The following is a copy of remarks delivered by Scott K.H. Bessent at the Toward a New Supply-Side: The Future of Free Enterprise in the United States conference.
The Biden administration chose to put central planning at the heart of its economic agenda. The resulting economic calamity was the predictable result.
President Reagan had a unique political talent for explaining complex matters of policy and strategy in simple terms. In 1986, he summed up the state of the U.S. economy under the Carter administration:
“Back then, the government’s view of the economy could be summed up in a few short phrases; if it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”
Over eight years, the Reagan administration successfully rolled back excessive government interventions of the Kennedy, Johnson, Nixon, and Carter administrations, unleashing the productive capacity of the U.S. economy. This consensus mostly held through the George H.W. Bush, Clinton, and George W. Bush administrations. But the Obama administration featured a return to heavy government intervention in the private sector, particularly through its turbocharged expansion of the regulatory state, delivering an economic constipation similar to that which plagued the U.S. before the Reagan revolution. The Trump administration’s pursuit of tax reform, deregulation, and fair trade produced noninflationary growth that generated the fastest increases in real wages in a generation.
Yet the Biden administration actively chose to disregard the roadmap for economic dynamism that Presidents Reagan and Trump left behind. Instead, the Biden administration reached back for the Carter model. “Bidenomics,” or under Treasury Secretary Janet Yellen’s more nomenclative framing of “modern supply side economics,” is neither modern nor supply side nor economical. At its core, Bidenomics represents a return to the discredited economic philosophy of central planning. President Biden’s economic team hoped, in the words of former National Economic Council Director Brian Deese, that the Bidenomics experiment would result in a “new equilibrium of higher productivity, higher wage growth, [and] higher GDP growth as a result of this set of policy interventions.” But like all prior attempts at central planning, it failed to deliver prosperity, and instead generated a substantial upward price-level shock, accompanied by an insidiously persistent inflationary environment that has eroded standards of living in the United States. Continual economic anxiety has replaced abundance and prosperity.
The Biden administration chose ideology over risk management, igniting inflation
Like every incoming administration, the Biden administration faced a choice at the outset as to how to govern. Despite a narrow margin of victory, and benefitting from a burgeoning economic recovery, the former vice president chose to undertake massive stimulus and a would-be transformational reordering of the U.S. economy. On January 20, 2021, the economic resurgence was well underway. After the enormous shock from Covid in the second quarter of 2020, where real gross domestic product (GDP) fell at an annual rate of 28.0% amid widespread lockdowns, real GDP bounced back dramatically in the third quarter at a rate of 34.8%, and the fourth quarter continued the recovery at a rate of 4.2%. The unemployment rate had fallen precipitously from its peak of 14.8% in April 2020, with the December 2020 rate reported in January 2021 at 6.7% and poised to continue its steep downward trajectory.
The speed of the economic healing was not surprising given the peculiar nature of the pandemic recession and the calibration of the Trump administration’s response. Covid was not endogenous to the economy. It was a true external shock to what had been a vibrant, balanced economy that was producing noninflationary growth and significant real wage gains. Economic policy must construct the proper policy mix for the economy as it exists to deliver the economy as you wish it would be. To that end, the Trump administration pursued a policy of preserving productive capacity in the economy so as to enable a resumption of economic activity once the underlying public health emergency had passed. The economic data in January 2021 suggested that for the most part, that policy succeeded. The arrival of vaccines in December 2020, as a result of Operation Warp Speed, meant that the worst of the public health emergency was over. A careful appraisal of the economy would have led sensible policy makers to conclude that all that was needed for a return to the pre-Covid economy was for the government to get out of the way.
Upon assuming office, the Biden administration cast aside risk management and made irresponsible choices to pursue a set of policies designed to deliver the managed economy it desired. Unfortunately, the goal was not a return to economic growth and real wage gains, but social and political engineering under a classic central planning paradigm. The Biden administration also seriously misjudged the economic consequences of its approach, particularly with respect to inflation, triggering a surge in prices in excess of anything seen in four decades.
