January 27, 2022

Numbers released today by the Bureau of Economic Analysis, which is part of the U.S. Federal Statistical System producing data and official statistics, show that the U.S. economy grew by an astonishing 6.9 percent annual rate from October to December 2021. That puts the growth of the U.S. economy for 2021 at 5.7 percent in 2021. Despite the ongoing pandemic, this is the fastest full-year growth since 1984.

At the same time, the U.S. added 6 million jobs in 2021, pegging the unemployment rate below 4%.

Economists predict that in 2022 the economy will continue to grow at a much higher rate than the 1.8% policymakers generally expect, expanding at 3.9%.

This growth is the outcome of a dramatic change in economic policy launched by the Biden administration through measures like the American Rescue Plan and the bipartisan infrastructure law.

On January 21, Treasury Secretary Janet Yellen explained to the World Economic Forum that the Biden administration rejected Republican supply-side economics, ushered in during the Reagan administration. That system relied on tax cuts and aggressive deregulation to spark private capital—the supply side—to drive the economy. Supply-side economics has not increased growth, Yellen said, while it has failed to address climate change and has shifted money upward as it moved the burden of taxes from capital and put it on workers.

Biden’s economic policy, Yellen explained, rejected this philosophy in favor of what she calls “modern supply-side economics.” This term appears to be intended to suggest a middle ground between the supply-side economics of the 1980s, which focused on putting money in the hands of the wealthy, and the post–World War II idea that the government should manage the economy by investing in infrastructure and a social safety net.

Biden’s plan, Yellen explained, has focused on “labor supply, human capital, public infrastructure, R&D, and investments in a sustainable environment.” Rather than focusing on putting money into the hands of the “demand side” of the economy—consumers—it focuses on developing a strong labor force in a strong democracy to create growth through hard work and innovation.

In its emphasis on education and access to resources, the Biden administration’s economic policy echoes the ideology Abraham Lincoln articulated in 1859. Wealthy southern enslavers insisted the government should simply defend the property rights of the wealthy, who would amass wealth that they would then put to its best use to develop the country. But Lincoln argued that the government should nurture the country’s laborers, who were the nation’s true innovators and hardest workers and who, if properly supported, would move the country forward much faster than a few wealthy men would.

Yellen said, “A country’s long-term growth potential depends on the size of its labor force, the productivity of its workers, the renewability of its resources, and the stability of its political systems.” The administration plans to increase growth by increasing the labor supply and productivity while reducing inequality and environmental damage. “Essentially,” she said, “we aren’t just focused on achieving a high topline growth number that is unsustainable—we are instead aiming for growth that is inclusive and green.”

This new approach is designed to address the problem of a limited labor force. Yellen noted that for decades now, the U.S. has underinvested in public infrastructure, and in education and training for children and for those who are not college-bound. That underinvestment has widened the wealth gap between people with and without specialized training or college degrees. Biden’s policies would address that gap.

Yellen identified investment in children as central to the administration’s policies. Universal childhood education, a cap on childcare costs, and expanded eldercare to relieve pressures on families are designed to enable younger people to join the workforce and boost growth.

When the numbers underlining the success of his policies came out today, President Biden tweeted: “Last year, we had the fastest economic growth in 38 years. While there is still more work to do, it’s clear we are finally building an American economy for the 21st century.”

In contrast, when asked earlier this week about childcare in this moment when the pandemic has created a severe childcare shortage—a gap Biden’s Build Back Better bill is designed in part to address—Senator Ron Johnson (R-WI) made it clear that he saw no such role for government. “People decide to have families and become parents, that’s something they need to consider when they make that choice,” Johnson said. “I’ve never really felt it was society’s responsibility to take care of other people’s children.”

That attitude, the idea behind forty years of supply-side economics and the tax cuts that were its centerpiece, is showing up in opposition to the extension of the Child Tax Credit that lifted more than 30% of America’s children from poverty in the past year. Studies show the Child Tax Credit was enormously effective. It enabled families to buy food and clothing and to pay off debt. But the measure expired in December. Negotiations over the Build Back Better Act continue, but Congress has dropped the Child Tax Credit from the plan. All of the Republicans in the Senate stand against it, as well as at least one Democratic Senator: Joe Manchin of West Virginia, who wants a work requirement added before he will agree to an extension of the policy.

And yet, stories of the end of the new Child Tax Credit system focus not on the Republicans, who oppose it across the board, but on Democrats, who are doing their best to put their new system in place permanently. A piece in Politico today suggested that angry voters who counted on the Child Tax Credit are blaming the Democrats for its demise, and that as families suffer, they too will blame Democrats, who will pay in the 2022 midterms.

Similarly, the media seems to be downplaying the extraordinary success of the Democratic policies and instead focusing on their possible downsides. Today, the Washington Post ran a story that began: “Even as the U.S. economy grew at its fastest pace in decades in 2021, the recovery has more recently flashed troubling warning signs, with soaring inflation, whipsawing financial markets and slowing consumer spending complicating the rebound.”

It was a surprising way to introduce the best economic growth since 1984.

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Notes:

https://www.washingtonpost.com/business/2022/01/27/gdp-2021-q4-economy/

https://home.treasury.gov/news/press-releases/jy0565

https://www.politico.com/news/2022/01/27/bidens-signature-legislation-child-tax-credit-00002560

https://www.brookings.edu/wp-content/uploads/2021/09/20210929_Hamilton_stevenson_womenWorkFamilies.pdf

https://www.cnbc.com/2022/01/04/manchin-wont-support-enhanced-child-tax-credit-without-work-requirement.html

https://www.washingtonpost.com/business/2022/01/27/omicron-economy-gdp-2022/