After plunging 3.5 percent in 2020, U.S. economic growth was on a steep path when Joe Biden took office. In the last four months of 2020, annualized growth was 4 percent. During the first quarter of 2021, GDP growth was even higher, reaching a 6.4 percent annualized rate (although this performance is slightly lower than what some market analyses were forecasting). The IMF projects the U.S. economy to grow more than 6 percent in 2021.

To boost the recovery and escape the specter of a depression, Congress passed two gigantic stimulus packages in 2020 — together amounting to $2.5 trillion, equivalent to 21.5 percent of U.S. GDP. After this, it was unclear whether the new administration would launch further stimulus measures. Yet this is exactly what Biden did. In March, Congress passed the American Rescue Plan Act, which will inject $1.9 trillion this year. The stimulus is aimed at giving $1,400 to everyone earning less than $75,000 a year; granting a monthly child allowance; providing emergency health insurance; guaranteeing a weekly unemployment benefit of $300; and directing $750 billion to vaccines and support for state and city governments.

Immediately after this package was approved, the president announced a new infrastructure investment project, the American Jobs Plan, initially projected to cost $2.25 trillion, but Biden later cut it down in negotiations with Republicans, to $ 1.7 trillion. He also mentioned the forthcoming announcement of a Climate Plan and an American Families Plan of similar amounts.

The package is completed with the Made in America Tax Plan, which increases taxes on corporate profits to a rate of 28 percent. Yet this is far from an excessive amount; under this law, companies will pay taxes at a rate seven points lower than the 35 percent that was in force until 2017, when Trump reduced it to 21 percent. Although Biden’s bill speaks of ending “the race to the bottom” between countries competing among them by sacrificing taxes, it leaves taxes on companies at historically low levels.

In his first speech to Congress on April 28, Biden sought to underscore a change of course in economic policy, when he spoke of ending competition among countries to lower taxes to attract investment. He also nodded to the unions when he stated that “the middle class built the country, and the unions built the middle class.”

This deepening state interventionism, which seeks to strengthen an economy that is already showing signs of recovery, raises several questions for debate. The first is whether we are facing a paradigm shift in the political economy of the main imperialist power. The second is, what will result from all this? Will it strengthen the economic boom, or will it cause the “overheating” of the economy that some critics of the “excessive” stimulus warn about, even among the ranks of the Democratic Party? Will the economy escape another decade of anemic growth and steady degradation for a large part of the working class, like the one that followed the Great Recession of 2008–10?

Keynesian Imperialism

These are the terms used to define Biden’s policy in a recent article in Tempest magazine.¹Ashley Smith, “Imperialist Keynesianism: Biden’s Program for Rehabilitating U.S. Capitalism,” Tempest, May 18, 2021. Biden stated unequivocally that the U.S. is “in a competition with China and other countries to win the 21st century.” That is, to prevent China from emerging as a serious contender to challenge U.S. dominance. But as we pointed out after Biden’s electoral victory, avoiding the threat of being absorbed by the domestic agenda was a sine qua non condition for these objectives. The sharp turn in economic policy must be interpreted as a need to appease the domestic front, containing social discontent, with the goal of concentrating energies on the rivalry with China and other countries “to win the 21st century.”

Susan Watkins notes this same connection between the “paradigm shift” in Biden’s economic policy and his dispute with China.²Susan Watkins, “Paradigm Shifts,” New Left Review, no. 128 (May/April 2021). Her article analyzes Biden’s program in the light of the neoliberal tenets that have characterized the political economy in the imperialist countries since the governments of Ronald Reagan and Margaret Thatcher.

Watkins starts by explaining how the functioning of capitalism has been transformed over the last decade. Governments in the richest countries took generous measures to save banks and big business — a socialization of losses at the expense of the working sectors and the poor to benefit first and foremost those who for years made extreme speculative bets with which they obtained formidable profits. From this emerged an economy “addicted” to monetary stimuli. The so-called quantitative easing, which began at the worst moment of the crisis as a novel experiment of injecting money on a large scale through the purchase of financial assets, was initially a “transitory” measure, but it was later maintained for years, along with zero nominal interest rates. This, in turn, laid the groundwork for a policy of cheap money for banks and investment funds, which re-created the basis for the same frantic financial activity that led to the crisis. As Watkins argues, “A new regime of accumulation emerged from the solutions to the financial crisis: a form of globalized, financialized, debt-driven, and now centrally monetized capitalism.” After 2010, while loose monetary policy continued, there has been a new quest to reduce government spending. In the U.S., this combination resulted in an economy characterized by “soaring stock markets, backed by trillions of dollars in QE [quantitative easing], and an anaemic recovery, with weak domestic investment.”

