President Joe Biden said on Tuesday he would safeguard the independence of the Federal Reserve, breaking with his predecessor, Donald Trump, who often tried pressuring the central bank to lower the cost of borrowing.
“Starting off my presidency, I want to be real clear that I’m not going to do the kinds of things that have been done in the last administration – either talking to the attorney general about who he’s going to prosecute or not prosecute … or for the Fed, telling them what they should and shouldn’t do,” he said at a White House news conference.
“I think the Federal Reserve is an independent operation,” he said, adding he does speak with Treasury Secretary Janet Yellen. The Treasury did not immediately respond to a request for comment.
The remarks reflect another way that the president is distancing himself from his predecessor by preserving the Fed’s traditional independence from the White House. Trump heaped criticism onto Powell throughout his term, assailing him as “an enemy of the state” and a “terrible communicator” from his now-suspended Twitter account.
Trump furiously tried pressuring Powell from raising interest rates while the economy was in the middle of its longest expansion in history in the years leading up to the pandemic. At one point, he suggested Powell may be a “bigger enemy” of the US than China.
Powell played a critical role designing the Fed’s stimulus programs as vast swaths of the economy shut down last year. He also encouraged Congress to continue approving more federal aid for struggling individuals, small businesses, and state and local governments.
“Given the low level of interest rates, there’s no issue about the United States being able to service its debt at this time or in the foreseeable future,” he told NPR recently. Powell, a Trump nominee, has also downplayed the inflation risks stemming from the $1.9 trillion stimulus package.
Powell’s term as Fed chair expires in 2022, and Biden must decide whether to keep him onboard.
President Barack Obama and President Joe Biden faced similar circumstances in their first months in office. Both entered the White House in the midst of crippling economic downturns. Both immediately pursued emergency stimulus plans to put the country on track for a recovery. And both spent unprecedented amounts to do so.
But Biden is going bigger, and it could be a very big deal for the future of economic policy.
Biden came out swinging with his $1.9 trillion stimulus package, passed less than two months into his presidency. Beyond its size, scope, and speed, the plan signaled a major deviation from Obama-era logic on spending and working across party lines. The result was a wide-reaching package passed through reconciliation, one that picked up zero Republican votes in both the House and the Senate.
It showed that Biden doesn’t plan to govern like Obama, where the aim was as much bipartisanship as possible and a mindfulness of the size of the federal debt. Biden’s big spending has already evoked comparisons to FDR and LBJ – two presidents Axios reported Biden is very interested in these days – and he may just be getting started. The big question is what comes next.
“The recovery from the Great Recession was long and painful. It exacerbated inequality and other forms of economic scarring,” Claudia Sahm, a former economist at the Federal Reserve, told Insider. “Those experiences are fresh in the minds of policymakers and the public.”
Neither Obama’s office nor the White House responded to requests for comment.
Recover first, pay the bill later
Congress’ recession-recovery playbook has traditionally been fairly simple: offer support where needed, then pull back on aid and turn to austerity once the rebound is on track. Past downturns have seen calls for fiscal support quickly give way to deficit concerns among Republicans and Democrats.
But the record of recoveries from past downturns is informing Biden’s approach. The Federal Reserve’s decision to dampen inflation and start lifting interest rates in 2015 sparked years of weak growth and low inflation. Many economists have since looked back at the rate hikes and the Obama administration’s stimulus package as allowing for a plodding economic rebound.
The very nature of the current slump changed the thinking around fiscal stimulus and paved the way for a new era of government support, said Jason Furman, professor of economics at Harvard University and chair of Obama’s Council of Economic Advisors.
“When there is a big disaster like Katrina or the Gulf oil spill or superstorm Sandy, we’ll spend $100 billion. This was like one of those disasters, but happening everywhere at the same time,” Furman said. “People don’t completely believe in fiscal stimulus. They do believe in disaster relief.”
Congressional Democrats and Federal Reserve officials have been lining up alongside Biden. The rush to austerity in 2009 was a “big mistake” that left the country in recession for five years, Senate Majority Leader Chuck Schumer said in a March interview on CNN.
More recently, Federal Reserve Chair Jerome Powell told NPR that the economic recovery still takes priority over the national debt. While the country’s spending path is currently unsustainable, low rates ensure it can pay off its debt until the economic activity fully rebounds.
The government will eventually have to put the federal debt on a sustainable path, “but that time is not now,” the Fed chair added.
