It is good to be back at the Economic Club of New York to reflect on the U.S. outlook. Recent data suggest the current outlook for the U.S. economy is upbeat. From the data alone, it would be hard to find clues that the U.S. economy was in the midst of a protracted global pandemic just two years ago and a war-driven shock to energy and food prices just one year ago.
Despite repeated forecasts that recession is just around the corner, the U.S. recovery is solid, and inflation is down. Unemployment has fluctuated in a narrow band below 4 percent for 17 months in a row—the longest stretch in 50 years. Labor market outcomes have been unusually good for the groups of Americans that faced challenges in past recoveries. The share of working age Americans who are employed has risen to highs not seen in twenty years—up from lows not seen in 45 years. Real wages are now higher than they were before the pandemic, and this is particularly true for production and non-supervisory workers who make up roughly 80 percent of the workforce.
In an important development, the labor market is now in much better balance than it was even six months ago. American workers have defied predictions that many would not return to the labor force following the pandemic. Recent months have seen labor force participation by prime age workers rise above pre-pandemic levels, and the participation rate for the overall workforce is now above its pre-pandemic trend. This has occurred as vacancies and payrolls have moderated.
The economy is defying predictions that inflation would not fall absent significant job destruction. Just today, we saw new and encouraging evidence that the U.S. economy is on the path to moderate inflation accompanied by a resilient jobs market. Annual CPI inflation is 3.0 percent—close to the 2.9 percent average level that prevailed in the nearly two decades leading up to the financial crisis. Annual inflation has now declined every month for 12 months in a row. And inflation in the United States is now the lowest among G-7 nations – for both headline and core inflation – even as our economic recovery from the pandemic has been the strongest.
While declines in energy and food prices have been important in bringing overall inflation back down, core inflation is also declining. Annual core CPI inflation has now fallen and is projected to decline further as rents decelerate. The closely watched category of core non-housing services CPI has run at annualized rate of 3.3 percent over the last six months, close to the 3.2 percent average from the three decades before the pandemic and excluding the financial crisis. It will be important for corporations to continue to bring their markups back down after having raised them to unusually elevated levels over the past 2 years, which would help in reducing inflation. The markups associated with price-price spirals– with final goods prices going up by more than input prices – should unwind if customers become more price-sensitive and firms compete more intensely for customers.
Growing the Economy from the Middle Out and Bottom Up—Not the Top Down
In sum, this economy is delivering strong results for America’s middle class—creating good jobs and yielding real income gains, especially for workers whose earnings have too often not kept up. These economic gains did not happen by chance, and they will not be sustained absent a deliberate strategy. President Biden’s economic strategy aims to grow the economy from the middle out and bottom up—not the top down.
Bidenomics represents a fundamental shift from a flawed top-down economic theory that too often drove economic policymaking in the past. Trickle-down economics emphasized cutting taxes for big businesses and those at the top, and held that government should get out of the way. It is now clear that the benefits from these policies were not broadly shared. While tax cuts for high-income Americans and corporations added trillions to the national debt, they failed to deliver gains in jobs, real wages, or investment. Economic inequality increased, many communities suffered from sustained disinvestment, and earnings growth for many Americans failed to keep pace with the cost of necessities like health care, housing, and education. Investments in infrastructure and vital industries stagnated.
Past policies left the American economy vulnerable to a series of challenges that provide important lessons for present policy. For instance, China’s state-led approach to its integration into the global system resulted in profound dislocations in patterns of production and manufacturing workforces around the world. Policymakers failed to take action to counter China’s opaque nonmarket practices, leaving too many American communities, industries, and workers particularly vulnerable. America remains among the most open economies in the world. We are strong supporters of the global arrangements that America has led. We also now know that for growth to be broad and sustained, it is vital to make sustained public investments in our own economic future, to safeguard strong pathways to the middle class for American workers in communities around the country, and to ensure our supply chains are diversified.
Similarly, the Global Financial Crisis took a severe economic toll on the livelihoods and wealth of middle-class Americans. At great cost, we saw the damage associated with trickle down’s preference for deregulation and its indifference to the concentration of market power. It was also a reminder that the labor market scarring associated with prolonged downturns can have lingering effects.
Most recently, the waves of the global pandemic followed by Russia’s war on Ukraine revealed fragilities in the supply side of our economy that contributed to severe shortages and a surge in inflation. Our economy faced acute constraints on shipping and on the supply of non-substitutable intermediate inputs like semiconductors. This experience highlights the importance of investing in the supply side of our economy to make it more resilient. Efficiency in resource use remains an important goal, but we now know that resilience is also needed to prevent and mitigate damaging supply side breakdowns.
