America’s election

Bidenomics: the good the bad and the unknown

Joe Biden should be more decisive and ambitious about America’s economy

The two presidential contenders squared up this week in the first debate before America votes on November 3rd. President Donald Trump set out to make it a brawl, even throwing a punch at the validity of the electoral process itself. Joe Biden spent the evening jabbing at Mr Trump for bringing the country to its knees. 

And the president went for what he hoped would be a knockout blow, accusing his opponent of being a weak man who would succumb to the left’s plans to dramatically expand government and cripple business.

Fear of just such a leftward lurch under Mr Biden is circulating among some American business leaders. However, as we explain, the charge is wide of the mark. Mr Biden has rejected the Utopian ideas of the left. His tax and spending proposals are reasonable. 

They imply only a modestly bigger state and attempt to deal with genuine problems facing America, including shoddy infrastructure, climate change and the travails of small business. In fact, the flaw in Mr Biden’s plans is that in some areas they are not far-reaching enough.

When Mr Trump took power in 2017 he hoped to unleash the animal spirits of business by offering bosses a hotline to the Oval Office and slashing red tape and taxes. Before covid-19, bits of this plan were working, helped by loose policy at the Federal Reserve. 

Small-business confidence was near a 30-year high; stocks were on a tear and the wages of the poorest quartile of workers were growing by 4.7% a year, the fastest since 2008. Voters rank the economy as a priority and, were it not for the virus that record may have been enough to re-elect him.

Yet, partly owing to the pandemic, Mr Trump’s shortcomings have also become clear. Long-term problems have festered, including crumbling infrastructure and a patchy social safety-net. The underlying dynamism of business remains weak. Investment is muted and fewer firms have been created even as big ones gain clout. 

Mr Trump’s chaotic style, involving the public shaming of firms and attacks on the rule of law, is a tax on growth. Deregulation has turned into a careless bonfire of rules. 

The confrontation with China has yielded few concessions, while destabilising the global trading system.

As the 46th president, Mr Biden would alleviate some of these problems simply by being a competent administrator who believes in institutions, heeds advice and cares about outcomes. Those qualities will be needed in 2021, as perhaps 5m face long-term unemployment and many small firms confront bankruptcy. 

Mr Biden’s economic priority would be to pass a huge “recovery” bill, worth perhaps $2trn-3trn, depending on whether a stimulus plan passes Congress before the election. This would include short-term money, boosting unemployment insurance and help for state and local governments, which face a budget hole. Mr Biden would also extend grants or loans to small businesses which have not received as much aid as big firms. 

He would ease tensions with China, soothing the markets. And if a vaccine arrives, his co-operative rather than transactional approach to foreign relations would make its global distribution easier and allow borders to reopen and trade to recover faster.

The recovery bill would also aim to “build back better” by focusing on some long-term problems for America that have also been Biden priorities for many years. He is keen on a giant, climate-friendly infrastructure boom to correct decades of underinvestment: the average American bridge is 43 years old. 

Government research and development (R&D) has dropped from over 1.5% of GDP in 1960 to 0.7% today, just as China is mounting a serious challenge to American science. Mr Biden would reverse that, too, with more r&d in tech and renewable energy. 

He would scrap Mr Trump’s harsh restrictions on immigration, which are a threat to American competitiveness. And he wants to raise middle-class living standards and social mobility. That means more spending on education, health care and housing and a $15 minimum wage, helping 17m workers who earn less than that today.

This is hardly the agenda of a socialist. Mr Biden has ignored the Panglossian fantasies of the left, including Medicare For All, a ban on nuclear energy and guaranteed jobs. His plans are moderate in size as well as scope, adding up to an annual increase in public spending of 3% of gdp, assuming they could all pass the Senate. That compares with 16-23% for those of Elizabeth Warren and Bernie Sanders. 

He would raise taxes to pay for about half of the spending that is approved, with higher levies on firms and the rich. Even if all of his tax plan were enacted, which is highly unlikely, studies suggest corporate profits after tax might drop by up to 12% and the income of the top 1% of earners by up to 14%. 

If you are rich that would be an irritant, but not a catastrophe.

The real risk of Bidenomics is that his pragmatism will lead him to be insufficiently bold. Sometimes he fails to resolve competing objectives. 

For example, he rightly supports ladders for social mobility as well as a better safety-net for workers who lose their jobs; his plans range from more affordable housing to free public universities. But equipped with these safety buffers, he should be willing to welcome more creative destruction so as to raise long-run living standards. 