So doctrinaire was this administration in its social goals, that its members failed to recall a foreboding, famous conversation between President John F. Kennedy and James Tobin, a Yale economics professor, advisor to the Treasury Department, and Janet Yellen’s mentor. In the early 1960s, JFK asked “…but is there any economic limit on the size of debt in relation to income? There isn’t, is there?” The future Nobel laureate replied, “The limit is inflation.” JFK ended, “That’s right, isn’t it? The deficit can be any size, provided it doesn’t cause inflation.
Everything else is just talk.” Indeed, as Biden and his economic team take to the airwaves today to defend their ideological, inflation-inducing policies, all they have left is “just talk.”
On the demand side of the economy, the Biden administration provided maximum stimulus, beginning with the $1.9 trillion American Rescue Plan (ARP). In part, the ARP was designed to reward political allies, including through the $350 billion bailout of state governments that favored heavily indebted states and a $122 billion bailout for schools to reward teachers’ unions, even as many public schools remained closed. It significantly expanded benefits programs that created material disincentives to work. This approach was the essence of central planning—social engineering designed to support the Democratic Party’s favored political interests.
In justifying its blowout spending, the Biden administration corrupted classic Keynesian economic theory. This theory holds that deficit spending can help restore growth and lift employment in a particularly deep recession not responding to monetary stimulus. Such a policy mix can, in fact, assist in promoting economic recovery, provided that there are productive resources in the economy lying idle that could be brought back online with demand stimulus. The Federal Reserve accommodated the fiscal stimulus with ultra-loose monetary policy and large-scale asset purchases. But Covid was a fundamentally different situation from a classic recession caused by the normal fluctuations of the business cycle. There was no output gap, and few unused resources as the pandemic had restricted supply and demand in concert. As a result, the Biden administration’s demand stimulus set the conditions for significant upheaval when it collided with the supply side of the economy.
Inflation was the natural result of regulatory restraints on the supply side of the economy interacting with the demand stimulus provided by the Biden administration’s unprecedented spending binge. Inflation peaked in June 2022 at a 9.1% annual rate, as measured by the consumer price index, the highest rate in 40 years. As a result, real wages significantly declined through 2021 and 2022, and are now approximately 5% below their pre-pandemic trend.
The majority of Americans have seen their standards of living diminished as a result of Bidenomics, however, it is those most vulnerable—minorities and lower income households—who have endured the most pain from the Biden administration’s central planning agenda. That is, inflation affects all U.S. consumers, but not equally. Due to a lack of substitution autonomy, inability to trade down, and an inability to stock up at low prices, lower income households take the brunt of the inflation burden.
Additionally, the components of the CPI basket most affected by Bidenomics have been those that are most essential—energy , food, and shelter—meaning the demographic cohorts most reliant on these essential components have faced harsher conditions due to Biden’s poor policy design. Research from the Federal Reserve Bank of New York shows that inflation is not experienced equally across racial groups. Between December 2020 and December 2022, black and Hispanic Americans faced inflation of 14.7% and 15.6%, respectively. Over that same period, inflation was lower for white Americans (13.6%) and Asian Americans (13%).
These disparities have likely continued to today. Since January 2021, the overall headline CPI index is up 19%, compared to 38% for the energy component, 21% for the food component, and 21% for shelter and rent. These are not optional purchases, but necessities to live. For comparison, during President Trump’s tenure, these same components moved up by less than half the pace they did under Biden.
Furthermore, the stifling of real sustainable growth through the central planning agenda has created an earnings drag which has been most taxing on minority populations. For example, during the first three years of the Trump administration, median real weekly earnings for black and Hispanic Americans grew 7.5% and 4.5%, respectively. During the Biden administration, however, black and Hispanic American median real weekly earnings have shrunk by 3.6% and 0.7%, respectively. Consumers themselves confirm this data. The Census Bureau’s Household Pulse Survey shows lower-income households are more than twice as likely to report that recent price increases are “very stressful” versus those making above $150,000 per year.