We face additional challenges ahead, including those associated with climate change. We can either adopt smart policy to build the clean energy economy so that it benefits American workers and communities, or face the physical and transition risks of climate change that are affecting every state in the nation. It will be particularly important to apply these lessons in facilitating a smooth transition to clean energy and meeting the historic U.S. emissions targets adopted by President Biden.
President Biden has secured historic legislation to drive change. His agenda has three pillars: making smart public investments in infrastructure, semiconductors, and clean energy; educating and empowering workers; and promoting competition and lowering costs. The President is committed to execute this three-part strategy in a manner that is fiscally sustainable, by ensuring that our long-term investments are responsibly financed by a tax system that is fair. I’ll discuss each in turn.
Smart Public Investment
After years of declining public investment, the President has secured historic legislation that enables smart public investment in infrastructure, semiconductors, and clean energy in order to catalyze private investment, boost our economic potential, and make our economy more resilient to shocks. Already, we’ve seen over $500 billion in private investment in these key industries, and real manufacturing construction spending has increased by nearly 100 percent since the end of 2021.
Mainstream economics has long recognized there is a role for public investment to catalyze private investment in targeted areas where private returns may not reflect the overall public benefit, such as where high fixed investment is needed, where there are foundational inputs that have few substitutes, in public goods where there are large externalities, and in national security. In these targeted areas, private action needs to be supported and encouraged in cases where markets on their own are unlikely to deliver, particularly given extensive state intervention by some other countries. Where frictions in financing and demand uncertainty around nascent technologies make it more difficult to commercialize promising early innovation, public investments can help.
When the President entered office, U.S. infrastructure was lagging behind foreign peers. Public investment in infrastructure as a share of the economy had fallen by more than 40 percent since the 1960s. President Bident secured the Bipartisan Infrastructure Law, and the Biden administration is investing in tens of thousands of projects around the country to repair and rebuild the nation’s roads and bridges, airports, rails, and ports. In the same spirit as FDR’s rural electrification plan, President Biden’s broadband initiative is a generational investment to connect every household and small business in America to high-speed internet.
Semiconductors are essential components in a vast number of consumer, industrial, and defense products. But, the share of global semiconductors produced by the United States has fallen by two thirds since the 1990s – in part due to large-scale public investments by foreign governments. We saw the far-reaching and costly effects when increased demand paired with shutdowns of foreign semiconductor fabs disrupted U.S. supply chains, leading to persistent shortages of goods from cars to washing machines. In response, with the help of the CHIPS and Science Act, we’re seeing private investment in semiconductor manufacturing and R&D in the United States, with the potential to achieve important synergies with America’s robust semiconductor-user base and design ecosystem.
Smart public incentives are also critical to encourage the private sector to invest in technologies that are vital for the clean energy transition—including batteries and storage, solar panels, and electric vehicles. In part due to intervention by some foreign governments, production of key parts in the battery and solar supply chain is highly concentrated in a few countries and, in the case of solar, actually declined in the U.S. despite growing demand. That is now changing, with the Inflation Reduction Act tax incentives for the private sector to innovate and manufacture in the United States. We are doing this in partnership with our friends and allies around the world, working together to drive down costs and advance the frontier for technologies that are likely to be deployed everywhere. The administration has already forged agreements to harmonize these clean energy incentives with foreign partners, and we will continue to look for opportunities to cooperate.
Investing in Workers and Communities
Second, President Biden’s economic strategy is centered around empowering and educating workers and ensuring a brighter future for communities that have been left behind.
Over the last 30 years, there has been a decline in the convergence of incomes across states and metropolitan areas. And since 2000, states in the “heartland” of the country have seen persistently lower labor force participation than the coasts. Place-based policies that provide incentives for private investments can create good-quality jobs where they’re most needed and pay off with outsized economic benefits. A recent study assesses that the economic benefits of policies that add jobs in communities classified as “distressed” are at least 60 percent greater than in places that are already “booming.” That’s partly because underserved areas are more likely to have existing but underused infrastructure and a skilled workforce.
We are implementing a series of innovative programs that provide positive incentives for the private sector to invest in communities that have faced challenges. The Inflation Reduction Act creates and funds provisions to provide incentives for private clean energy investment in areas with existing workforces and infrastructure that are well-suited to transition to future-oriented industries. Programs to provide public seed funding in areas including clean hydrogen and other cutting-edge technologies will help catalyze sustainable private sector ecosystems in future-oriented sectors. And, underserved communities stand to benefit from significant tax benefits in the IRA for solar and wind energy projects located in low-income communities, while programs in the CHIPS and Science Act will help strengthen the capacity of communities with high unemployment to compete for public and private investment.
