Peterson Institute for International Economics
Conference on “Rethinking Fiscal Policy”

Good afternoon.

It is great to be here.

Thank you to the conference organizers, Karen Dynan, Paolo Mauro, and David Wilcox, for this this important agenda today and to Adam Posen and his team for all the Peterson Institute for International Economics does to inform policymaking.

Today, I will share with you this Administration’s economic framework for thinking about fiscal questions.

In doing so, I’ll describe the broader shift in thinking that animates President Biden’s economic strategy.

I’ll lay out how the President’s Invest in America agenda has laid the foundation for decades of sustained, equitable growth,

… for an economy where U.S. manufacturers drive global progress through innovation,

… where the greatest economic transformation of our lives is a source of strength and not weakness,

… where the public sector is a partner, not a rival, to the private sector,

… where American workers can get a high-quality job in their community.

The President aims to achieve this through a strategy that focuses on making responsible and strategic publicinvestments in specific high-externality and distribution-sensitive sectors and industries.

We certainly can’t do this all on our own.

That is why I am so glad to come here and talk to you today about how together we can solve these pressing challenges.

But first, the bipartisan deficit-reducing elephant in the room, rarely seen in the wild.

As I’m sure you’ve all heard, there is now a two-year bipartisan budget agreement that also raises the debt ceiling.

This compromise between Democrats and Republicans gives us more certainty over appropriations through 2025, lowers the deficit while protecting key discretionary programs, and, most importantly, avoids a catastrophic default.

I join the President and members of Congress in both parties in urging a swift approval of this budget deal so we can move on to tackling our other longer-term challenges.

And in fact, it’s the President’s long-term fiscal vision for our country and sustained economic growth that I’m here to talk about.

President Biden believes, and has shown, that we can both be fiscally responsible and invest in America.

His policy proposals spend responsibly, as seen in his fiscal year 2024 Budget proposal, which would cut deficits by nearly $3 trillion over the next decade.

The President’s budget also puts forward the first concrete plan to keep Medicare solvent through 2050 without reducing it to a voucher program.

And he pays for his long-term spending priorities.

He has done this, in part, by eliminating wasteful spending.

This will reduce the debt-to-GDP ratio and help extend the life of the Medicare trust fund.

Case in point: Medicare will soon have the power to negotiate certain prescription drug prices, so the government doesn’t overpay for prescription drugs.

At the same time, he’s making sure the wealthy pay the taxes they owe by investing in the IRS’s human capital and infrastructure.

In the budget and elsewhere, the Administration has been influenced by the work of Peterson fellows and others in this audience.

There is now a line in the Budget for real net interest to GDP, building off of work done by Larry Summers and Jason Furman.

Under this budget, we keep real net interest to GDP at around 1 percent at the end of the ten-year window, which is below their proposed 2 percent limit.

And our forecast for interest rates over the next ten years stays below GDP growth, which as Olivier Blanchard and others have pointed out, indicates continuing downward pressure on debt-to-GDP.

We appreciate your continued work on these and other topics. 

Already, the President’s approach has led to strong macroeconomic outcomes.

When he came into office, thousands of people were dying each day from COVID-19 and the unemployment rate was 6.3%.

The immediate task was to contain the virus and put the economy back on track.

Thanks to a robust monetary and fiscal response, including the 2020 CARES Act and the 2021 American Rescue Plan, we have seen a remarkable economic recovery.

  • The economy has added jobs more quickly than in any recovery going back decades
  • The unemployment rate has been hovering at lows not seen in over half a century
  • The share of Black workers who are unemployed is at an historic low
  • The share of prime-age women participating in the labor force is at an historic high
  • And, the U.S. economy has seen the strongest pandemic GDP recovery in the G7, weathering repeated shocks, including a land war in Europe and banking turmoil.

Of course, inflation remains an important priority.

Since its peak, overall inflation has fallen by nearly half, although it remains elevated.

Core inflation is also too high, although harmonized core inflation in the United States is below the rate in the Euro area and the United Kingdom.

The Biden Administration will continue to support a number of policies to lower prices and reduce inflation, including strongly defending the independence of the Federal Reserve.

But the pandemic also revealed fault lines from a decades-long failure to invest in America.

We saw clearly the negative effects of underinvestment in our infrastructure and in industries critical for our national and economic security …

… of centuries of racial and economic inequity across our nation.

… of a lack of action on climate change, even as the costs mounted—with extreme weather and climate events costing the United States almost $120 billion per year on average.

