Shortsighted policies drown the US

By David Blair & Li Wenhan
0 Comment(s)Print E-mail Beijing Review, September 13, 2022
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Customers pay bills at the checkout counter at a supermarket in Oregon, the United States, July 13, 2022. [Photo/Xinhua]

The current U.S. leadership is so shortsighted they don't even consider the long-term consequences of their irresponsible policies. In an interview with Bloomberg Television's Wall Street Week last year, former Treasury Secretary Lawrence Summers warned the U.S. "was suffering from the least responsible macroeconomic policy in four decades."

Yet the U.S. administration continued its massive cash printing and subsidies. The CHIPS and Science Act signed into law by President Joe Biden on Aug. 9 included $52.7 billion to be invested in semiconductor companies, intended to revive U.S. chip manufacturing as the country's global share of chip production fell from 37% to a mere 12%. Such a huge amount of money flowing into one industry brings a sense of déjà vu.

Former President Barack Obama's administration had a case of investment in a solar-panel company called Solyndra. The investment ended up partly eaten away by corruption, and partly going into firms that proved incompetent. This was more of a political payoff than an economic investment.

The same can be said to be true of the new bill. Building a new chip foundry requires time, money and effort. But a string of provisions in the bill are social policies that have nothing to do with chips while the administration is choosing the "winners" by deciding who gets the money and how it is to be used.

There was an earlier attempt in the late 1980s to promote chip production in the U.S., which didn't work at all and it is unlikely the move will work now. From a macroeconomic point of view, the first question to ask is where the money is flowing when Washington passes a big bill. A large part will go to friends of the administration, or friends of other government officials.

Or consider this. On Aug. 24, President Biden announced a plan to cancel significant amounts of student loan debt for tens of millions of Americans. But he can't "cancel" it; he can only transfer it. Either the taxpayers will have to pay for it or the government will have to print more money.

The president's move takes money that could be spent on the lower middle class and people living in poverty and uses it largely to subsidize the upper middle class. According to a report from Brookings Institution, a nonprofit public policy organization based in Washington, D.C., one third of student loan debt is owed by the wealthiest 20%, while the bottom 20% carry only 8% of student loan debt.

Inequality is a tremendous issue in the U.S., which used to be a much more equal society where 65% of GDP went to labor and the remaining 35% went to capital for decades. Over the last 30 years, however, there was a big increase in GDP with the national income going to labor falling by around 9%, from 65% to 56%. The real wages in the U.S. have not risen as the wealth flowed to a coterie of elites. And the average American is unhappy about it.

Since the onset of the COVID-19 pandemic in 2020, the U.S. Federal Reserve has already created more money than it had in the previous 100 years. All these irresponsible policies have created booms and busts, leading to an artificial economy based on financial manipulation. With a huge amount of cash flowing into the market, inflation follows and risks start spinning out of control. The only way to fight inflation now is a big recession, and unfortunately the U.S. is heading toward one.

The status of the dollar has made it possible for the U.S. to run massive fiscal deficits—borrowing huge amounts of money at very low interest rates for decades on end. And the Federal Reserve has been able to use a very expansionary monetary policy to stimulate the American economy without raising inflation, until recently. Global confidence in the dollar is already low. The only reason people still want dollars is many other places look even worse, for instance, Europe.

One thing is certain—no country can do anything to make the U.S. economy better. The next decade will be dangerous when the economy looks dire, for many reasons—partly bad policy decisions. The declining population growth rate, or even outright decline, will also make growth hard. It's crucial that future U.S. policies don't repeat the mistakes of the past, let alone make worse ones. But no one knows whether it will be theatrics all the way down. 

David Blair is vice president of and senior economist at the Center for China and Globalization. 

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