Watkins distinguishes neoliberalism as a set of policies from neoliberalism as an ideology. With a state interventionism hinging on a financial alchemy with the purpose of keeping the wheel of accumulation turning, the author asserts that policies of this kind continued “undeterred.” Neoliberal ideology, in contrast, “took a battering.” The divergent economic performance that followed the crisis — as a result of bailing out the rich at the expense of the rest of society — which led to the social discontent encapsulated in the formula “1% vs. the 99%” taken up by a series of movements since Occupy Wall Street in 2011, produced adverse social effects that continued to exert their impact long after the recession was left behind. This fueled political phenomena on both the Left and the Right of the “extreme center,” which had characterized neoliberal governance for decades. The first of these phenomena found expression in the U.S. in the popularity of Bernie Sanders’s “socialist” bid for presidential candidate in the 2016 and 2020 Democratic primary elections. In Europe, it was the growth of neoreformist parties in several of the countries most severely hit by the economic crisis. On the political Right, it emerged as the “populist fury” that brought about Brexit, put Donald Trump in the White House, and allowed parties of the Far Right to grow across Europe. Watkins observes that “the main populist forces on the right — whether national-imperial, Catholic-conservative or charismatic-authoritarian — and on the left — whether social-democratic or anarchist-cosmopolitan — were not anti-capitalist as such, but stridently anti-neoliberal.” The Trump administration distanced itself more rhetorically than in actuality from neoliberal imperatives. Even though it pushed a policy that was more protectionist and critical of trade agreements — which, in the case of NAFTA, only renegotiated — it nevertheless reduced taxes on capital just as did other Republican presidents like George W. Bush and Ronald Reagan.

When the pandemic hit in 2020, “the first reflex of authorities on both sides of the Atlantic was the protection of capital.” Apart from monetary stimuli in stock markets by central banks, one of the main chapters in the CARES Act voted by the U.S. Congress in March 2020 was directed at ensuring companies’ solvency and resolving the stock market’s collapse. Yet,

in contrast to 2009, monetary largesse was backed by unprecedented debt-based state spending — a clear break with austerity nostrums, if an avowedly temporary one, justified by the extraordinary circumstances of the pandemic. Confidence bred by a decade of cost-free central-bank money printing underwrote the move.

The first novelty presented by Biden is that he intends to continue spending even if the economy is on the road to recovery, based on this same confidence that it is possible to spend and print money without the risk of an increase in the financing cost. The second novelty is a more “compensatory” bias in the targeting of such spending. The direct transfers to taxpayers will increase the income of the poorest 20 percent by one third in 2021, and that of the poorest 60 percent by more than one 10th. Of course, these are one-time or temporary payments, which “leave the systemic reproduction of inequality unchanged.” Taking the programs as a whole, “the ratio of capital-labour spending is still heavily tilted towards big business.” To soberly gauge the relationship with past policies, Watkins notes that compensatory social payments and capital investment “do not fall outside the neoliberal policy repertoire”; at the same time, “the left’s push for a $15 minimum wage,” which could have proved highly disruptive to prevailing conditions in labor relations, “was politely ignored.” Let us add that in the negotiations with Republicans to approve the infrastructure plan, the intended tax increase on corporations could be reduced — that is, at least, what Republicans are trying to do.

In short, if the new administration increases public spending and gives it a new slant, it is for the sake of recovering the legitimacy of the regime, and, by doing so, be in a better position to defend the interests of big business and gain stamina for the dispute with China. Biden promised in 2019 that the rich had nothing to fear from his administration; this promise still stands. His goal, he would then tell some of his wealthiest campaign contributors, was to act on the margins (though he acknowledged that “we can disagree” about where these margins stand). That “marginal” intervention aimed to ensure that “nothing would fundamentally change.”³Dominique Mosbergen, “Joe Biden Promises Rich Donors He Won’t ‘Demonize’ the Wealthy If Elected President,” Huffington Post, June 19, 2019.

Watkins sums it up thus:

Bidenomics could be seen as a step towards recasting the centrally monetized, debt-driven capitalist regime in a more compensatory form — a neo-third way, driven both by the populist shock and, above all, by competitive friction with a rising China.

Using the idea of a “neo-third way,” Watkins associates the current “paradigm shift,” characterized by new economic policy tools and greater “compensations” that do not qualitatively alter the scaffolding of economic policy, to the so-called Third Way promoted by Bill Clinton and Tony Blair during the 1990s, in the United States and Great Britain, respectively.

Just as the harsh class-struggle policies of Reaganism and Thatcherism gave way to softer, more palatable versions of the same under Clinton and Blair — tax credits, cheap loans, diversity and inclusion — so under Biden, central-bank monetization is underwriting a marginal fiscal recompense for decades of falling real wages and worsening job prospects, gearing up the country for rising competition with China.