The President has taken on these challenges, passing—and now implementing—historic legislation to invest in America.

And, he’s been clear that this agenda reflects a shift in economic thinking.

Indeed, President Biden insisted in his first press conference after entering office, “I want to change the paradigm.”

Now he’s doing just that.

The core principle behind the President’s agenda is that investments in America and its people are the best investments we can make.

What we invest in and how we invest matters.

Our investments must lead to an economy that delivers growth and opportunity.

It is with this core idea that we are changing the paradigm.

As I will explain—we are building a new, modern American industrial strategy, one that is tailored to our current economic moment and learns from the successes and failures of the past.

Our modern American industrial strategy takes a sector-based approach to investing in our national and economic security, where individual companies succeed or fail on their own merits.

That means we invest in specific, essential areas of the economy, but still let the market do what it does best—lowering costs, discovering new technologies, and uplifting successful business models.

Our modern American industrial strategy is the public sector working with the private sector as a partner, not a rival.

It has guided us to the Invest in America agenda that the President—in partnership with Congress—has put in place.

And, it guides us now as we implement these laws.

  • It includes a $1.2 trillion investment in the infrastructure at the foundation of our economy through the Bipartisan Infrastructure Law.
  • It provides over $50 billion in funding for semiconductor manufacturing, research and development, and workforce training through the CHIPS and Science Act.
  • And it includes a $370 billion investment towards building America’s clean energy future over the next decade through the Inflation Reduction Act.

These laws were designed together and will be implemented together.

They aim to crowd in private investment.

Already, since President Biden took office, private companies have announced $470 billion in manufacturing and clean energy investments in the United States.

And our agenda starts from the premise that people and places matter, with commitments to …

… fair wages and training and labor standards,

… to making things here in America,

… and to investing in places and communities that risk being left behind.

With this modern American industrial strategy, the Administration is rethinking the role for government in times of crisis and normalcy and reassessing certain ideas that have guided economic policy in recent decades.

Later in my remarks I’ll outline the theoretical rationale and the historical precedents for this, but I’d like to start with the economic evidence—first for what we are investing in, and then for how we are investing.

The President’s Invest in America agenda reflects three primary areas of investment that everyone from academics to business leaders has identified as critical: infrastructure, technological innovation, and clean energy.

As I’ll outline, for each area in turn, there is rigorous economic evidence for why the government should—indeed must—intervene.

The most sophisticated approach to economic policy is one that respects the power of these long-term investments to boost our productive capacity.

First, as economists, we know that well-designed investments in infrastructure are some of the best investments that government can make.

Improving our roads, bridges, ports, and waterways increases productivity, lowers costs, and in the long run supports overall growth.

And investments in more modern forms of infrastructure—like broadband internet—can also help promote growth, employment, health, and education.

Second, innovation is crucial for economic productivity and growth.

Despite this, since the 1960s, we have seen a striking decline in public R&D funding.

Before the President entered office, public R&D funding as a share of GDP was at a 60-year low.

Government funding for R&D is important for innovation, as are investments in domestic manufacturing.

Consider the example of semiconductors.

They are the building blocks of the modern economy and critical elements of products like televisions, refrigerators, cars, healthcare equipment, and weapons systems.

Yet even so, their manufacture has largely moved overseas.

Over the last three decades, the share of global chips manufacturing production that is located in the United States has fallen by two thirds.

Today, almost none of the most advanced semiconductors are produced in the United States.

This poses a risk for our long-run economic growth and stability and for our national security.

And, third, we need to build the clean energy economy.

I will assume that we all here today agree that addressing climate change is crucial, so the question is what we do about it.

There is no question more relevant to our country’s long-term productive capacity than dealing with our biggest long-term risk.

Climate change is a classic market failure.

Firms emit more carbon than is socially optimal.

For an economist, the most elegant solution to such a failure is market-based.

A comprehensive, price-based climate policy would let the market deliver new technologies that can power our world.

And indeed, I doubt a day has gone by since I joined this Administration when I didn’t want to turn back time and see President Johnson or Nixon or Carter put in place a carbon tax that gradually increased its bite over time.

But that’s not our reality.

Our past efforts to enact price-based policies have failed to garner sufficient political support.

We cannot wait, crossing our fingers for this policy to gain political traction, while the planet’s biggest challenge grows by the day.

Moreover, even if we could, we would still have to confront a serious economic challenge more immediate than climate change itself.