The central bank is still projecting its first rate hike won’t arrive until after 2023, and officials have hinted they aren’t even considering pulling back on the Fed’s emergency asset purchases. Rising Treasury yields suggest investors have different expectations, but policymakers have so far been steadfast in their patience.
“If my 2010 self could see just how different we’re handling this recovery than we handled that one – when we were just pulling our hair out, because Congress was turning towards austerity when the unemployment rate was literally over 9% – it was just an outrageous approach to the recovery at that time,” Heidi Shierholz, director of policy at the left-leaning Economic Policy Institute and former chief economist to Obama’s secretary of Labor, told Insider. “And so this is just incredibly different.”
A lack of state and local spending hindered Obama’s recovery, but Biden is pouring in billions
Economists began to sound the alarm before the second stimulus, emphasizing the urgent need for state and local funding. As Insider’s Ben Winck and Joseph Zeballos-Roig reported at the time, the CARES Act’s $150 billion for local governments ran out on December 30 – and the lack of similar funds in the Great Recession likely slowed the subsequent recovery. That funding was also scrapped in former President Donald Trump’s second stimulus package; as CNN reported.
When it comes to his legacy, Biden is reportedly excited about what’s forming. Axios reported that he recently met with presidential historians to discuss the size and speed of potentially huge changes, with comparisons abounding to Presidents Franklin Delano Roosevelt and Lyndon Baines Johnson, who both spearheaded huge expansions of the social safety net.
“The historians’ views were very much in sync with his own: It is time to go even bigger and faster than anyone expected. If that means chucking the filibuster and bipartisanship, so be it,” Axios’ Mike Allen and Jim VandeHei wrote. In fact, they report, Biden loves the narrative that he’s thinking bigger and bolder than Obama.
He’s even gotten praise from another longtime politician and Senate veteran: Progressive figurehead Bernie Sanders. In an interview with The New York Times’ Ezra Klein, Sanders praised Biden for moving past his more “moderate” past and “acting boldly” with the American Rescue Plan.
Leonard Burman, the Paul Volcker Chair of Behavioral Economics at Syracuse University’s Maxwell School, told Insider that the Great Depression actually lasted as long as it did because Roosevelt and other leaders feared deficits too much.
FDR actually spent less than would have been “appropriate,” Burman said, and recovery really only came with the influx of spending that accompanied World War Two.
“People think of the New Deal as this really, really aggressive response to the Great Depression,” said Burman, who is also cofounder of the Urban Institute’s Tax Policy Center, and he said it limited pain by creating jobs for some people that needed them and providing other assistance, “but it was way too small. So we literally have now – as far as I know – we’ve never done this.”
“We have lots of experience with spending too little to try to get out of a recession. We don’t have any experience with spending too much,” Burman said. “So it’ll be interesting to see what happens.”
The Fed is behind the push for stronger-than-usual price growth. The central bank updated its policy framework in August to target inflation that averages 2% over time, as opposed to the prior goal of simply pursuing 2% inflation.
Officials have since confirmed that, at least for a period after the pandemic, the Fed aims to let inflation trend above 2% to counter years of weak price growth, underscoring just how different the approach is this time around.
The Obama administration “had a hard time” getting some Democratic senators to lift the debt limit and spend roughly $831 billion on the American Recovery and Reinvestment Act, Furman told Insider.
The Biden administration, on the other hand, has had a far easier time uniting Democrats around trillions of dollars worth of relief spending.
“The inflation debate is largely taking place among economists. It’s not a concern that I’ve heard very much from members of Congress,” Furman said. “Biden benefits from people having much more tolerance for larger numbers than they used to.”
Biden and the Fed both want an equitable labor market
Going hand in hand with the Fed’s new inflation target is a goal to pursue “maximum” employment instead of its previous mandate of “full” employment. The updated strategy leans more on using a range of indicators to judge the labor market’s health than focusing on the headline unemployment rate.
Though the central bank acts independently of the White House, the new framework opens the door to economic policy that more aggressively targets a tighter and more equitable labor market.
“There was a time when there was a tight connection between unemployment and inflation. That time is long gone,” Fed Chair Powell said during a March 17 press conference. “We had low unemployment in 2018 and 2019 and the beginning of ’20 without having troubling inflation at all.”
