The single thing Larry Summers gets right about ‘Bidenomics’—it’s different than what came before

Economist Larry Summers made waves with highly critical remarks about the Biden administration’s economic policies while attending a Peterson Institute for International Economics event on industrial policy and U.S. foreign policy last month. Although Summers expressed support for the trio of industrial policy bills that the Biden administration has passed—the Infrastructure Investment and Jobs Act (IIJA), the CHIPS and Science Act, and the Inflation Reduction Act (IRA)—he strongly criticized the “doctrines” (his word) of the Biden administration.

For now, we’ll set aside the question of whether supporting the administration’s concrete actions but disliking their rhetoric merits this level of blistering criticism. Instead, we’ll point out two things. First, Summers’s description of the aims of these industrial policy bills (and hence the “doctrine” of Bidenomics) is obviously inaccurate. Second, to the degree that the administration really has made an intellectual break with the past (including past Democratic administrations), it’s a welcome and necessary break. This is especially true regarding Summers’s claim that the pre-Trump approach to trade policy is a model that should be restored.

Summers describes the Biden administration doctrine as “manufacturing-centric economic nationalism.” Almost every bit of that seems overblown. The main doctrinal provocation that Summers is responding to is an April speech by National Security Advisor Jake Sullivan. In this 4,800-word speech, Sullivan uses the word “manufacturing” four times and “nationalism” or “nationalist” zero times. Summers implicitly claims that the Biden administration has made restoring historic levels of employment in U.S. manufacturing a goal of their industrial policy efforts (he’s not alone in pushing this claim—it was repeated by esteemed economics writer Martin Wolf in a number of venues recently). But that’s just not true—the Biden administration has made no such promise or goal. The trio of bills passed in 2021 and 2022 are actually narrowly tailored, matching up the tools of industrial policy tightly to the economic challenges they’re targeting (the renewable energy transition and supply-chain resiliency, with particular focus on semi-conductor supply chains). In short, the doctrine seems simply to be using public policy to address market failures that won’t be fixed by private markets.

We should be clear that the U.S. could certainly benefit from an intentional “manufacturing policy” that tries to address some of the broader-based challenges to domestic manufacturing production. Key among these challenges are exchange rate misalignments (including those driven by the rapid rise of the U.S. as an oil exporter) and poor macroeconomic policies in trading partners. But, the three industrial policy bills do not constitute an overall manufacturing strategy and they’re not meant to—they have other hugely important virtues.

Among his short list of substantive criticisms, Summers objects to attaching strong labor standards to public subsidies. In his view, even mentioning co-benefits of clean energy investments like job creation or job-quality betrays unseriousness in addressing the core targets of these industrial policy interventions. This obviously does not follow. Nobody looks back on the U.S. defense buildup in the late 1930s and early 1940s and thinks that it got derailed by extraneous labor standards. Instead, this buildup is universally seen as wildly successful and as one of the keys to winning World War II. And yet, the labor standards attached to defense contracts in that time were hugely ambitious and led to the creation of the U.S. middle class. Labor peace agreements as a condition for defense contracts led to large jumps in unionization, and non-discrimination mandates contributed to a large reduction in Black–white wage differentials economywide. Summers argues that any industrial policy effort should be done with as light a touch as possible to ensure that it does not disturb wider economic outcomes. But if these wider economic outcomes are going poorly, why not implement industrial policy in a way to nudge them in better directions?

Summers’s largest criticism is that the Biden administration does not concede that the pre-Trump trade policy regime was a series of successes that we should seek to return to. Summers is right that there is a real intellectual shift here, but it’s a welcome one. Summers argues that the laser focus of trade (and, incidentally, anti-trust) policy should be on costs, full stop. The Biden administration’s welcome pivot in trade policy to also centering workers and their wages is summed up well by United States Trade Representative Katherine Tai:

Our new approach to trade recognizes people as more than just consumers, but also producers—the workers, wage-earners, providers, and community members that comprise a vibrant middle class. Our focus has shifted from liberalization and the pursuit of efficiency and low costs—at any cost—to raising standards, building resiliency, driving sustainability, and fostering more inclusive prosperity at home and abroad.”

Recognizing that households are comprised of both consumers and workers is a cornerstone to making more progressive policy across a number of areas. For example, the same forces that lead to international trade flows reducing import prices are also those that lead to depressed wages for non-college labor in the United States. Celebrating only the cost declines while ignoring the wage suppression is intellectual malpractice and leads to policies that damage far too many.

Summers tries to support his argument for pre-Trump trade policy by claiming that removing the Trump-era tariffs would have measurably reduced inflation over the past two years and that this, in turn, would have boosted real wage growth. Honestly, I find this claim wildly overstated. The Trump tariffs were introduced in 2018, and there was no measurable inflationary effect. The idea that removing them would have led to large inflationary reductions makes little sense—and the magnitudes of the tariffs just don’t add up to large potential price declines. Finally, and this is too inside baseball for most, but tariff removal changes relative prices, not the absolute price level. A key claim of inflation hawks in recent years is exactly that focusing on relative prices is irrelevant to the larger debate over inflation. I personally think that’s wrong and that relative prices do matter a lot, but it’s a clear (and pretty opportunistic) contradiction for somebody like Summers to make. This confusion between what might change relative prices and what might meaningfully reduce inflation also applies to his implicit claim that anti-trust policy that focused only on consumer prices would reduce inflation, and that somehow the broader focus of the Biden administration’s anti-trust policy was making inflation worse.

Does all of this mean we think the Biden administration has hit every note perfect, in both deed and word? Of course not. Given the extreme political constraints they’re facing, it would be shocking if they did. For one, we’d certainly like to hear more from the administration about what they see as the unfinished business of “Bidenomics.” The public investments are welcome and extremely well-targeted, but huge problems remain in the economy—like high levels of inequality—that aren’t well-targeted by industrial policy and need other policy levers to fix. The administration has been admirable in talking a lot about some of these policy levers—like targeting full employment—but could talk more about labor standards like fundamental labor law reform and the need for movement on the federal minimum wage. And, contra Summers, there is plenty of room to expand even the labor standards directly associated with the investments made by the trio of industrial policy bills.

For another, this section of Sullivan’s speech didn’t crystallize what was wrong with pre-Trump trade policy in a way that felt right to me:

The main international economic project of the 1990s was reducing tariffs… Simply put: In today’s world, trade policy needs to be about more than tariff reduction, and trade policy needs to be fully integrated into our economic strategy, at home and abroad.”

The main problem with pre-Trump trade policy was not that it focused too much on tariff reduction. Ninety percent or more of the text of trade agreements from NAFTA onwards dealt with non-tariff issues and sought extremely deep integration of signatory countries. The problem was that the agreements were captured by corporate interests and were exercises in selective protectionism that exposed some actors (mostly manufacturing workers) to fierce global competition but protected others (mostly corporate exporters and monopolists). The “depth” of integration is not the problem—it’s on whose behalf this integration works. Much of what the Biden administration has done on these issues seems to grasp this more fundamental critique, and I hope it shapes their approach going forward.