inflation pointed to a broader demand story, not just a few idiosyncratic temporary supply shocks.
I’ve explored economic forecasts from that time, and you can see how people got it wrong. The Biden administration wasn’t alone. If you look at the Congressional Budget Office, the Fed, or private-sector forecasters: all underestimated the inflationary impact of running the economy so hot. People had come to believe the Phillips Curve was very flat, so you could run a hot economy without creating inflationary pressure. That turned out to be wrong.
Another error in the thinking was not appreciating how costly inflation would be for Americans. I can say as an educator that I had spent very little time in my macroeconomic courses on the costs of inflation. I taught my students that when prices go up, wages tend to go up by similar amounts. But the focus was always on aggregate wages, and if aggregate prices and aggregate wages moved together over time, we could assume everything was okay. But the average wage masks big differences across the population. You see officials pointing to average gains – or wages in a particular group that went up a lot during this period—but many folks still come out behind in terms of real income. Inflation also created uncertainty and a heavy cognitive load for families trying to manage their finances. Thus, it’s fair to say that prior to the inflation surge, the costs of inflation were underappreciated.
Q. A number of forecasters—at the Fed and in the private sector—didn’t expect the eventual surge in inflation. Do you think that was a mistake by the administration that’s only clear in hindsight or was it foreseeable at the time?
Just because a lot of people made the same mistake doesn’t mean we should hold them all blameless. Economists in general should have been more cautious. There were people warning about inflationary pressures, so the administration should have weighed those views more seriously. Let me be clear: I don’t know exactly what conversations were happening internally, but I assume they were similar conversations that the Congressional Budget Office or the folks at the Fed were having. I can understand why they discounted the possibility of inflation, but ex post it was clearly a mistake.
If you want lessons for the future, it’s crucial to listen and give more weight to voices challenging the conventional view.
Q: Could you expand on the specific ways fiscal stimulus and inflation have unevenly affected different households?
First, somebody needs to do a careful study of how many people ended up behind on real income. If such a study exists, I haven’t seen it. But based on other evidence I’ve seen, it looks like there are many people across the income distribution who lost out when inflation rose.
Wages went up a lot, especially for people in leisure and hospitality because that’s where the strongest labour shortage was. But we also know the big wage increases were associated with people who switched jobs. There are plenty of people in that sector who didn’t change jobs for whatever reason, many of whom I suspect were left behind.
Then we have the Fed’s response. Traditionally, we think tighter monetary policy hurts across the income distribution. But one of the very different things in this period was that a lot of people in the middle to top part of the income distribution were insulated from the increase in interest rates. Stock prices and home prices did dip for a while, but then started to rise and have more than made up for the earlier losses. Meanwhile, many homeowners had refinanced into low, fixed-rate mortgages and were insulated from higher rates. So people who are somewhat-to-very affluent were largely protected. Meanwhile, people at the lower end of the income distribution, with adjustable-rate car loans or credit card loans, have seen monthly payments go way up. Many of these people may have been renters too and faced rising rents as house prices went up. So you have to look at the distributional impact of both the inflation and the policy response.
Q. Some critics have questioned whether the universalism of the fiscal support to households in 2020 was necessary. Do you have a view on that?
I’m not against the fiscal stimulus—it should still be a lesson that we need to respond aggressively to recessions. I want to make that point clear. What happened after the Great Recession was terrible. It took almost a decade for the macroeconomy to be back on track, and many households had significant financial scarring from that period for many years. I don’t think the lesson should be that we shouldn’t fight recessions or job loss aggressively.
In light of that, the 2020 fiscal packages seem less debatable. It was a time when job losses were unprecedented, and uncertainty was tremendous. Even if the packages were universal, I think that those packages were the right move. Some argue it made no sense to send cheques when the economy was shut down, but part of the logic was making sure firms felt confident that demand was going to come back once the virus passed. Back in spring 2020, many thought that might be in June or July. There was a good justification for stimulus early on to mitigate lay-offs.
By 2021, though, things were changing: vaccines were rolling out, the economy was picking up, with a significant if incomplete rebound in many economic indicators. That’s when universalism seems more questionable—particularly the fact that the stimulus cheques were so large in early 2021 and that they were sent to people so high in the income distribution. That’s the part we really have to question. I think it would be great to see more research on how we could have done better with the targeting of stimulus.
Q. Many point to America’s highly dynamic labour market post-pandemic. Could a champion of “Bidenomics” say it was the stimulus that drove stronger wage gains at the bottom?
Yes, but I think those consequences came with costs. You can’t separate the two which is why it’s complicated. When we were debating policy in mid-2020, we had seen all this job loss and were looking at Europe, where workers had stayed connected to their jobs. People started asking hard questions about whether our system—which relied more heavily on layoffs, unemployment insurance, and a belief that people would re-match—was actually better. We often said the United States was more dynamic, so surely our system would be better than Europe’s, but many of us were pretty nervous.
If you’re asking whether strong labour demand played a role in making all that happen, I’d say it did. But I am not sure at all that we needed labour demand to be as strong as it was to get there.
It is too soon to say exactly what role US labour markets played in the productivity increase. I think we could have had pretty good matching and productivity results by turning the dial up but not turning it quite as far as we did.
Let me just say one thing broadly on productivity. If you consider the trend, we always see strong business cycle swings in productivity. When you net it all out, as of the end of 2024, we were only slightly ahead of where we might have expected to be, based on the pre-pandemic trend. We are ahead, which is pretty good after going through a downturn, but it’s only a little ahead. So I’m not as effusive as the productivity bulls about where we stand.