While the stated goal of the Biden administration is to “pursue a comprehensive approach to advancing equity for all, including people of color and others who have been historically underserved, marginalized, and adversely affected by persistent poverty and inequality,” his policies have done exactly the opposite, saddling the most vulnerable communities with higher prices and earnings that can’t keep up.
The results for disproportionately wealthy asset owners have not been as disastrous but are far from desirable. President Biden touts the nominal level of the stock market, which is near all-time highs, but inflation-adjusted household net worth since the start of the Biden administration is flat, as a result of a more than 20% rise in the general price level. By comparison, real household net worth rose 16% in the first three years of the Trump administration.
On the supply side, the Biden administration similarly chose to pursue a set of central planning policies aimed at subsidizing supply in favored industries and restricting it in disfavored ones. Within days of taking office, President Biden announced new restrictions on oil and gas production that were designed to implement his campaign promise to “end fossil fuel.” The administration continued its efforts to suppress energy production even in the face of potential geopolitical gains amid Russia’s invasion of Ukraine. Biden recently ordered the pause of new liquefied natural gas export licenses in an unsettling election season intervention, all while using the Strategic Petroleum Reserve (SPR) as a device to manage prices. Much is made of the fact that U.S. oil production is currently at an all-time high, but this is in spite of government policy, not because of it. Private innovation and productivity gains are entirely responsible for the increase in production; the Baker Hughes rig count has never exceeded the pre-Covid level of approximately 800 during the Biden administration, and currently sits at 621, as the administration makes it more and more difficult to produce fossil fuel energy, including natural gas, which should form the basis of any sane, sound policy that considers both energy needs and the environment.
The Bidenflation was the entirely predictable result of Bidenomics, or as I have referred to it in the past, Bidenitis, Bidenism and Bidenismo. Preventing it simply required a basic commonsense understanding of demand and supply. That is why former Clinton Treasury Secretary Larry Summers called the ARP the “least responsible” economic policy in 40 years at the time of its enactment. The Biden administration’s primary response to inflation has been to reach for price controls and blame imagined “greedflation,” a term so discredited that even the Federal Reserve Bank of San Francisco published a paper refuting the concept. This desperate mischaracterization reveals the willful illiteracy at the heart of its economic agenda. Yet it is not particularly surprising that the Biden administration misdiagnosed the economic consequences. The primary purpose of the agenda was not economics, but instead to achieve social and political objectives through central planning. Economic forecasting errors are a natural consequence of deprioritizing economics.
Modern central planners use the language of economics to justify their central planning
While Bidenomics at its core subsumes economic policy to social and political objectives, it relies heavily on traditional economic arguments and tools in order to justify its interventions. Government interventions in the economy can often have merit, including to address market failures after careful and rigorous economic study. Council of Economic Advisors Chairman Jared Bernstein recently noted that “our work to accelerate the spotting and correcting of market and policy failures raises some eyebrows.” Indeed, sober economic thinkers should raise their eyebrows when hearing about Bidenomics’ latest planned intervention. If all you have is a central planning agenda, everything looks like a market failure.
Simply calling something a market failure does not make it so. The Biden administration recognizes the political expediency of cloaking its social and political engineering in the language of economics. As a result, it has bastardized economic analysis to pursue its goals, principally through the regulatory state. This approach has upended the rigor that should be at the heart of U.S. economic policy with corresponding impacts on the stability and predictability of the regulatory environment that is needed for the private sector to thrive.
Cost-benefit analysis has been a feature of the regulatory state since President Clinton’s Executive Order 12866 and has generally brought increased analytical rigor to policy making. The Biden administration, however, has abandoned any pretense of intellectually moored cost-benefit analysis in pursuing its regulatory agenda. Biden’s regulatory czar has assigned unjustifiably low discount rates to future benefits of regulation in order to inflate their present value. As a result, cost-benefit analysis will now significantly overstate the future benefits of almost any regulatory undertakings in order to justify high present-day costs.
