When Joe Biden assumes the presidency in January, which is overwhelmingly likely as I write this, he will face an important decision: Should priority be given to reform or recovery? In my view, recovery should take precedence.
In early 1933, Franklin Roosevelt took office at the low point of the Great Depression and faced a similar choice. He decided to pursue both objectives simultaneously. My research suggests that while FDR’s recovery measures boosted the economy, his reform initiatives slowed the recovery. In late 1933, hugely influential economist (and progressive hero) John Maynard Keynes reached a similar conclusion in a letter of advice to FDR, printed in The New York Times:
“(The) NRA, which is essentially reform and probably impedes recovery, has been put across too hastily, in the false guise of being part of the technique of recovery.”
Keynes is referring not to the National Rifle Association, but to the National Industrial Recovery Act, which among other things mandated an across-the-board wage increase of roughly 20%, despite high rates of unemployment. This act is now widely seen as having slowed the recovery that was being aided by other FDR initiatives.
Biden supports raising the federal minimum wage to $15 per hour. There is a vigorous debate among economists as to the merits of this idea. My own view is that workers can be helped more effectively with an expanded Earned Income Tax Credit, which helps put money in low-income workers’ pockets but does not raise business costs and discourage employment.
Furthermore, the optimal minimum wage rate varies widely by state. Each state should have some latitude to make its own decisions, reflecting local differences in worker productivity and cost of living.
Even if the Biden administration decides to go ahead with a higher federal minimum wage, it should delay any major increases for a few years in order to hasten the labor market’s recovery from the 2020 economic shock. Once a vaccine is available, it is important that policy not impede the rebuilding of key sectors of the economy, such as hotels, restaurants and other service industries. Minimum wage increases are less likely to cost people their jobs when the labor market is already strong.
Fiscal stimulus is one popular method for boosting the economic recovery, but even if this course is blocked in the Senate, there are other methods to promote economic growth. For instance, the Fed can be encouraged to engage in additional asset purchases, including for corporate bonds if necessary, as required to achieve its 2% inflation target and higher levels of employment.
A Biden administration will also have wide latitude to roll back the burdensome international trade barriers that slowed investment in 2019. They should allow more immigration of the sort of high-skilled workers who are known to create dynamic new American businesses. And any tax increases on businesses should be delayed for several years, until the economy has recovered.
Finally, the Biden administration can and should encourage states to make it easier to build new housing, and thus lower housing costs. Throughout the country, so-called “NIMBY” policies have made it extremely difficult to do so. This has restricted economic growth and people’s ability to seek careers in many of the areas with the highest productivity, such as Silicon Valley.
Of course, many progressives will not be pleased with my suggestion to prioritize recovery over reform. But as Keynes pointed out in his 1933 letter, a strong economy is the best way to create the political capital required to pursue a reform agenda:
“It will be through raising high the prestige of your administration by success in short-range recovery that you will have the driving force to accomplish long-range reform.”
Scott Sumner is the Ralph G. Hawtrey Chair of Monetary Policy with the Mercatus Center at George Mason University and a professor emeritus at Bentley University.