Q. Another striking feature is the surge in business creation in the US, which hasn’t appeared in Europe. What do you make of that?
It’s been pretty remarkable. When I first saw the results, I thought it was a statistical anomaly, but at this point it seems real. The generosity of fiscal support deserves some credit. That’s probably not the whole story—technological advances may have made it easier to start businesses. But probably having some money was a necessary condition.
I’d put that in the category of one of the benefits we got from that stimulus. I’ve compared bankruptcy rates from the Great Recession versus the COVID recession. Bankruptcy rates now are still lower than they were before the pandemic, which is incredible. It’s consistent with the higher business formation you’re talking about.
Still, I don’t believe we needed it to be quite as generous. When we talk about people who didn’t have the money to start a business but then suddenly did, that’s generally the lower half of the income distribution. I still don’t think that means we couldn’t have targeted more effectively.
Relatedly, if you look at the projected path of federal debt from the Congressional Budget Office, it doesn’t look much worse than before the pandemic. I think various factors fed into that—for instance, good news on healthcare costs and probably the surge in immigration. Business creation and dynamism helped directly by keeping incomes strong and were factors that also helped the stock market. Some of the good news on federal debt is also related to strong capital gains realisations that led to higher tax revenues. So when we talk about the financing costs of the stimulus, we should consider whether they are overstated if one just looks at the initial rise in debt.
Q. If growth, debt and productivity are more or less on the same trajectory as they were pre-pandemic, do you think the Biden years are economically significant at all or should we be focussing on the core US strengths that mean it is on a faster trajectory of growth than the UK and Europe?
That’s way too strong. The early 2020s were very unusual for a lot of reasons but there are lessons to be learned. First of all, we overcame the huge economic shock associated with the pandemic. It’s true that GDP might not look that different from what we originally projected, and the path of debt might not look that different. But we do see a higher price level, and interest rates look higher as well. Some of that is monetary policy, but even as monetary policy eases, we’re going to see a materially higher neutral rate than we saw prior to the recession, partly because of the higher government debt.
Q. From a European or UK perspective, one could see the big U.S. stimulus as a success, or the focus on labour reallocation as a success, or maybe the big push on industrial policy as something to learn from. How do you see it?
First let me just say that bigger is not always better. Relative to what we did after the Great Recession, bigger is better. But comparing ourselves to Europe this time, it’s not clear bigger was necessarily superior.
On industrial policy, we have a lot to learn. Economists had grown comfortable with simplistic talking points – like “industrial policy is a bad way to run an economy because it’s about picking winners.” The last few years have reminded us that we should approach the issue with more nuance. If we had been teaching it right, we would have said that industrial policy is often a bad idea, but there are certain cases – infant industry, supply chains, national security – where it can be justified.
What we still need to learn is how best to deploy it. I don’t think we have the answer to that yet. I suspect that when we reflect back on this period, we’ll say that promoting advanced semiconductor technology in our country was a good idea. But we might question whether we should have coupled it with restrictions that made doing business more costly like childcare requirements or hiring unionised labour or training workers. Those are all laudable goals, but it’s not obvious you want to couple those things together if your goal is raising semiconductor production. So I think we have more to learn about industrial policy, but I certainly think we shouldn’t be as dismissive as we were six years ago.
Q. What do you think about their approach to place-based policy?
My own view— I know people are on both sides of this issue—is that it is important and constructive to put more focus on place-based policy and how to make it effective. I think one lesson from the last couple of decades is that certain shocks in an economy disproportionately hurt some areas more than others, and that the concentration of pain and disruption can cause a devastating setback in terms of the ability of the local economy to recover and, in turn, cause terrible socioeconomic dysfunction. That’s another feature of “Bidenomics” we haven’t said much about, but it definitely needs attention.
Q. What advice would you give to policymakers in places like the UK or Europe who are looking at US economic performance in the last few years?
If we start with countercyclical support, fighting recessions aggressively is important for individual households and for the economy as a whole. But at the same time we’ve learned you can overdo it with fiscal stimulus. When I talk to microeconomists they want to separate the fiscal support from the fiscal stimulus. They think I’m saying that support wasn’t important. That’s not it at all – the support was important to much better outcomes at the low end of the income distribution. But it is a lesson that you can overdo fiscal support and that also comes with significant costs, including at the low end of the distribution. Policymakers need to keep that in mind as they are crafting legislation.
In the future, we’d be well served—here and probably in other countries—to have more automatic stabilisers tied to economic conditions. They’d turn on when needed and, importantly, turn off when no longer needed.
I also think the questions about dynamism matter. My hunch is that the general dynamism of our economy – which doesn’t only come from the pandemic policy response but also from other parts of our economy like our system of regulation – is a reason we outperformed other economies. More thought is needed in that area.
I’m not sure which approach to job losses is better. Our unemployment rate recovered quickly in the United States, but both the shock and the policy response were unusual. I do not know if European-style employee retention programs might be better than our system in different circumstances. We need more study of that issue.
How immigration fits into broader economic patterns is an issue that certainly wasn’t discussed in real time and even now warrants more attention from researchers. It’s not clear to me we would have seen the rapid disinflation in this country without the surge in immigration. It’s certainly not clear to me that we wouldn’t have seen our 2.5 – 3 percent growth rate – well above trend – without immigration. But that also came with costs. Even those who are pro-immigration weren’t prepared to see cities overwhelmed with unhoused people and state coffers drawn down by efforts to deal with the surge.
ENDS