The 4717 is not a political newsletter, focused as it is on the intersection of finance, the economy and geopolitics – the new Great Game. It was historically easy to ignore Washington’s industrial policy for the simple reason that we didn’t have one.
With the November 8th midterms approaching, the economy and how much it’s going to cost us is the issue. As the party in power, the Democrats would prefer voters to stick to points like “January 6th” or “My 2nd grader has a right to identify as a kangaroo.” One of those is legitimate, but after two years it’s hard to see how any minds are getting changed in the next week. What they Democrats don’t want to talk about is that bacon now sets you back a sawbuck, and that really chaps. The party has had the Holy Grail – or we should say the Holy Trinity – of the White House, the House and Senate for 20 months now, so a halftime report on Bidenomics might be in order.
Some have called the president’s two years with said Holy Grail a failure or, more charitably, a missed opportunity. Yet the administration has passed three significant spending bills that make up the core of Bidenomics – which is a larger break with the past that it feels. Broadly is consist of:
A $1.2trn infrastructure bill,
A $280bn semi-conductor and science act, and
A $390bn package for the climate. Sure, if the entire history of the planet is anything to go by, the climate is going to do what it’s going to do, but I’m a Southerner who hunts, so let’s not foul the nest.
Overall, that’s $1.7bn – about .7% of GDP (more than France spends monkeying with its gooey economy) aimed at re-engineering American’s economic growth model. Normally, Washington has much less impact on the private sector than people give it credit, but a package that size is bound to have some gravitational pull.
Everyone is down on globalization, and it has largely been discredited in circle that don’t understand economics.
With the world’s second largest economy (and largest navy) openly yapping from Beijing about crippling the liberal global order – that has created more wealth and lifted more people out of poverty in half a century that the previous ten combined – to be replaced with an autocratic system lead by China, you can admire the aim of Bidenomics. The practical issue is that the execution of Washington’s new industrial policy isn’t likely to do much but make matters worse.
Let’s take a look at the spending bill at the heart of the policy: semi-conductors and other chips. Sure, it’s pumping money into the industrial infrastructure and subsidizing new jobs, but the protectionist “Buy American” provisos and tariffs will knee-cap the policy before it starts, leaving the US and its allies weaker for it. We should restrict sensitive trade with China, Russia and the rest of the world’s shit-hooks, because they are weaponizing the economy. We should not enact tariffs and “buy American” provisos that pinch our allies, forcing potential partners to protect themselves from US policy. This will result in both the US and the EU (putting together its own raft of chip subsidies) duplicating efforts and spiking costs and slowing innovation to get to the same end.
Everyone is down on globalization, and it has largely been discredited in circle that don’t understand economics. Still, if the US and our allies want to stay ahead of China in decarbonization and technological innovation, we need free trade within the free world to spur innovation growth faster and cheaper without having to depend of autocratic countries that we know, by matter of policy, are trying to destroy us.
Even on the domestic front with its $10 bacon, the subsidies aren’t the gift they seem. Aside from driving an expensive wedge between allies, the “buy American” clauses limit industrial inputs which drive up costs. These new laws require firms taking the subsidies to pay workers government mandated “prevailing wages.” It’s a noble aim, but anyone who has ever checked their home’s tax assessment against, say, Zillow, can tell you – the government’s figures have a logic of their own. What you are left with are badly made products that very expensive and no one wants to buy. There were sectors where the old USSR could almost match US output, but it was at a cost that was 4 to 5 times in capital and material inputs than the same in America. Considering the track record of Barack Obama in backing its green energy darlings, the US government central planning isn’t much better.
The threat of China is real and the aim of Bidenomics isn’t entirely bad because we don’t want Beijing to be able to throttle our supply lines and use our pirated technology against us. Yet fine aims aren’t the same as fine execution: the US had noble aspirations in Afghanistan, Iraq and Vietnam.
To win this Great Game the US shouldn’t retreat from the global economy, but keep trade alive with the free world while China and Russia retreat. A process that has already started as their ailing economies, collapsing investment and social unrest gets the better of them. All US policy has to do is keep their retreat open. We absolutely should not indulge in a faculty lounge experiment in centralized planning at the precise moment when China is illustrating its failures.