Achilles’ Heel

Biden’s bid is much more ambitious in its objectives than was anticipated before he took office. It also faces several risks that could bog it down. Although the Democratic Party has a majority in both houses of Congress, this does not guarantee the approval of its programs. The American Rescue Plan Act was able to pass without Republican support. This was a sign of strength for the administration, which did not depend on negotiating with the opposition. But, in the face of its upcoming legislative projects, it could run into difficulties unless it brings all Democrats on board. The strategy for the American Jobs Plan now involves reaching an agreement with Republicans, but this required cutting the initial proposal by more than $500 billion. Despite the grandiose stated goals of modernizing infrastructure to compete with China, the investment plan was already modest from the start. With only a few hundred billion dollars per year (since the total amount will be spent over eight years), it would have a negligible impact on an economy whose annual production exceeds $20 trillion. Now, after the cut, it looks even thinner.

In the future, new fronts may open for Biden within his own party. The fact is that the new economic policy is not only questioned by sectors related to the Republican Party, the traditional custodian of public spending and proponent of lower taxes, or from the most recalcitrant financial press. Other opposing voices were raised, such as that of Lawrence Summers, an economist linked to the Democrats who played a key role in the neoliberal reforms of the Clinton years and participated in Obama’s team of advisers at the beginning of his presidency. This is the same economist who, for much of the last decade, warned about the prospect of “secular stagnation,” ostensibly the result of structural changes in the U.S. economy, but also produced by the weakness of the stimulus measures taken during the Obama administration. Today he conveys a quite different view. As he explained in a debate before the American Rescue Plan Act was approved, unlike in 2009, when the “stimulus was too small,” in 2020 the situation was different: the stimulus was “at least three times the size of the output shortfall,” that is, the difference between the level to which output had fallen as a result of the crisis and the previous trend projection. If the 2020 measures had already been excessive for this economist, Biden’s first package was, in his opinion, four times what could be required this year.⁴Benjamin Wallace, “Larry Summer Versus the Stimulus,” New Yorker, March 18, 2021. For this reason, he speaks of the danger of “overheating.”

Summers’s is far from being an isolated warning call. After more than a decade of money creation without consequences on prices or interest rates, the idea that the U.S. government can continue borrowing without this becoming a tax burden, a notion that took a pretentious conceptual construction in Modern Monetary Theory, has set in. But warnings about “dangerous” levels of money creation and debt are more and more common since last year.

These cautionary calls seemed to be validated by April’s inflation figure, which rose 0.8 percent to 4.2 percent annualized rate. These levels were seen as a confirmation of the announced overheating. Yet, days before, the employment report had shown the opposite. The U.S. economy had shown in April a slowdown in the job creation that had been seen in previous months, and thee unemployment rate bounced back to 6.1 percent. These “mixed” signals add uncertainty to this year’s economic projections and give grounds to those pushing to curb the stimulus as well as those seeking to accelerate it.

But even if the economic indicators do not justify the calls of curbing stimulus, the “markets” — that is, the big businessmen, banks, and investment funds that benefit in part from the spending but also resist the tax increases — may act “with their feet,” limiting the Treasury’s room for spending. One possible response to higher inflation is a devaluation of U.S. bonds as a result of bondholders’ projecting that the Fed may raise interest rates to tackle inflation. Even if the Fed delays this measure — which, so far, its head, Jerome Powell, shows no intention of taking — the devaluation of Treasury bonds is already translating into a higher cost of financing for public spending. This is where the idea of spending and borrowing indefinitely without consequences could find its limits.

But an even more ominous issue for a “centrally monetized” capitalism that, as Watkins reminds us, is “balanced upon teetering piles of debt, with financial instability an ever-present risk,” is that the conditions under which this risk can materialize will accelerate. The end of “zero” interest rates would leave “leave states and firms with dollar-denominated debt critically vulnerable to reverse capital flows, risking a concatenation of current-account and exchange-rate crises comparable to 1998.” The string of crises that began that year continued with a shock wave that had Argentina’s 2001 economic meltdown as one of its most dramatic episodes. Although these crises may hit the “emerging” countries harder than the U.S. itself, economic stability is by no means assured for the U.S. and other imperialist countries, in a world that is sailing on such a gigantic sea of debt.

Beyond the risk of these critical scenarios that produce a shock in the world economy and that of the U.S. itself, even without such a scenario, it is unlikely that the “virtuous,” doubly expansionary combination of fiscal and monetary policy that Biden’s economic team (chaired by Treasury secretary Yanet Yellen) seems to envision can be sustained. If expansionary fiscal policy begins to be countered by contractionary monetary policy, even if only moderately so, the goal of continuing an economic boom that does not repeat in this decade the flimsiness of growth that followed the Great Recession could become more elusive. And with this, it could become even harder to avoid the class struggle — which has already shown signs that it will not give respite — or to prevent the “populist fury” from reemerging in full force.

Biden’s purpose of showing that it is possible to recycle a “progressive capitalism” at home in order to reinforce the reactionary domination of U.S. imperialism over the oppressed peoples of the world, confronting the aspiring hegemonic powers that intend to dispute its primacy, may find in all of this its Achilles’ heel.

First published in Spanish on May 23, 2021 in Ideas de Izquierda.

Translation: Juan Cruz