Worse yet, Biden’s cost-benefit overhaul instructs agencies not just to consider effects on U.S. based citizens and residents who live abroad but to “include effects experienced by noncitizens residing abroad” where “regulating an externality on the basis of its global effects supports a cooperative international approach to the regulation of the externality.” While this approach is legally dubious at best and will likely be challenged in courts, it sets a dangerous precedent. The practical result of the changes to cost-benefit analysis mean that the Biden administration will have a freer hand to interfere with the productive economy to serve its political interests, while holding up fundamentally flawed analysis to justify its globalist aims.
Distinguished economist and social commentator Thomas Sowell in his 1996 book The Vision of the Anointed, presciently outlined the Biden administration’s policy playbook 25 years in advance:
- Assertions that a great disaster is about to occur.
- Calls for massive government intervention to prevent the impending catastrophe.
- Disdainful dismissal of contrary arguments as uninformed, irresponsible, or motivated by unworthy purpose.
- The policies of the anointed are implemented and are themselves disastrous.
- The anointed steadfastly refuse to acknowledge mountains of evidence that their polices have failed while accusing their critics of dark motives.
This is a recurring cycle in the Biden administration across countless policy domains, highlighted by the flawed description of inflation as transitory.
At the same time the Biden administration manipulates arithmetic to retain at least the appearance of a scientific approach, it has also embraced the cultural grievances of the progressive left in shaping policy. A recent amendment to the regulations implementing the National Environmental Policy Act required the government to consider “indigenous knowledge” in the environmental review process.
Monetary policy also plays an important role in the new paradigm for central planning in the United States. The so-called “unconventional” monetary policies proffered by academic economists and deployed by the Bernanke Fed in the aftermath of the financial crisis blurred the line between fiscal and monetary policy. The Fed’s quantitative easing—or large-scale asset purchases—brought the Fed into the business of managing the nation’s stock of borrowing. This policy enabled fiscal excesses by repressing the government’s long-term borrowing cost. Moreover, the Fed’s expanded set of bank regulations after the global financial crisis conveniently required the central bank to keep its balance sheet bloated for the sake of supplying ample reserves to the banking system. Thus, these regulations provided justification for the permanent acquisition of Treasury securities and allowed for a direct monetization of fiscal deficits.
These same regulations have also increased the regulatory requirements for banks to hold Treasuries, creating a clientele devoted to keeping yields low. As a result, central planners have been able to extend their control over the economy through profligate spending and an inexorable expansion of the regulatory state.
Overreaching and arbitrary regulation undermines the rule of law and fuels backlash
The Biden administration has repeatedly stretched its legal authorities to direct resources towards favored areas of the economy, often in direct contravention of statute. Congress designed the farcically named Inflation Reduction Act (IRA) in part to encourage the development of a domestic electric vehicle (EV) supply chain, including by restricting tax credits to vehicles that are sourced in the United States. Yet the Biden administration unilaterally rewrote the law to extend subsidies to EVs that are largely manufactured outside of the United States. This and other regulatory expansions to the IRA have pushed its estimated cost to $1.2 trillion—more than three times greater than the original forecast. This will severely distort the supply side of the economy by crowding out investment in more productive sectors. Firms and households have been unable to pursue capital expansion plans or home purchases because Biden’s fiscal policies have kept interest rates elevated for longer.
The courts have occasionally checked the Biden administration’s excesses—for example, its attempt to stretch the Clean Air Act of 1970 to restrict fossil fuel production in West Virginia v. EPA. But even where the courts have ruled that the Biden administration has exceeded its legal authority, it has persisted in finding extralegal mechanisms to pursue its goals. Despite the Supreme Court striking down its student loan forgiveness plan in Biden v. Nebraska, the administration forged ahead with a slightly different legal approach to cancel student debt in a transparent vote buying scheme that reduces incentives to work, stokes inflation, and swells the deficit. It too may be struck down in court. Individuals’ ability to plan for the future depends on a stable and predictable regulatory environment governed by law. The Biden administration’s legal chicanery threatens to upend these expectations, with associated consequences.