To lower emissions and maintain our standard of living, we need to build a clean energy economy.

We do not have a choice about whether our economy changes in response to climate change.

We are already seeing the effects of climate change on our economy—in natural disasters, agricultural productivity, insurance markets, and more.

Without bold action, the costs of climate change will consume the expected benefits from technological growth, lowering our standard of living in the decades to come.

And on top of these effects, more than 700,000 workers in the United States are employed in fossil-fuel extraction, mining, and processing—and almost 2 million workers are in jobs manufacturing or repairing gasoline and diesel motor vehicles.

Nearly 1.9 trillion dollars of capital is tied up in fossil fuel extraction and processing.

Most Americans use gas or oil in their homes and drive gas-powered cars or take gas-powered buses.

Our choice is about what building a clean energy economy looks like.

That path will be decided by our economic policies.

The President’s economic agenda is grounded in the idea that a coherent, whole-of-government modern industrial strategy is our best chance for building a clean energy economy that benefits America’s workers and communities.

That idea is backed by decades of evidence as to what has actually worked in the real-world—what has driven energy innovation, cost declines, and emissions reductions, and what we know about how to support workers and communities.

The answer is smart regulations, smart industrial policies, and a commitment to good jobs.

Industrial policies are our best chance to reduce emissions and meet our Paris commitments.

Our best chance to boost productivity and foster shared, stable growth.

And our best chance to support workers and communities.

We can act now—investing in clean energy technologies that we know are rapidly growing, consistently outpacing projections with steep learning curves.

And we believe this will have global benefits.

By one estimate, over the next decade, the Inflation Reduction Act could reduce global clean energy costs by up to 25% for some technologies.

Let me summarize so far.

The economic evidence is clear that for these three areas—infrastructure, innovation, and building a clean energy economy—markets cannot deliver goods that are critical for our economic and national security on their own.

Instead, strategic public investments in these areas can

  • create good jobs for American workers
  • make supply chains more diverse and resilient
  • and support stable, lasting growth.

As Secretary Janet Yellen explained in a recent speech: “our policies are designed to expand the productive capacity of the American economy. That is, to raise the ceiling for what our economy can produce.”

These are exactly the outcomes—in the short- and long-term—that economists should prioritize when evaluating a policy agenda.

Our approach to how we make these investments is built on decades of evidence, which I’ll bucket into four categories:

Evidence that …

… investing in people and places matters

… that markets must be shaped so as to be fair and competitive

… that resiliency is important for long-run growth

… that collaborating with our global partners can foster durable global growth.

I will touch on each in turn.

First, the President’s economic agenda starts from the presumption that places and people matter.

The abstractions of economic theory have too often set aside harms for workers in specific industries and regions.

According to groundbreaking research by David Autor, David Dorn, and Gordon Hansen, during the 1990s and early 2000s, rising import competition from China resulted in lasting job and income losses in U.S. manufacturing communities.

By 2011, this so-called “China shock” had led to the loss of one million U.S. manufacturing jobs—2.4 million jobs overall.

And, there’s evidence that these economic outcomes contributed to growing ideological polarization—and racial and ethnic political divides—in the 2000s and 2010s.

Today, income and wealth inequality in the United States is higher than in almost any other developed economy.

This follows decades of the gains of growth accruing more to capital than labor, declining unionization, and falling labor force participation.

These trends have defined my years as an economist, addressing them is one of the primary goals of this Administration.

And we know paying workers fair wages and benefits, promoting unionization, and ensuring equal opportunities for all is good for workers, businesses, and the overall economy.

On a larger scale, investing in places that have historically been overlooked is one of our greatest untapped resources.

One study found that the economic benefits of policies that add jobs in a given place are at least 60 percent greater in “distressed” regions than in “booming” ones.

That doesn’t mean we abandon sensible place-neutral policies like progressive income taxation, and this Administration has not done so.

But it does mean that adding place-based policies to our toolkit is good for growth and equity.

This is not an either-or, but a both-and proposition.

We can address inequality and see the economy grow.

Second, our strategy implements with an eye toward strengthening competition.

These investments are designed in conjunction with a set of policies that shape markets to avoid monopoly power and build industries that are productive and fair.

As the President likes to say, “capitalism without competition is exploitation.”

Consider the example of ocean shipping—which is critical for the global flow of goods.

During the pandemic, the three global alliances that dominate the ocean-freight system raised the price of shipping a container more than ten-fold, a cost increase that was estimated to contribute to approximately a 1 percent increase in consumer prices over the following year.