Instead Mr Biden’s instinct is to protect firms, and he has too little to say on boosting competition, including prising open tech monopolies. Incumbent firms and insiders often exploit complex regulations as a barrier to entry. His plans are wrapped in red tape.

Making trade alliances great again

Mr Biden’s climate policy represents real progress. Building green-power grids and charging networks makes sense because the private sector may hold back. But, again, its effect will be blunted by the rule that 40% of spending must favour disadvantaged communities and by perks for domestic suppliers: a recipe for inefficiency. 

His plan to cut emissions involves targets, but shies away from a carbon tax which would harness the power of capital markets to reallocate resources. That is a missed opportunity. Just last month the Business Roundtable, representing corporate America, said it supported carbon pricing.

This lack of boldness also reflects the lack of a fully developed strategy. Mr Biden has a record as a free trader, but he will not remove tariffs quickly and his plan indulges in petty protectionism by, say, insisting that goods are shipped on American vessels. That would complicate the daunting task ahead of him: to create a new framework to govern the economic relationship with China, which involves persuading America’s allies to sign up even as they flirt with protectionism, too.

It is the same with fiscal policy. To his credit, Mr Biden wants to pay for some of his spending—a novelty these days. Nonetheless, by 2050 public debt is on track to hit almost 200% of gdp. There is little reason to fret now, when interest rates are near zero and the Fed is buying up government debt. 

But America would benefit if the next president faced up to this long-term challenge. 

That would mean beginning to build a harder-nosed consensus on entitlement spending and a sustainable tax base.

Mr Biden still has to win in November, so his ambiguity is understandable. But there is a risk he assumes that victory and a return to growth and competence will be sufficient to set America on the right track. 

If he wants to renew America’s economy and ensure it leads the rich world for decades to come, he will have to be bolder than that. 

On the threshold of power, he must be more ruthless about his priorities and far-reaching in his vision.

Big business is no longer the planet’s biggest problem

Multinationals will not achieve their sustainability agenda unless they convince smaller companies of the merits

Andrew Edgecliffe-Johnson 

   © Ingram Pinn/Financial Times

When Walmart pledged to slash its greenhouse gas emissions to zero and Washington’s Business Roundtable endorsed carbon pricing recently, some hailed the news as evidence of a profound shift in corporate attitudes on climate change. 

Not quite. If there is such a transformation, it is happening largely in the boardrooms of the world’s largest companies. And that poses a challenge for those who have been pushing business hardest in the hope of creating a more sustainable form of capitalism. 

To most activists, “big business” has long been a byword for corporate misdeeds, just as politicians use “small business” as shorthand for wholesome entrepreneurialism. Both groups tend to have less to say about those middling companies that make up much of the global economy and remain wedded to business as usual. 

Bigness is itself a problem when it leads to monopolistic behaviour, and current antitrust concerns from Brussels to Washington reflect how decades of consolidation have concentrated power in hands of the largest corporations. But most of those giants have bought into a more socially and environmentally responsible way of operating — or been pushed into it by their investors, employees and customers. 

In the US, this expressed itself most vividly in the 2019 letter from the Business Roundtable, in which Washington’s voice of big business vowed to serve all stakeholders, not just shareholders. But the same impulse can be seen in a Big Oil companies, such as BP pushing into renewable energy, or a Big Tobacco company like Philip Morris International embracing a smoke-free future. 

Many outsiders still suspect such moves are cosmetic, but the incentives to back up the words with action are growing, from the growth of funds that screen out environmental, social and governance (ESG) miscreants to the rise of an intangible economy in which no chief executive can neglect brand value. As the author Tyler Cowen put it in his book, Big Business, large companies have helped make the US more socially inclusive because intolerance would narrow their target market. 

Critics tend to think that big business has government in its grip, yet we have seen the limits of this theory in the era of US President Donald Trump: well-known CEOs have had little luck in steering his administration’s policies in areas from free trade to skilled immigration. 

If you wonder how the rise of ESG could coincide with the defanging of the US Environmental Protection Agency, for example, the biggest companies are not the leading villains. The likes of ExxonMobil argued against easing methane emissions rules, while the deregulatory agenda was pushed by second-tier companies whose leaders may spend more time tending to local politicians’ fundraisers than to World Economic Forum white papers.

As a new report from the Center for Political Accountability shows, even large US companies that loudly champion the fight against climate change still undermine it through their political donations. Too many have also been happy to let the trade associations they fund do political dirty work that is at odds with their greener-than-thou public postures. Now, though, the gap between such lobbying and their public relations has become untenable for some. BP, Royal Dutch Shell and Total have all cut ties with lobby groups over climate issues.

