The Keynesian honeymoon period lasted quite a long time in United States. Frank D Roosevelt (FDR) started after defeating Herbert Hoover in the 1933 American presidential election and became the longest running president in American history, four terms. The market failure that occurred during the Great Depression brought Roosevelt to move slightly to the left. Through tough negotiations between FDR, the Unions represented by the two left parties, and the private sector (big business), FDR succeeded in formulating a new economic path to get out of the Great Depression, namely the New Deal.
Minimum wages and unemployment benefits were agreed upon, infrastructure and manufacturing projects to absorb labor were initiated, and the balance budget model was changed to a deficit budget. The Great Depression which made the US unemployment rate jump from 14 percent to 25 percent showed a significant change after Roosevelt’s policies were implemented. The Second World War provided oil to the American economic engine where American manufactured products, from weapons to food and clothing, were urgently needed by all the allied nations. Although in power until 1945, the Keynesian regime continued into the 1960s, leaving unemployment at only 4.6 percent.
A year before FDR died, 1944, on the other hand, John Maynard Keynes also formulated a new trade and finance formula at the Bretton Wood Agreement. The currency that originally referred to gold was converted to the Dollar and the Dollar was the only one that referred to gold which also acted as the global reserve currency. This is what makes all world economies finally affected by the Dollar, because all currencies are tied to the Dollar.
So, the FDR policies became a arena for the actualization of Keynesian concepts related to the role of government in the economy, aka a continuation of Keynes’s thought that the Great Depression was the result of the overconfidence of the free market (self-regulating market) which led to market failure in the Great Depression crisis. So that it needed the touches from the government or the state, in the form of stimulus and regulation, and with a deficit budget model.
Until the late 1960s, the fruit of the first stone which was laid by FDR was sweet. Unemployment narrowed, income inequality decreased, job opportunities for women widened, and the standard of living for people increased. As a result, demand increased sharply beyond domestic production capacity. Automatically the Dollar strengthened sharply and the first trade deficit occurred in 1971. The Dollar went crazy, reducing the appetite of trading partners, because American commodities and manufacture production automatically became expensive which resulted in imports exceeding export capacity, aka trade deficits.
But president Nixon refused to exercise austerity policy. Nixon even canceled the Bretton Wood System by cutting off the dollar’s reference to gold in 1971. A fiat currency was born, which is based on debt. All world currencies ultimately refer to the Dollar which rests on nothing more than debt securities. And this is what we live for today. It was unexpected that two years later, 1973, after the Yom Kippur war in the Middle East, Arab countries did not accept America’s position which did not take a clear stand, and even seemed to tend to support Israel. The Arab world punished America by imposing an oil embargo.
Oil prices went crazy. The crisis was getting worse. Keynesians never thought that unemployment and inflation could go hand in hand, but that’s what happened after the Arab world took its deadly kick, namely stagflation. Then recession ensued. The dollar was finally saved by the lobby of Henry Kissinger telling OPEC to use the Dollar as a tool for oil transactions, which eventually gave birth to the Petro-Dollar. But inevitably, the Keynesian regime was finally evaluated. Milton Friedman emerged as an angel carrying the message of neoliberalism-libertarianism, namely a lean government that did not intervene and regulate much on the one hand and private sector that did not come under much regulatory and taxes pressure on the other.
America was starting to breathe again, but based on the actions of the big private sector and free market principles. The risks were that income inequality widened, the socioeconomic conditions of the middle to lower classes begun to be vulnerable, the role of the Unions almost disappeared, and the neoliberal crisis finally took hold in the early 2000s, starting from the dotcom crisis to the big financial capitalist crisis in 2008. From these time till today, the big capitalists are too big, so the solution is no longer like what FDR thought. Because the situation was “Too big too fail.”So the big company must be saved first. What happened then was the emerging of Quantitative Easing, cheap money, super low interest rates, etc . To treat guilt towards FDR, Obama-Biden introduced Affordable Housing Policy and Obamacare (Affordable Care Act).
Actually, in the years 1970-1980s, Americans economic were also exacerbated by Japan which began to rise to the top, exporting manufactured commodities at lower prices. Imports from Japan were rampant, making domestic manufacturing even more inefficient, so imports made more sense. Automatically, the deficit would be more and more. Then in 2000s, China entered the World Trade Organisation (WTO) which has been causing worse effects than Japan. The cheaper investment costs in China have brought capital to the land of the Bamboo Curtain. Millions of manufacturing jobs have been lost. Trump is finally the first and most outspoken president, just like he spoke in 1980s to Japan effects to American economic
The two school of thought seemed to fail, tarnished the self-esteem of the Keynesian principles and worshipers of Milton Friedman. Capitalism, which breaks the boundaries of the state, does inflame the economy in one hand, but if it is not limited, it will end up destroying the socio-economic and cultural root of society in other hand, as Karl Polanyi wrote in “The Great Transformation.”When countries that trade with each other experience surplus, produce a lot of money, their economy rises, and the value of currencies will also rise, which ultimately makes investment costs in the country expensive. Investment expansion will slow , then labor absorption also begins to slow down. Even finally, many are leaving from work.
Then many of them will begin to tighten the economy (austerity)and make structural adjustments, making rules which make everything possible into economic system, sell land and labor cheaply, so that the economy would continue to run well. But if the economic remains stuck, moving slowly because the competition at the global level is getting crazy. At that time, many are trapped into so called “only two options” trap, socialism or fascism. Some pundits try to understand the Trump’s victory not only due to the personal frustration of voters over a situation that tended to be stagnant here and there, but also because of the unrest among whites who had begun to lose their dominance. And they see it as fascism wrapped in white supremacysign. Whereas, voters really bought Trump’s tough narrative on global trade (especially with China), which has taken away millions of manufacturing jobs in America.
So Biden, of course, understand very well the above dilemma that the market cannot be kept away from government intervention, but also not too close attached. Imagine if Congress and the Trump administration did not pass a budget relief policy for businesses at the start of the pandemic a few months ago? And imagine if there was no relief policy for workers who are victims of dismissal and unemployment? No doubt, the American economy will fall apart. However, the combination of pro-business, (pro-Wall Street) and pro-Main Street policies, will determine America’s economic fortunes in the future.
Like other democratic presidents, Biden will certainly raise corporate taxes and the upper middle class. Biden will also improve the Affordable Care Act, invest a very large amount in climate change policies and R&D projects, and strengthen the domestic supply chain. Biden is likely to use large federal authority to intervene in the economy. But, the American public will be watching him. That’s why, Joe Biden must also be able to distinguish which economic policies continue to preserve American values which are completely different from China’s. It is not an easy responsibility, it will be a big deal for the American economy in the coming years. In other word, Biden will be expected to improve the economy while remaining on the American economic path
On the other hand, to realize his grand plan, Biden will be trapped in large amounts of new debt and all efforts to pump capital into the economic system, so that the American economy can keep moving. But the 1.9 trillion dollar stimulus will increase US domestic demand without being followed by an increase in domestic production capacity. This step will cause two things, firstly is inflation and second is an increase in the trade deficit, particularly with China, because the increase in demand will be met by imports. These two risks will make Biden return to bring the American economy into a new crisis. The more inflation increases, the purchasing power of Americans will also be depressed, without being followed by a significant increase in labor absorption and wages, and the end is a new stimulus and new debt, which will make the economy warmer and more contracted.