In the 2022 State of the Union, President Biden called for Congress to crack down on ocean shipping companies’ price hikes, and Congress responded swiftly to pass the Ocean Shipping Reform Act – the most significant reform of ocean shipping laws in decades.

The Bipartisan Infrastructure Law includes nearly $17B to improve infrastructure in ports and waterways.

Since their peak in September 2021, ocean shipping costs have fallen by nearly 90 percent.

This is just one of many ways we are working to shape markets to reduce rent-seeking and promote growth that is both strong and equitable.

Third, our strategy invests in the resilience and diversity of our supply chains to protect us from future economic shocks.

During the COVID-19 pandemic, American consumers paid the price for fragile global supply chains.

We saw price hikes and acute shortages in products such as new and used cars, household appliances, medical supplies, and much more.

We also paid the price for the outsourcing of semiconductor manufacturing.

In 2021, a COVID-related shortage of chips affected an estimated 169 industries, raising prices for a range of goods.

One could say that globalization of supply chains limited these shocks.

And when responses to sudden, short-term shocks require long-term investments, that’s a mismatch.

But here, too, the solution isn’t either-or.

We need to build up capacity to increase resiliency for future shocks.

Looking forward, the many risks of inaction are clear.

In large part due to government subsidies, China currently controls over 80 percent of part of the world’s supply chain for batteries used to power EVs.

For context, OPEC controls 40 percent of global crude oil supply.

We cannot let clean-energy supply chains become a weapon in the way that oil was in the 1970s, or natural gas in Europe in 2022.

Such lack of resiliency threatens our nation’s productivity and growth, as well as as our national security.

We cannot predict all future supply chain shocks, but we have the opportunity now to protect against clear, foreseeable risks.

The Invest in America agenda is designed to spur domestic manufacturing of critical goods like clean energy technologies and chips so unexpected crises and geopolitical tensions do not block our access to critical goods.

So friend-shoring, yes,

But we must all pay greater attention to the totality of the supply chain and where upstream products are coming from.

Finally, this Administration is committed to working with our allies and trade partners to foster durable global growth.

In a speech just a month ago, National Security Advisor Jake Sullivan outlined the President’s plan to renew American economic leadership.

I want to highlight one of his points in particular.

He said, “we will unapologetically pursue our industrial strategy at home—but we are unambiguously committed to not leaving our friends behind. We want them to join us. In fact, we need them to join us.”

We cannot build everything ourselves, and we need our allies and trading partners to pursue their own capacity-building strategies.

Three specific examples of how the Administration is acting on this:

In 2021, the United States announced the Global Arrangement on Sustainable Steel and Aluminum to promote the clean steel and aluminum trade, while limiting dirty steel from accessing our markets.

Last year, we launched the Partnership for Global Infrastructure and Investment to mobilize hundreds of billions of dollars in financing to close the infrastructure gap in developing countries.

More recently, following a meeting between President Biden and the European Commission President Ursula von der Leyen, we established the U.S.-EU Partnership on Critical Minerals to partner on supply chains for critical minerals essential to building a clean energy economy.

This is not a simplistic zero-sum economics.

Instead, central to the President’s approach is the positive-sum economics of collaborating with our allies and trade partners.

Rethinking isn’t easy.

Sometimes new paradigms are dismissed for not conforming to the textbooks of decades past.

But when the data and evidence evolve, our views need to change too.

We need to be Bayesian [BAY-zhin]

And that’s just the sort of informed evolution the President’s agenda embraces.

In particular, it revisits three basic assumptions embedded in many of America’s economic policies over the last half century.

First, these policies too often assumed that unrestricted markets would use resources productively and efficiently, maximizing our nation’s long-run growth.

Second, these policies assumed that the composition of growth does not matter.

The notion here was that growth accruing to the top would trickle down and that growth in any industry was equally good.

And, third, these policies assumed that the role of government was best suited to fixing consumption gaps with redistribution-after-the-fact, rather than predistributing gains, delivering growth with equity.

We now know better.

Time and again, these assumptions did not hold.

Of course, we have seen the value of markets.

But we have also seen how they can lead to harmful and avoidable costs.

Too often, our policies disregarded or downplayed transition costs and frictions, or ignored the political agendas of our competitors.

We saw this in the global financial crisis, in the Covid pandemic, in the offshoring of supply chains for critical goods, and in our failure to address climate change.