The gap between rhetoric and reality in big business is still too wide. But even the rhetorical shift is important for letting investors and activists hold hypocritical CEOs to account. And even if it was motivated by PR, that is because big businesses have realised they face reputational risks their investors will no longer put up with.

Many smaller companies have understandable reasons for not embracing the sustainability agenda: sustainable development goals and ESG metrics can be costly and complex to navigate, notes Andrew Wilson, the International Chamber of Commerce’s permanent observer to the UN. Campaigners for a more sustainable model of capitalism should pay greater attention to what companies are quietly lobbying for than to what they’re putting in their press releases. But they must also focus on changing behaviour among mid-tier companies.

If they do, they will find some of their most motivated allies in the corporate world’s upper echelons. Almost 1,000 multinationals have made Paris-aligned commitments, Mr Wilson notes, but few have aligned their suppliers with those goals. The typical multinational’s supply chain generates 5.5 times more emissions than its direct operations. They cannot keep ignoring this problem.

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The biggest businesses are under increasing pressure to take responsibility for their suppliers’ behaviour, notes Alison Taylor, executive director of NYU Stern’s ethical systems centre. Where she has seen smaller businesses adopt sustainability programmes, she adds, it was typically as a result of pressure from large corporate customers such as Apple or GSK.

Bosses of big companies who are in earnest about their environmental and social goals need to realise that they will not be reached without support from businesses outside their elite circles. And the largest companies’ harshest critics should consider that, in their own pursuit of those goals, big business may not be the biggest problem.

After the Vaccine

For some childhood diseases, the development of a vaccine was by itself decisive. But this may not be true of COVID-19, because adoption will be slow, effectiveness will wane over time, or both, implying that the need for testing will be ongoing.

Simon Johnson

WASHINGTON, DC – There is a growing consensus that one or more COVID-19 vaccines will become available at some point in early 2021. 

Within a year, many people in the United States, and some other countries, will be vaccinated. 

For some childhood diseases, the development of a vaccine was by itself decisive. 

But this may not be true of COVID-19, because adoption could be slow or effectiveness wane over time – or both.

In that case, the need to test people both for individual safety and to prevent outbreaks will be ongoing. The long-term problem with testing is already evident: the cost per test is high. 

In health-care systems where scare medical resources are allocated on a fee-for-service basis, such as in the US, this means that many people cannot afford to get tested. In addition to progress toward a vaccine, we need to make virus testing at scale much cheaper, so that it becomes available to everyone, whatever their income level.

Currently, the untested in the US include most children attending public primary and secondary schools, as well as the teachers and others who work in those schools. They also include millions of older people, including those living in low-income housing (known as Section 202 housing). This lack of access to testing is a major economic and moral issue that will not go away.

The economic problem is centered around schools. If families and teachers are worried about what happens when children go to school, it is hard to get the economy – including jobs and incomes – back on track. Education disparities, which are already stark, will continue to widen. Some children will never attain the reading and math skills they are missing now. This will likely lower their lifetime incomes.

There are roughly 57 million children in primary and secondary schools in the US, living in 34 million households (of which nearly 24 million have two parents and ten million have one). There are close to four million teachers and more than one million childcare workers. The continuing failure to provide virus testing in schools thus directly affects about one-third of the population.

If an effective vaccine becomes widely available, schools are likely to require children to be vaccinated. But there may be exemptions for religious or health reasons, as there is now for other vaccines. Health information is confidential, so you do not know who around you has had which vaccines. Tests for live virus are now non-intrusive (saliva or nasal swab) and can provide considerable reassurance – as well as the ability to detect and stop outbreaks.

Owing to a legacy of official neglect and inaction, 40% of the COVID-related deaths in the US so far have occurred in long-term care facilities, where many residents are seriously ill and most are over the age of 60. Now, these facilities have more infection-control resources, testing is available, and the discussion is shifting toward preventing anything like this from happening again.

But we must not forget other vulnerable people, including in minority communities and those living in “congregate” facilities such as apartment buildings. Many elderly people have been in some form of self-imposed isolation since March, avoiding others as much as possible. By all accounts, the resulting isolation and loneliness is taking an awful toll, including by accelerating aging and potentially pushing more people toward dementia.

