Interview with Michael Strain (Director of Economic Policy Studies, American Enterprise Institute)
Michael R. Strain is the director of Economic Policy Studies and the Arthur F. Burns Scholar in Political Economy at the American Enterprise Institute. His research and writing span a wide range of areas, including labour markets, public finance, social policy, and macroeconomics.
Interview conducted 5th December 5th 2024
Q. How would you characterise Bidenomics? What do you think its real objectives were, and how do you think it has performed?
I don’t think it was a coherent approach to economic policy – which is not necessarily a judgment on any of the policies. Reaganomics was a concerted effort to juice the supply side of the U.S. economy through policies to stimulate labour supply, investment, and remove regulatory barriers. Reaganomics means something. I don’t really think there was a Bushonomics or an Obamanomics and I don’t see that there was a Bidenomics either.
At one point, Bidenomics was going to be a kind of supply-side progressivism, but that went away pretty quickly. If you really pressed me, I would say the distinguishing feature of the Biden Administration’s approach to economic policy was an embrace of industrial policy through the form of subsidies. That would have been a lot more novel if President Trump weren’t the previous President, because he also embraced industrial policy with similar aims, although President Trump favoured tariffs whereas President Biden favoured subsidies. There’s a lot of continuity between Trump and Biden.
Another way to approach the question “what is Bidenomics?”, rather than focussing on the economic philosophy, is to ask: How will President Biden’s stewardship of the economy be remembered? What are the biggest effects of the Administration’s economic policy? I suspect the American Rescue Plan is going to be what is remembered. I think it has had a larger impact on the economy than either the Inflation Reduction Act or the CHIPS Act. It has also had a larger impact on political outcomes and society more broadly. If asked what the economic legacy of the Biden Administration is, I would say: engaging in what I would characterise as the most reckless fiscal policy in decades. This resulted in substantially overstimulating the economy to the point that it contributed 2 or 3 percentage points to inflation, pushing up the price level, and leading to or exacerbating a period of political instability. This probably contributed to President Biden not being able to accept the nomination of his party for a second term and contributed to the Democrats losing the White House.
Q. Aside from policies, what has been the most notable trajectory of the U.S. economy over the past four years – how will history look back on the past four years?
Inflation is the big story. The pandemic was weird in several ways. The economy entered into a deep recession, but it lasted only two months. By June 2020, the economy was growing again. By January 2021, when President Biden took office, the unemployment rate was falling, and the economy was adding jobs and growing. It was normalising, growing below potential but not so dramatically. The output gap in the first quarter of 2021 was $200-400 billion. That’s not nothing but it’s not a catastrophe. Was there an output gap? Yes, but the trajectory of the economy was solid, and it was going in the right place.
If the pandemic had played out a little differently then that would have been the big headline. But as it happened, the economy had stabilised by January of 2021. So, after four decades of inflation not being a big problem, and after a decade and a half where the big problem was too little inflation, we had a period of some months where the consumer price index was growing at a 9% annual rate.
That was a hugely traumatic event, leading to most workers seeing the purchasing power of their wages decline, and median inflation-adjusted household income being lower in 2021 than in 2020, and lower in 2022 than in 2021. This led to low levels of consumer sentiment. We engaged in a year-long exercise to figure out why people felt this down about an economy with an unemployment rate below 4%; and for me, inflation and its consequences will be the big takeaway.
To be clear, I think the American Rescue Plan contributed to that inflation, but we would have had significant inflation even if the ARP had never been passed.
Q. Accepting that the ARP almost certainly increased inflation, could any policy bundle have helped reduce inflation or was that something structural and global that would have swept across the US economy independent of any policy decisions?
There would have been inflation independent of U.S. policy decisions. Some of that inflation came from the kind of global forces you’re describing, particularly the supply side of the economy. There were supply chain issues that needed to be resolved. There were big increases in commodity prices as a consequence of the war in Ukraine and other geopolitical conflicts and the US was going to be hit by those regardless of the policies of the Administration.
Monetary policy gets too easy of a pass in these conversations and was egregiously miscalibrated in 2021, contributing to inflation – independent of anything Congress or the President did.
Third, the pandemic’s end also pushed forward consumer demand in a hard to predict, volatile, certainly aggressive manner. So regardless of the fiscal policy approach of the Biden administration, there was a lot there. But the ARP was a big factor in the inflation that the U.S. experienced.
Were there things that could have been done? Clearly the answer is yes. The U.S. kept tariffs in place that, if dismantled, could have reduced measured inflation. Expansionary fiscal policies, not just from the ARP but also from the Inflation Reduction Act and CHIPS Act, contributed to inflation. While it may not have been advisable to halt their plans for modest CPI reductions, there were certainly actions that could have reduced inflation.