Job gains seen at the end of the last economic expansion largely benefited racial minorities and lower-income Americans, two groups that underperformed the broader unemployment rate for years. Biden’s latest stimulus plan stands to lift demand and pull forward such gains. The millions of jobs still lost to the pandemic indicate there’s plenty of slack in the economy and, therefore, reason to supercharge growth with fiscal support, UBS economists said in a March 9 note.
That slack also supports calls for additional large-scale spending packages. The $3 trillion in new spending is still not enough to get the US economy to the finish line, Sahm told Insider.
“Both the 2001 and 2008 recession were jobless recoveries, in that GDP got back on track much sooner than employment,” she said. “A year into the pandemic, we are still missing 9.5 million jobs relative to pre-pandemic. We cannot afford to have another jobless recovery.”
It’s becoming clear just two months into his presidency that Biden has an endgame in sight: lots of government spending to create a more equitable economy.
House Democrats said on Friday afternoon they have officially started work on an infrastructure package, kicking off what appears likely to be a lengthy stretch of negotiations on a multitrillion-dollar economic recovery bill.
“Building our transportation system has long been bipartisan,” Speaker Nancy Pelosi said in a statement. “It is our hope that spirit will prevail as we address other critical needs in energy and broadband, education and housing, water systems and other priorities.”
She went on: “As we engage in these job-creating initiatives, we must discuss their impact on the federal budget, on creating economic growth and on preserving our planet.”
Rep. Richard Neal of Massachusetts, chair of the House Ways and Means Committee, said in a statement that Pelosi had instructed him to explore “how we can use the tax code to invest in modernizing and uplifting our communities while creating good jobs that will get Americans back on their feet.”
The statements came only hours after Pelosi, Neal, and other top Democrats from both chambers of Congress took a victory lap at the White House on a $1.9 trillion stimulus package that the president signed into law Thursday. Democrats are attempting to quickly capitalize on the law’s popularity with the public and show that their control of Congress and the White House is producing tangible benefits for ordinary Americans, like the $1,400 direct payments in the stimulus.
But Democrats are likely to face hurdles as whether to employ budget reconciliation to fast-track parts of it in a party-line vote, and how to pay for it. Some Senate Democrats and the Biden administration favor raising taxes on corporations and the wealthy, a step likely to trigger Republican opposition.
Pelosi elaborated on potential elements of an infrastructure package during her weekly press conference on Thursday, calling it one of her “favorite subjects.”
“It’s not just roads and bridges, mass transit and high-speed rail, it’s also about water systems,” she said. “Some of the water systems we have are over 100 years old.”
The Biden administration initially said it would release an infrastructure plan in February. It never did so and hasn’t outlined any specifics. Still, there are early indications of its possible scope.
The White House chief of staff, Ron Klain, told Punchbowl News on Wednesday that the administration views robust spending on infrastructure as a way for the US to bolster its global competitiveness. He also said it could include funding for new fleets of electric-vehicle-powering stations and clean power.
Democrats are on course to approve $1.9 trillion in emergency pandemic spending within the next month. It would be yet another large infusion of federal aid only months after Congress passed a $900 billion aid package in December.
But Democrats show few signs of hitting the brakes anytime soon on federal spending. Instead, President Joe Biden is indicating he may press his foot on the gas and shrug off the growing federal debt.
“In order to grow the economy a year or two, three, and four down the line, we can’t spend too much,” Biden said on Tuesday during a CNN town hall. “Now is the time we should be spending. Now is the time to go big.”
It’s a remarkable split for Democrats a decade after the Great Recession. Confronted with the worst economic downturn in generations, President Barack Obama enacted an $800 billion stimulus package in February 2009. Many economists and Democrats now say it was inadequate to address the fallout of the financial crisis.
Previous efforts in Congress on infrastructure legislation collapsed during President Donald Trump’s term. Now, Democrats are in the early stages of a sprawling effort that could encompass jobs, climate change, and energy. They appear emboldened by the Federal Reserve promising to keep borrowing costs low for the near future. Fed Chair Jerome Powell also recently called for a “society-wide commitment” to recover lost jobs.
Rep. Don Beyer (D-Md.), vice chair of the Joint Economic Committee, told Insider that House Democratic leaders discussed a follow-up package this week with at least $2 trillion in further spending.
“I think the number one priority for the White House and Congress will be to build the climate initiatives we’ve so much wanted into an infrastructure bill,” Beyer said in an interview. “The second big thing would be accessible, affordable broadband in rural America and lower-income, urban America.”
