The economic policy dialogue in the United States has undergone an earth-shaking change in just a few years. Neoliberalism, Washington Consensus, and market fundamentalism have been replaced by something completely different. In terms of taxation, the acquiescence of global competition to lower tax rates has been eliminated and replaced by the lowest global tax rate for multinational companies. Until recently, the industrial policy, which was still not on the table, has also returned in retaliatory terms.
The list goes on. The buzzwords of labor market policy used to be deregulation and flexibility, but today they are talking about high-quality jobs, correcting the imbalance in bargaining power, and empowering workers and unions. Big technology companies and platform companies that were once regarded as sources of innovation and consumer benefits have now become monopolies that need to be regulated or even broken up. Originally, trade policies were all about global division of labor and improving efficiency, but now they are all about resilience to shocks and safeguarding domestic supply chains.
Some of these changes are necessary adjustments to the impact of the new crown, and may also be the inevitable reversals spawned by the long-term increase in inequality, economic insecurity, and concentration of market power in the U.S. economy. But this is of course thanks to President Joe Biden, who brought a brand new economic team to Washington, and also resisted the criticism of the older generation and quickly adopted new ideas.
Since the Reagan-Thatcher Revolution in the 1980s, the market fundamentalism model that has dominated the economic policies of the United States and most of Western Europe has a source of knowledge. It was first developed in the academic hall, and then promoted by public intellectuals such as Milton Friedman.
But this time, academic economists have largely fallen behind. Although economists’ enthusiasm for the free market has diminished, there has been no syllabus development such as Keynesianism or Friedman conservatism. Policymakers hope that economists can provide some overall solutions that are not only tinkering, but always end in disappointment.
However, economists have been affected by changes in mood. For example, at the annual special meeting of central bankers held in Jackson Hole, Wyoming at the end of August, a team of well-known academic economists from the Massachusetts Institute of Technology, Harvard University, Northwestern University, and the University of Chicago submitted a paper To explain why a short jump in inflation may be a good thing.
When wages experience a rigid downward trend—the fall will not be as easy as the rise—the structural change can be promoted by raising wage levels in the part of the economy where demand is booming. Although this may cause the overall inflation rate to exceed the target set by the central bank, it is still desirable because it can adjust the relative wages of various sectors.
Similarly, David Otell of the Massachusetts Institute of Technology recently wrote that the labor shortage in the United States that many employers complain about—the lack of job vacancies caused by not enough workers willing to accept jobs from employers—is actually a good thing. He believes that the problem is that the US economy has produced too many "bad" jobs with low wages and few benefits. If the current epidemic makes workers more demanding and more choices, it should be employers who need to adjust.
Jackson Hole’s research shows that only under certain conditions—sector adjustments are driven by changes in consumer demand, wages cannot fall, and monetary stimulus will not hinder structural changes—temporary inflation is an acceptable solution. On the contrary, wages for informal employment in developing countries are quite flexible, and the expansion of modern sectors is restricted by supply-side restrictions. Under these conditions, the effects of monetary or fiscal stimulus measures are much smaller.
Other countries may misunderstand the changes in the United States, causing their policy makers to blindly copy the remedies of the United States regardless of their own national conditions. Those developing countries that lack fiscal space and have to borrow in foreign exchange, especially need to prevent excessive reliance on macroeconomic stimulus.
The Washington economic bureaucracy's reconsideration of economic policy is welcome. But the real lesson that other countries should learn from this is that economics—as a social science—can only give different policy recommendations for different situations. Just as the changing environment and political preferences of the United States are giving birth to new remedies, other countries are better off paying attention to their own specific problems and constraints.
