THE RISKS OF BIDENOMICS GO BEYOND INFLATION / THE ECONOMIST

The risks of Bidenomics go beyond inflation

Joe Biden’s protectionism is costly for America and the world

America’s midterm elections are less than a fortnight away. 

When voters go to the polls on November 8th, surging prices will be uppermost in their minds. 

Annual inflation is running at just over 8%, nearly a 40-year high and the hottest in many voters’ lifetimes. 

For decades, inflation was quiescent enough that most Americans could ignore it. 

Now the cost of the weekly shop is dominating voters’ daily lives—and fuelling their ire.

Joe Biden’s colossal economic stimulus in early 2021 first set inflation on its feverish trajectory, before Russia’s invasion of Ukraine sent prices spiralling further. 

Voters may soon punish him for it, among other perceived excesses. 

According to the Pew Research Centre, a polling firm, four-fifths of Americans say the economy will be “very important” to their voting decisions; three-quarters are “very concerned” about the price of food and consumer goods.

Yet the consequences of nearly two years of Bidenomics go well beyond stoking inflation. 

Bidenomics takes on two of the biggest long-term threats facing America: the rise of an increasingly autocratic China, and the looming dangers of climate change. 

In the past year Mr Biden has signed three landmark bills, on infrastructure, semiconductors and the environment, which together contain plans to spend $1.7trn. 

With his executive actions, these amount to full-blown industrial policy. 

The result is unlike anything seen since Congress threw its weight behind America’s car- and chipmakers in the 1980s. 

The government will dole out $180bn in subsidies and tax credits to local firms over the next five years. 

At 0.7% of gdp, that is more than supposedly dirigiste France.

This phase of Bidenomics is praiseworthy in its aims. 

But its protectionism makes America less likely to achieve them. 

It is as if, having correctly identified his destination, Mr Biden has tied his legs together before setting off. 

The costs of this hobbled approach will be borne both by America and its allies.

America rightly wants to maintain its technological lead in advanced chipmaking over China. 

Semiconductors are growing in military significance, and could become crucial as artificial intelligence reshapes warfare. 

Another sensible worry relates to America’s dependence on China for crucial green-energy kit such as batteries. 

This could one day give Xi Jinping a hold over America’s economy, rather as Europe’s reliance on Russian natural gas strengthened the hand of Vladimir Putin. 

At home Mr Biden wants to spruce up rusting infrastructure and reduce carbon emissions. 

He has pursued these goals with subsidies and “Buy America” rules, and Democrats might hope that boasting of their support for domestic manufacturing and middle-class jobs will pick up votes on the campaign trail.

The trouble is that protectionism is a poison pill that weakens the whole enterprise. 

It hurts friend and foe alike, sapping America’s alliances of good faith and encouraging others to respond in kind. 

The European Union and South Korea complain that buyers of their electric vehicles will not benefit from America’s new subsidies, which will favour cars assembled in North America, and which may breach the World Trade Organisation’s rules. 

The eu is readying its own chip subsidies, which will compete wastefully with America’s. 

America’s attempts to woo Asian countries away from China’s sphere of influence, for example through the Indo-Pacific Economic Framework, its latest trade initiative in the region, have been undermined by its inward turn. 

Western protectionism lends credibility to Mr Xi’s claims that democracies argue for global economic rules only when they are not the ones breaking them.

At home, too, protectionism makes the aims of Bidenomics harder to achieve. 

Subsidising electric cars assembled in North America will make them more expensive and lower-quality, dulling the incentive to go green. 

The new laws often require projects to pay government-mandated “prevailing wages”, or to use American iron and steel. 

The Department of Commerce’s plan for doling out chip subsidies pledges to take on an array of social problems, from giving jobs to the poor to helping businesses owned by women. 

The red tape will raise costs to consumers and taxpayers still further.

Rather than putting up barriers, America should reap the benefits of openness. 

More high-skilled immigration would boost both its green-tech and chipmaking industries. 

Easing permitting rules might do more than subsidies to encourage the building of green infrastructure. 

Tax deductions can favour investment. Free trade in crucial technologies with allies would make it cheaper for the democratic world both to decarbonise and to avoid excessive dependence on autocracies. 

And if the intent is to hinder Chinese chipmaking, America can do so without bungs to industry, as its recent ban on selling advanced chip technology to China shows.

Mr Biden might reply that he has to work within the boundaries of the politically possible. 

At least his protectionist instincts are being channelled towards some productive ends: Democrats got nowhere trying to impose a federal cap and trade system to curb carbon emissions more efficiently. 

And both the infrastructure and semiconductor bills have attracted bipartisan support. 

Promising a manufacturing renaissance might help Democrats win seats that once looked hopeless.

A chip in every port

Such thinking is flawed. 

In the short term, gains in the Democrats’ popularity are likely to be small compared with the damage from voters’ fear about inflation. 

Rebuilding an industrial base and encouraging manufacturing jobs may be popular, but will heap costs on Americans. 

Bidenomics may help America deal with climate change and China, but less than it ought, because of its costly and inefficient design. 

Much of its appeal comes from the mistaken idea that America must concoct its own industrial policy to counter China’s steroidal version. 

In fact, China’s ailing economy and crashing stockmarket show the flaws of centralisation. 

The West’s advantage lies in its understanding of the strategic and economic benefits of openness. 

If America casts that aside, it risks losing the technological race.