This administration’s overreach in pushing its central planning agenda risks sparking significant backlash against reasonable long-term goals. The forced conversion to EVs and attempts to phase out internal combustion engine vehicles have resulted in the politicization of the EV market, with 69% of Republicans reporting they would not buy an EV in the future, compared to 27% of Democrats. The administration’s incompetence has also added to public skepticism. In the two and a half years since Congress appropriated $7.5 billion to build a federal EV charging network, the Biden administration has actually delivered only 8 charging stations, which even recently led a sympathetic journalist to laugh in Transportation Secretary Pete Buttigieg’s face.
Similarly, the Biden administration’s open borders policy has fueled the worst border crisis in U.S. history. It is unclear exactly how many illegal and legal immigrants have entered the country under President Biden’s watch, but it is clear that immigration has played a significant role in suppressing domestic wages, as shown in a recent study from the Kansas City Fed. While the additional labor supply has reduced inflation, it has reduced it in the worst way possible—by eroding the wages of American citizens. The chaos at the border and harmful economic effects of uncontrolled immigration have resulted in a loss of support for even high-skilled immigration under the kind of merit-based immigration that President Trump supported during his administration.
Central planning favors incumbents and reduces competition
In 2023, the Biden administration added 90,402 pages to the Federal Register, an annual total eclipsed only by the final year of the Obama administration. The Biden administration’s expansion of state control predictably breeds favoritism for market incumbents and creates significant barriers to entry for new firms, reducing U.S. economic dynamism and increasing prices. A recent study found that the top 1% of businesses by revenue grew their share over overall business receipts from 60% in 1960 to approximately 80% today.
Artificial intelligence (AI) offers great promise for enhancing productivity throughout the economy. Predictably, the Biden administration is rushing to regulate AI—without any legislation—whichh will lay the groundwork for government management of the developing industry. The Biden administration has turned to leaders of large technology companies, who are best positioned to benefit from regulatory barriers to competition, to shape AI regulatory policy. If this trend continues, complex regulations will cement the market position of incumbents who are well-resourced to navigate the compliance environment. Potentially more innovative competitors who lack the means necessary to manage the regulatory burden risk a death in the cradle.
Financial regulation has also served to privilege incumbents and push economic activity outside the regulatory perimeter. Between 1984 and 2008, an average of 172 new bank charters were granted annually for Federal Deposit Insurance Corporation–insured commercial banks. Since 2009, there has been an average of 7 new charters annually. The enormous regulatory burden of contemporary financial regulation has also increased the concentration of those banks that do continue to operate. The five largest U.S. banks now control approximately 50% of all U.S. banking system assets, up from 28% in 2000. There are legitimate reasons for encouraging the development of credit intermediation outside of the banking system, such as reducing maturity transformation, but there is no coherent justification for the privileging of large banks. The loss of regional and community banks is a particularly concerning development for small and medium-sized businesses. Regional and community banks are efficient sources of credit for local communities because they have local knowledge and the appropriate scale to serve small businesses. Locking them out through regulation is not addressing a market failure but creating one.
The American economy’s sources of capital are the world’s most efficient and deepest due to our unique combination of capital markets and a varied array of bank and non-bank lenders. The diversity of the system assures that both Main Street and Wall Street thrive. Supervisory neglect and failures are not a reason to consolidate institutions. The regulators should be overhauled—not the lenders.
Tax and spending decisions distort incentives
In addition to regulation, spending and taxation also impact incentives to work and invest. Unconditional cash transfers under the ARP and a broad range of non-means-tested government programs result in disincentives to work that inhibit the supply side of the economy from expanding to meet demand. President Biden has proposed to transform the child tax credit, which currently includes work incentives, to a permanent benefit without work requirements. A University of Chicago study found that such a change in policy would result in 1.5 million workers leaving the labor force. Additionally, the hundreds of federal and state income support programs are typically not designed to interact with each other. Consequently, as John Cochrane posited, many Americans earning less than $60,000 face an approximately 100% marginal tax rate on income, meaning that for every dollar he or she earns by working, he or she loses one dollar in government benefits. While many of these programs provide important assistance that Americans need to flourish, program design must be improved to create better incentives.