Q. The fiscal position in the US in the Trump years was relatively loose, in terms of tax cuts and the initial COVID spending through the CARES Act. What lesson did the Biden administration draw from the Trump years?
I think they drew the wrong lesson from the Obama years, not the Trump years. President Biden and his advisors looked back on President Obama’s first term and concluded that the recovery from the 2008 financial crisis would have been faster if the stimulus had been larger. They reached the correct conclusion in my judgement that the Recovery Act was too small relative to the needs of the economy which resulted in some pretty troubling economic outcomes such as big increase in the rate of long term unemployment, while the unemployment rate came down much too slowly during the first term and inflation-adjusted wages were stagnant or declining for most of the workforce until President Obama’s second term. They wanted to avoid that mistake, leading to a “better to err on the side of too much than too little” approach.
At the time, and today, I agree that it’s better to err on the side of too much rather than too little. But too much is not an exact term and, in my judgement, an American Rescue Plan that was 500 or 600 billion dollars would have been erring on the side of too much rather than too little. A Rescue Plan that was a trillion dollars would have quite clearly been too much and what we got was a $1.9 trillion stimulus. That was not erring on the side of too much; it was reckless.
So how did that happen? It happened in part because President Biden and the Democrats had unified control of the elected branches of government, and there wasn’t a lot of discipline put on them. It happened in part because they felt political pressure to do things like stimulus checks to households that hadn’t lost any income and had never lost their job, and that were earning six-figure salaries—things that I don’t think the Administration’s economic advisors thought were wise, but that political advisors and progressives in the House of Representatives thought were politically necessary.
I think that over-learning the economic lesson from 2008, the Obama first term, combined with those political factors, was then combined with a clear analytical error: assuming that inflation is a thing that happened decades ago but wasn’t going to happen anymore – “We did all this stimulus under President Obama, and we didn’t get inflation; the Fed did all this quantitative easing, and we didn’t get inflation; President Trump did his tax cuts, and we didn’t get inflation; we had the $2 trillion CARES Act, and we didn’t get inflation. Inflation is a variable that is somewhat influenced by real economic outcomes, but is mostly influenced by psychology. And thanks to Paul Volcker, the psychology has been tamed. Sure, I’m worried about inflation, but I’m also worried about an asteroid crashing into the Atlantic Ocean—I don’t think I’m going to plan my day around that, and I’m not going to design the stimulus package around it”.
That just turned out to be wrong. In fairness to the administration, there were not a lot of people arguing that it was wrong. Greg Ip at the Wall Street Journal wrote a column and managed to find three people, me, Larry Summers and Olivier Blanchard. I have some sympathy for that. But I don’t have an excessive amount of sympathy for it, because on the one hand, you could look at this as a $300 billion output gap, unemployment rate falling, not rising, economy growing, not shrinking, $2 trillion of stimulus, checks to everybody, and say: at some point the economy can’t expand its productive capacity to meet that demand, and so you have to have inflation. That was the basic argument from me. In response to that, you get this stuff about the magic power of inflation expectations, or arguments that are predicated on the Phillips-curve parameters from 2014 somehow still applying in 2021, when the economic environment had completely changed and we know those parameters aren’t stable across economic regimes. I think there was some optimistic forecasting.
Q. Putting aside the quantum of stimulus, what do you make of the direct-to-consumer approach of stimulus checks? Is this a new tool in the arsenal for whenever the next crisis happens?
First, I wouldn’t overstate how new it is. President Bush did a version of stimulus checks; and there are often calls for things like payroll tax holidays during recessions, which is equivalent to a stimulus check for workers – not for everybody, so that is a difference. Similarly, we always want to make unemployment benefits more generous, make food stamps more generous, and all this sort of stuff.
The innovation that the Biden Administration pursued is less about the delivery mechanism of the money—whether it’s a check versus a payroll-tax holiday versus a bigger food-stamp program or whatever. At the end of the day, you’re putting money in people’s pockets. The innovation is the absence of targeting. If you expand unemployment benefits, you’re putting more money in people’s pockets, but the pockets only belong to unemployed workers. If you expand the food-stamp program, you’re putting more money in people’s pockets, but only for low-income households who are eligible for food stamps. If you do a payroll-tax holiday, you’re putting money in people’s pockets, but only in the pockets of people who are employed. The innovation is the universality of the federal support. That, I think, we will look back on as an error.