The mass blackouts in Texas caused by an Arctic winter storm may add momentum to Democrats urging a major plan to revamp the nation’s infrastructure. Some senior Democrats are starting to press for wide-ranging legislation that comes with tax increases on the wealthy and large businesses.
“The catastrophe in Texas has underscored the urgent need to address the climate crisis and rebuild our infrastructure,” Sen. Ron Wyden (D-Oregon), chair of the Senate Finance Committee, said in a statement to Insider. “In the recovery package, my priorities will be making these critical investments by ensuring the wealthy and mega-corporations pay their fair share.”
Wyden added he would introduce proposals next month to remake the energy tax code and boost clean-energy manufacturing. He also said it was an “an opportunity to undo years of neglect” of roads, highways, and bridges by putting people to work repairing them.
“The past week has hopefully reminded all of my Republican colleagues that there’s no escaping the effects of climate change and broken infrastructure,” Wyden said.
“Historic investments in infrastructure”
The follow-up economic proposal after the Democratic rescue package will differ in two significant ways. The first is instead of delivering immediate relief to families and struggling businesses, the plan will be directed at sparking long-term economic growth.
White House Press Secretary Jen Psaki said on Wednesday that Biden’s plan “will make historic investments in infrastructure – in the auto industry, in transit, in the power sector – creating millions of good union jobs, and in the process, also addressing the climate crisis head-on.”
The second is Democrats are expected to try and finance permanent parts of the initiative through new taxes instead of deficit spending to offset its addition to the national debt. Last year, Congress and President Trump approved $4 trillion in relief spending to put the economy on life-support and stem the rate of coronavirus infections.
Beyer, a member of the tax-writing House Ways and Means Committee, said he believed many Democratic members of the panel “would really prefer there be a pay-for.” The committee held a hearing early last year on funding infrastructure and one possible method under discussion at the time was raising the gas tax, a step not taken since 1993.
Biden administration officials say they are still hammering out the plan’s details. Treasury Secretary Janet Yellen said in a CNBC interview on Thursday that tax hikes on wealthy Americans and corporations would form part of the bill, though they would be gradually implemented.
It’s unclear how much of a package would be covered with new sources of revenue, though up to half is a possibility. During his presidential run, Biden signaled he was open to a 0.1% financial transactions tax on the selling and trading of stocks and bonds. The nonpartisan Congressional Budget Office estimates such a tax could raise $777 billion in revenue over ten years.
“We can’t have a repeat of their COVID bill”
Democrats are grappling with difficult math over the next two years. They control the evenly-divided Senate because Vice President Kamala Harris casts the tie-breaking vote.
Should they use reconciliation to bypass Republicans, Democrats cannot afford any defections – a steep climb given wide differences in views on how aggressively the federal government should move to tackle the climate crisis, create shovel-ready jobs, and levy taxes.
Sen. Joe Manchin (D-W.Va) last month said he supported up to $4 trillion in infrastructure spending. A conservative Democrat, Manchin’s support will likely prove critical to the success of Democratic legislation.
There are Republicans who support upgrading American infrastructure, making a path to a bipartisan deal possible. But drawing 10 Senate Republican votes could lead to difficult trade-offs some Democrats view as unacceptable.
Sen. Bill Cassidy (R-LA), part of a Republican working group that pitched a $618 billion stimulus plan to Biden last month, said any infrastructure measure must be restrained in size and scope.
“We can’t have a repeat of their COVID bill,” Cassidy said in a statement to Insider. “To be successful, any action on infrastructure must be targeted spending and focused on real needs like expanding access to broadband in rural areas and fixing our crumbling bridges.”
Other Republicans said they were reluctant to support a infrastructure plan carrying a major price tag.
“The main thing is that I want to be careful,” Sen. James Inhofe of Oklahoma told Capitol Hill reporters after a White House meeting with Biden on the issue earlier this month. “When you’re working on infrastructure, that’s high dollars.”
The hesitation from Republicans clashes with Democrats eager to embark on robust federal spending – and wield the full power of their control of Congress and the White House.
“We’re only going to get a limited amount of bites at the reconciliation apple,” Beyer told Insider. “Now that we have Chuck Schumer running the Senate, Joe Biden as president, and a 2022 election that will be very contested, we better use our legislative power while we have it.”