We saw it as monopoly oil producers created energy shortages that rippled throughout the world.

We saw it in decades of rising economic inequality—despite many of our best efforts—and in policies that ignored the binds that human beings feel to their communities and jobs.

We saw it in economic policies that failed to meet the needs of the moment.

Yes, there were benefits.

We saw lower costs for consumers, more access to goods produced around the world.

Those benefits are not going away.

In recent speeches, both Secretary Janet Yellen and National Security Advisor Jake Sullivan have made this point.

The United States always has been, and always will be, an active and engaged participant in the global trading system.

And we welcome healthy economic competition that delivers benefits here and around the world.

But the global trading system has not always been fair, not always delivered the promised benefits to our citizens, too often favored large corporate interests over workers interests.

As economists like to say, there are tradeoffs.

And our assumptions have created an economy of short-term booms and busts.

Of starting, and stopping.

Of speeding up just to crash.

Now we are working to build an economy characterized by growth that is strong, stable, sustainable, and broadly shared.

This is not about building for the sake of building or spending for the sake of spending.

It is about building the capacity and potential of the American economy.

It is about making targeted public investments in essential infrastructure and industries critical for our economic and national security—where private investment has proved insufficient.

It’s about investing in workers and communities and ensuring that they benefit from our investments in industry.

And it builds on a long, American history.

Strategic investments are how we got ahead to begin with—and how we’ve faced tough challenges.

Industrial strategy was Alexander Hamilton submitting his Report on Manufactures in 1791, insisting that “the public purse must supply the deficiency of private resource” to “prompt[] and improv[e] the efforts of industry.”

It was President Franklin Roosevelt’s meeting of the challenges of the Great Depression with the New Deal—building dams, bridges, schools, highways, and creating Social Security—all while he affirmed the right of workers to organize unions and implemented labor standards to end “starvation wages and intolerable hours.”

It was President Eisenhower building the national highway system, a “Grand Plan” to improve safety, reduce traffic jams, increase economic efficiency, and provide for the national defense.

It was a bipartisan consensus during the Cold War years to invest heavily in science and research and development—with agencies such as DARPA, NASA, and the NIH laying the foundations of America’s technological dominance for decades to come.

Our job, as policymakers, is to “provide for the common defense [and] promote the general welfare.”

But the market was not designed to promote the general welfare.

On its own, the market does not care about equity, and it cannot build the clean energy economy at the pace that we need.

An unrestricted market is oriented around short-term profits and losses, not stable and sustainable growth.

It doesn’t understand that investments in people and places can pay off with improved productivity and shared growth.

And it alone cannot adequately take into account our national security interests.

Markets are a tool for achieving our goals, not the goal themselves.

The government—working with the market—must strive toward our goals.

That is why we need a modern industrial strategy—one that uses public investment to spur private investment and innovation to achieve our goals.

We are still early in the implementation of this approach.

And, we know we have obstacles to implementation, such as the challenges with permitting, that we must overcome.

But we are already seeing signs that the President’s agenda is working.

To date, the Administration has announced over $220 billion in new infrastructure funding, including for over 32,000 specific projects and awards, across over 4,500 communities in all 50 states, D.C., and territories.

We’ve seen statewide buy-in, as with the EV charging plans—all 50 states, the District of Columbia, and Puerto Rico submitted their plans on time, and all of the plans have since been approved.

And private investments are ramping up.

According to one analysis, between August of 2022 and April of 2023, total announced investments in chips and clean-tech manufacturing amounted to almost double the capital spending commitments made in the same sectors in 2021—and nearly 20 times the amount in 2019.

Our invest in America agenda has already created over 140,000 high-quality clean-energy jobs.

Many years ago, when Jason Furman, who I see here today, was a Deputy at the National Economic Council, he told me something I’ll never forget.

He said, when an economic adviser to the President gives advice, it has to be right.

Millions of American families will see their fortunes rise or fall depending on the advice we give.

That’s a big responsibility.

And the way I see it, this is a shared project.

Thanks to the work of so many economists and other researchers, including many in the audience here, we now have a large body of evidence to learn from the past.

We will continue to need your thoughtfulness, your research skills, and your economic acumen.

These are unprecedented challenges—building the clean energy economy will be a historic global transformation.

And so I ask that we all approach these questions from a place of humility.

In this moment of disequilibrium, we need new ideas and new tools.

I hope you will join us in this project to build a better, more resilient, and more equitable economy.

Thank you.

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