I say that with some hesitation, because there are obvious benefits if the goal is to stimulate consumer demand with the goal of stimulating labour demand and advancing reductions in the unemployment rate: we saw that can work. But both the experience with the stimulus checks and the experience with the advance child tax credit payments have solidified the view—correctly, in my judgment—that giving subsidies to households earning six-figure incomes who haven’t experienced an unemployment spell, and whose house is worth a lot more than it used to be, and whose stock portfolio is worth a lot more than it used to be, is not a good idea.
I would expect that the next time we have a recession, there will be some combination of these lessons—maybe the view that we should have stimulus checks, but that the checks should be targeted based on household income and focused, maybe not on the bottom 15% the way food stamps are, but maybe on the bottom 50%, or maybe even the bottom 60%. But let’s not send Warren Buffett a stimulus check. That could be where this shakes out – a part repudiation of the Trump-Biden approach. It’s arguably more Trump than Biden. Also observing that if you want to get people out there spending money, giving them money is a pretty good way to do it.
My worry is that if we have a recession in the next two years and there’s unified control of government, I’m not that worried about there being a response. But if Vice President Harris had won, but Republicans had won the Senate, my worry was that there’d be no stimulus even if it was necessary, because the ARP has so thoroughly discredited the stimulus. That that will end up being its legacy. With Republicans holding all three elected parts of the federal government, I think that’s less of a concern.
Q. During the COVID pandemic, people talked about the “great reshuffle,” where people seemed to move jobs a lot, and we’ve seen a sustained increase in business creation. How much of that explains U.S. growth in the last few years?
We don’t really know. There was a period where we saw this spike in entrepreneurship, and we thought maybe it was a temporary thing: you couldn’t go to work, or your job was only giving you half your normal hours, so you started a business to generate extra income. But it has persisted, and the current data show that it still persists. This cannot be explained as just a mechanical reaction to what was happening in the pandemic. It speaks to something that, in my view, is remarkable about the American economy: that the response of a large part of the population to this pandemic was to say, “Okay, how can I add value here? How can I make money here?”—and then start a business. That’s really quite impressive.
We don’t have a good empirical basis for answering your question, but my sense is that that’s been quite important in the U.S. recovery from the pandemic. And it’s likely an important factor in explaining the divergence between the U.S. and some of the other G7 countries.
Then there is the separate issue of upward mobility in the labour market among employees, not among entrepreneurs. We have lots of evidence that this has happened. In my view, it has increased the productivity of the workforce, increased the productivity of the economy. The flexibility in the labour market exists in the United States in a way it doesn’t exist in other advanced economies, and has a good amount of explanatory power in judging the differences between the U.S. and other advanced economies.
Q. How much can this increase in entrepreneurialism and upward mobility be ascribed to policies put forward by the Biden Administration rather than pre-existing conditions?
A good amount. One of the frustrating things about the economic-policy debate has been that critics of the American Rescue Plan don’t want to acknowledge its role in pushing the unemployment rate below 4% and in allowing for a full recovery of the rate of employment. Supporters of the American Rescue Plan want to argue that all the inflation came from the supply side, but that the ARP had all these miraculous labour-market effects. Those are internally inconsistent explanations. It’s Economics 101 that labour demand is derived demand—businesses assess consumer demand for the goods and services they provide, then figure out how many workers they need to provide those goods and services.
There’s an obvious link between consumer demand and labour demand, and a link between labour demand and the unemployment rate and the rate of employment. So the American Rescue Plan played a large role in the upward mobility we saw in the labour market that was caused by really low rates of unemployment. The flip side is that businesses were desperate for workers – we reached a point where there were two job openings for every one unemployed worker. The businesses that were so desperate for workers hired everyone they could, giving workers a ton of bargaining power, which led to upward mobility and big nominal wage increases and allowed traditionally vulnerable workers – those with work-limiting disabilities, those with criminal backgrounds – to get jobs, which pushed everyone else up the ladder.
But when there are two vacancies for every one unemployed worker, there just aren’t enough workers, when businesses cannot expand enough to meet consumer demand, they start raising prices in order to allocate their output. What happened is actually a very textbook case of what you would expect. Yes, the American Rescue Plan was absolutely a major contributing factor to a lot of upward mobility and an extremely tight labour market, and all the good things that come with that.
Q. What is your assessment of Bidenomics as industrial policy through subsidies, how much did it increase US productive capacity?
To a very limited extent. You want to ask, “Are these programs working?” and then the natural next question is, “What are they supposed to do?” It’s pretty hard to know. These programs were sold as programs that would revive manufacturing employment, and there, I think, there is no hope of success. Manufacturing employment as a share of total employment has been trending down for seven decades. Even if we were to double the number of manufacturing workers, we still wouldn’t be back to a place where the political rhetoric about the importance of manufacturing matched tangible economic statistics.