Taxation also significantly impacts incentives in the economy, as demonstrated by the economic effects of the Tax Cuts and Jobs Act (TCJA) of 2017. Reductions in marginal tax rates for individuals and immediate expensing of new equipment incentivized work and investment, with the resulting productivity boom flowing through into wages. Between the first quarter of 2018 and the first quarter of 2020, real wages and salaries rose 2.6% as measured by the employment cost index, a noticeable acceleration from the near lack of growth during the Obama administration, and starkly contrasting with the 2.7% decline during the Biden administration’s inflation surge. One recent study found that the TCJA increased domestic capital investment by 7%, supporting wage growth, especially for the non-managerial category.
In contrast, President Biden is proposing to nearly double taxes on capital gains, which would immediately chill the private sector investment that is needed to drive wage growth.
Additionally, for the first time in American history, President Biden proposes to tax unrealized gains. In particular, this tax would be a death knell for the venture capital model that drives American innovation, as these investments often take more than a decade to yield any cash flow. If the Biden administration wants to drive the American innovation engine to offshore hubs, it could not have proposed a more effective scheme.
Economic policy should be designed to advance the economy, not social engineering goals
Unfortunately, we must wait until November 5 for the voters to hold Bidenomics fully accountable. In the meantime, we should expect continued use of economic policy to further the social and political goals of the Biden administration, and there is ample time for it to cause significant damage. Secretary Yellen has departed from norms regarding the issuance profile of Treasury debt in an effort to stimulate markets in advance of the election. The Federal Reserve is so eager to loosen financial conditions that it continues to signal rate cuts in the face of resilient inflation prints. We may see a further softening of Iran, Russia, and Venezuela sanctions, and potentially a large SPR release as the administration seeks to suppress oil prices through the election. And the administration is currently racing to impose dozens of major regulations in an effort to prevent Congress from using the Congressional Review Act to overturn these rulemakings in the event that President Biden loses the election, making it more difficult for a successor to rescind the new rules. Cementing the ideological regulatory apparatus risks a continuation of the Biden administration’s inflationary policies. In military jargon, the apparatchiks are spiking the policy cannons as they retreat.
Bidenomics has left the U.S. economy in an extremely precarious situation. Government spending as a percentage of GDP has continued to climb to all-time highs outside of times of war and economic calamity. The expansion of the regulatory state threatens to stifle the economic growth necessary for the U.S. to manage both its existing debt burden and its commitments to its citizens. Absent a shift in the direction of U.S. economic policy, the country could be condemned to a European-style permanent malaise.
The current moment is particularly fraught given we are in the midst of the greatest economic and geopolitical realignment since the mid-20th century. The rise of China as an economic and strategic rival requires careful management, especially given the interconnectedness between our economies. There are legitimate questions as to the proper course to reduce our economy’s vulnerability to Chinese disruption and to counter Chinese influence abroad. All potential pathways to restoring American primacy require the reestablishment of financial prudence and private sector driven economic growth. Make no mistake, the Biden administration’s current spending lollapalooza is a national security threat.
Fortunately, just as the explanation for the failure of Bidenomics was straightforwardly predictable, the prescriptions are also well understood. History teaches us that prioritizing free enterprise and limiting government’s role in the economy are key to raising living standards. Private sector innovation and risk taking are the United States’ greatest assets. U.S. economic policy must cast aside the latest failed central planning experiment of Bidenomics and reorient back towards private sector led innovation and growth. The solutions are known: slay inflation, achieve energy dominance, execute meaningful deregulation, control federal spending, reorder unsatisfactory trade arrangements, reassert control on immigration, and project strength internationally.
The question is whether we have the political will to see them through.
The views presented in this speech are purely the opinions of the author (not of any affiliated organization) and are not intended to constitute investment, tax, or legal advice of any nature and should not be relied on for any purpose.
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