New testing technology, including disposable at-home kits, could become part of the solution. There are still questions about how precise these tests will be – how many false negatives and false positives we should expect – when deployed at massive scale. But the main question is how long it will take to establish and run the supply chains necessary to support production and distribution of hundreds of millions of such tests per month.

The other promising development is pooled testing. COVID-19 lab tests typically cost between $25 and $125, depending on the regional market. But the numbers look very different if you build the costs from the bottom up: a couple of dollars for the tube (with or without a swab) to collect samples, a small amount for the logistics of specimen collection at scale (mostly shipping), and whatever it costs to operate the relevant information technology system (including bar codes for the tubes and reporting requirements). 

Pooling ten or 20 samples in one tube can lower the costs significantly, because it economizes on the expensive reagents needed to run the lab tests.

What do we need to get the cost per person tested down to $5 or even lower? In a single word: competition. As more labs figure out and offer pooled testing, prices will fall. For once, capitalism and market competition can help the people most in need of help. 

Ensuring that they receive it will enable all of us get past the scourge of COVID-19.

Simon Johnson, a former chief economist at the International Monetary Fund, is a professor at MIT's Sloan School of Management and a co-chair of the COVID-19 Policy Alliance. He is the co-author, with Jonathan Gruber, of Jump-Starting America: How Breakthrough Science Can Revive Economic Growth and the American Dream.

Expedia Isn’t Ready for an Extended Stay

Its homestay business may be booming, but it isn’t the key to the online travel agent’s recovery

By Laura Forman

The coronavirus pandemic has hit various players in the travel sector hard. / PHOTO: MOHAMED ABD EL GHANY/REUTERS

Investors bidding up Expedia Group EXPE -0.10% might be mistaking it for Airbnb.

Back in July, Expedia Chief Executive Peter Kern called vacation rental specialist Vrbo the “strongest part” of his company’s story. 

Although its buoyancy over the pandemic-riddled summer has no doubt helped the online travel agent recover from the depths of a historic travel lull, data show its surge—even if sustained—can’t right the ship for the whole company.

Despite bookings for its overall business falling 85% in the second half of March and April, Expedia shares are up 100% from their mid-March lows and are now down just under 15% year-over-year. 

That is significantly better than shares of key players across various travel sectors, even though as a booking platform its success depends upon demand for the broader industry’s business. 

Shares of Marriott International are down 38% year-over-year, for example, while American Airlines and Carnival are down 57% and 70%, respectively, over the same period.

The homestay sector has indeed benefited from travelers’ desire to forgo crowded hotels and airplanes. While analytics firm STR reports that revenue per available room across U.S. hotels was still down more than 48% year-over-year as of mid-September, data from Edison Trends suggests that homestay giant Airbnb’s business had returned to or exceeded pre-pandemic levels in some cases for August. 

SimilarWeb data show Vrbo had about 40% more web traffic than the same time last year as recently as last week. A recent industry report by travel data site Skift and McKinsey & Co. posited that this year could represent an inflection point in the lodging industry “when vacation rentals became mainstream.”

It isn’t clear, however, that homestay’s hot moment is sustainable. An August survey of U.S. travelers from Raymond James showed that, while 41% were more likely to book at hotel alternatives like Airbnb and Vrbo over the next year because of Covid-19, 39% reported “no change” in where they would like to book, while 20% said they are less likely to book at hotel alternatives. 

When asked back in July whether recent trends lead him to believe there is a more permanent secular trend toward alternative accommodations in the industry, Expedia’s Mr. Kern himself said he hadn’t seen “anything to suggest that people’s travel behavior will materially change.”

Yet Vrbo is still relatively small, both compared to its competition and to Expedia’s overall business. Airbnb has more than 3.5 times the number of global listings as Vrbo, for example. And while Expedia hasn’t broken out Vrbo’s performance since the fourth quarter of 2019, the homestay business accounted for just over 9% of the company’s overall revenue and generated under 5% of its overall adjusted earnings before interest, tax, depreciation and amortization in that period.

Inherent to Vrbo’s recent success has been an aversion to air travel, hotels, and the inability to take many cruises due to no-sail orders—all of the things Expedia’s broader performance depends upon most. Its “core OTA,” or online travel agency business, was 82% of its overall bookings in the fourth quarter of 2019, Vrbo’s was 10%.

And that core business could be lagging even when controlling for the pandemic. A survey published in September by RBC across U.S. and British internet users found that while Expedia had historically been the most popular destination for planning travel in the U.S., it now ranks third, behind Airbnb and Google.

Even after the pandemic eases, Expedia’s investors might find that the company’s elite status has lapsed.