The CHIPS Act, in addition to reviving manufacturing employment, is supposed to contribute to the nation’s resilience, to make the nation more secure by establishing the United States as a place where semiconductors are manufactured. The Semiconductor Manufacturing Association – which is certainly not a disinterested group – lobbied hard for the CHIPS Act. They think the CHIPS Act is going to take the U.S. from producing 12% of global chips to 14% of global chips by 2032. This does not strike me as a large increase.
They also estimate we’ll go from producing none (or essentially none) of the most advanced chips to producing 28%. That feels bigger than the move from 12% to 14%.But if 72% of the advanced chips in the world are produced outside the United States, are we in a material sense more resilient than if 100% of the chips are produced outside the U.S.? Are we more secure? Are we less exposed to increasing tensions between China and Taiwan? I don’t know, but I’m deeply sceptical that the answer could be yes. If 5% of global chip production got knocked offline, that would be a really bad thing. If 10% got knocked offline, that would be a terrible thing. If 15% of global chip production got knocked offline, that would be a catastrophe. Even under these incredibly optimistic forecasts from the trade organisation representing the industry, we still have over 70% of chips not being made in the U.S. That doesn’t make me feel very good about a big disruption in that sector.
The Inflation Reduction Act, in addition to reviving manufacturing employment, has as its goal to advance the clean-tech sector. If you spend a trillion dollars on that, maybe you get something. But it’s not obvious you get something; and it’s certainly not obvious it passes any sort of cost-benefit test. When President Obama tried to protect the tire industry, he succeeded in saving some jobs and keeping some tire manufacturing in the U.S.; but he succeeded at the cost of several hundred thousand dollars of taxpayer money per job. Success has to include a cost-benefit assessment. You can’t just say, “Did the program do anything?” The Inflation Reduction Act is so expensive that I’d be deeply surprised if it passed any cost-benefit test.
It’s also pretty clear that there are better policies, if you want to spark the clean-tech sector in the U.S., than giving $7,500 to everybody who buys a Tesla. You could implement a carbon tax. You could increase support for basic scientific research. From either of those policies, the bang for the federal buck is much higher.
We’re never going to resolve this because President Trump won the 2024 election, and ten years from now, when retrospectives on the IRA are written that show it didn’t really achieve anything relative to its cost, the defenders are going to say, “Well, that’s because of everything that President Trump and the Secretary of Energy and the Secretary of Commerce and the Republican Congress did to it.”
On the surface level, there will be truth to that claim. But, in my view, passing a sweeping trillion-dollar industrial policy on a party-line vote is itself an indication that your policy is not going to work. One of the generalisable lessons from the IRA episode is going to be that if you want industrial policy to succeed, you have to have buy-in from both parties. Because any policy that has, at most, a four-year shelf life but that has the goal of transforming an entire sector of the U.S. economy, is poorly designed to the point where failure is baked in on the day the President signs it. The likely historical fact that the Trump Administration and the Republican Congress in 2025 and 2026 did things to hobble the IRA is an indictment of the policy as pursued by the Biden Administration, not an indictment of the actions of the Trump Administration. The Biden Administration did not take seriously enough the obvious points of failure it built into its own law by creating a law that had zero support among the other party that was probably going to win an election at some point again.
Q. What lessons should the UK and other countries do you draw from the U.S. experience with Bidenomics?
It’s challenging, because when the UK Chancellor of the Exchequer talked about how much she liked Bidenomics, that was in the supply-side progressivism era. Then that was quickly ditched. But she kept talking about how much she liked Bidenomics. When asked what it was that she was supporting, there wasn’t a whole lot there. I thought that was something you do when you’re 20 points up in the election and you don’t want to screw up your lead. But then the new Labour government got into the office, and there wasn’t a lot there.
I don’t really see any obvious lessons from either the Biden Administration’s successes or failures for the UK. The UK could never get away with persistent 7 per cent budget deficits. The UK could never get away with introducing the kind of geopolitical friction that the Inflation Reduction Act introduced. The UK could never get away with running the kind of protectionist policies that the Biden Administration either enacted or carried over from the Trump Administration. The UK could never mount an effort to deficit-finance a complete overhaul of the energy sector or the manufacturing sector.
The UK, rather than operating from a position of above-potential economic growth, is instead operating from a situation of 15 years of no growth. I don’t see any clear lesson from anything that the Biden Administration has actually done.
ENDS