As part of his strategy to empower workers, the President believes that unions are vital not only in promoting jobs with dignity, but also in training American workers and helping to make these investments in America’s future productive and successful. The Administration’s policies are designed to encourage job quality, worker empowerment, fairpay, and training and career pathways, as well as enabling historically underrepresented workers to take on good jobs in sectors of the future.
American workers must have access to training and education to secure high-quality jobs. A variety of policies invest in education and training–ranging from the President’s commitment to free and universal preschool and free community college to increases in Pell Grants, Registered Apprenticeships, HBCUs, Tribal Colleges, and Minority-Serving Institutions such as Hispanic Serving-Institutions, and career and technical education. Those options include important pathways to family sustaining jobs and good careers without having to pursue a four-year degree.
In addition to increasing economic opportunity throughout the economic cycle, a rapid return to full employment is important to mitigate the lingering effects of shocks and downturns. We have seen a far more rapid labor market recovery than was predicted. Although the Congressional Budget Office estimated that it would take until 2026 for unemployment to reach 4 percent, the unemployment rate has been consistently below 4 percent since the beginning of 2022. The strong labor market recovery has led to better pay and job quality. Household net worth and real wages are up compared to pre-pandemic levels – and job satisfaction reached the highest level on record last year. The promise of good-quality jobs and higher wages is also drawing people into the labor force, taking the prime-age labor force participation rate to a 20-year high.
Promoting Competition and Lowering Costs
Promoting fair competition and lowering costs is the third vital pillar of the President’s agenda. When the President took office, concentration had increased in more than three-quarters of U.S. industries. A seminal study on the impact of nearly four dozen major mergers found that over 80 percent resulted in price increases, which were particularly large in the hospital care and airline industries. A recent report by the Treasury Department found that a lack of competition can reduce wages by about 20 percent when compared to a fully competitive market.
Competition is central to capitalism. It can mean lower costs for consumers, higher wages for workers, and greater dynamism driven by small businesses and new entrants. This is why the President issued a Competition Executive Order in 2021, which made promoting competition a whole of government mission. We have also secured significantly increased funding for our antitrust enforcement agencies –after remaining flat for years.
We are working to lower the cost of living for middle-class Americans. It is important to continue making progress in reducing health care costs, which present difficult tradeoffs for many American families. For example, the FDA regulatory change enabling hearing aids to be sold over-the-counter is lowering hearing aid costs by as much as $3,000 per pair—a significant savings for the nearly 30 million Americans with hearing loss. According to new data, President Biden’s $2,000 per year out-of-pocket spending cap will save almost 18.9 million seniors and other Medicare beneficiaries an estimated $400 per year on average in out-of-pocket prescription drug costs starting in 2025. The savings will be $2,500 per year for the nearly 2 million enrollees with the highest drug costs. This includes savings averaging more than $100 per month for seniors due to the $35 per month cap on insulin.
We are also addressing junk fees—hidden fees that are added to the final price often without the consumer realizing it or a clear rationale. Already, the Consumer Financial Protection Bureau’s actions on overdraft and bounced check fees are saving 33 million households an average of $150 a year. We are making progress in addressing family seating fees at airlines, which can cost as much as $50 per ticket per flight, with a number of major airlines answering the President’s call to action by ending the use of these fees. Similarly, we are working to address early termination fees for TV, phone, and internet service, which can exceed $200. We are also calling for all-in up-front pricing at hotels to address surprise resort and destination fees that can be $50 per night.
And every worker should have the freedom to switch to a better job. The Federal Trade Commission has launched a rulemaking to ban non-compete agreements, which could increase wages by nearly $300 billion per year and expand opportunities for about 30 million Americans, if finalized as proposed. According to one survey, nearly two thirds of small businesses favor a ban on non-competes because they create barriers in hiring employees or even launching new businesses.
More broadly, our pro-competition agenda is important to the vitality of the small businesses that create jobs, drive innovation, and provide vital goods and services. Americans filed nearly 10.5 million applications to start new businesses in 2021 and 2022–the two highest years on record for new business formation.
In the weeks and months ahead, we will continue working diligently to support growth that benefits the middle class through smart public investments, educating and empowering workers, and lowering the cost of living. This approach will allow us to achieve growth that is more resilient and broadly shared, where economic gains flow to hard working Americans. Thank you.