Time to temper my optimism?
Do recent events give us reason to be less optimistic about technology, the economy, the pandemic, and the Biden administration?
Earlier this year, I wrote a number of highly optimistic posts about the short-term future of the U.S. To recap:
1) Biden’s effectiveness, investment, and the welfare state: Biden’s big COVID-19 relief bill made it through Congress via the reconciliation process. Not only did this have enough relief to see us through the pandemic and enough stimulus to boost us back to the pre-pandemic trend, but it also contained a major reform of the U.S. welfare system, in the direction of unconditional cash benefits (the child allowance). Meanwhile, Biden was also pushing a longer-term package of investment measures, including lots of spending on science and infrastructure.
2) The vaccine rollout and the pandemic: The U.S. vaccination effort got off to a roaring start in February and March, lagging only the UK and some very small countries. The U.S. also had what appeared to be the world’s best vaccines, providing added reassurance that future variants wouldn’t break through our immunity. Thanks to this, the pandemic looked to be on the way out the door.
3) Technological progress: The confluence of cheap solar, better and cheaper batteries, mRNA vaccines, A.I., Crispr, and various other technological breakthroughs seemed to promise a new burst of accelerated innovation, renewed productivity growth, and economic transformation.
4) The U.S. economy: Thanks to all of the above trends, the U.S. economy seemed on track for rapid growth this year and next.
Notice that I use the past tense here. This is not because I think all these optimistic visions have gone up in smoke — indeed, I think most of them remain the most plausible outcome. But now, a few months later, I want to revisit my optimism on all of these topics. I don’t believe in the idea of pundits as soothsayers, but I do think it’s important to keep track of one’s predictions and note how and why they evolve over time. Anyway, my conclusion is that I’m mostly still optimistic about all of this stuff, but there are a few reasons for concern.
Variants and antivaxers
The pandemic is still receding steadily in the U.S. Cases are declining at a more or less linear rate, and are already lower than they’ve been since June 2020 (and since we’re testing more, they’re actually even lower):
Meanwhile, 49% of the U.S. population (and over 60% of the >16 population) has now received at least one vaccine dose, mostly with a high-quality vaccine.
BUT, two problems loom. First of all, the U.S.’ once world-beating vaccination effort has faltered:
We’ve now been overtaken by Canada in terms of the percentage of people who have received at least one dose, and China has gotten its act together as well.
At first, many blamed the suspension of the Johnson & Johnson vaccine due to blood clot fears. That may have helped kick off the decline, but it’s becoming increasingly clear that the effort to immunize the nation has fallen prey to partisan politics. Trump-voting states have much lower vaccination percentages than Biden-voting states, while Republicans are far more likely than Democrats (43% to 4%!) to say they don’t plan to be vaccinated.
We will probably be able to overcome a bit of this so-called “hesitancy” with innovative techniques like vaccine lotteries, but if 40% of Republicans (and presumably some Republican-leaning Independents) just won’t take their shots, it’s going to be somewhat harder to guard against COVID variants like the one currently devastating India.
Fortunately, however, American technology will probably bail out our fractured society once again. A recent British study found that the Pfizer vaccine is 88% effective against the fearsome India variant two weeks after the second dose, compared with 93% effectiveness against the now-common British variant. (The UK may be in slightly worse shape, with the AstraZeneca vaccine only 66% effective against the India variant.)
The strength of the Pfizer vaccine (and presumably of the extremely similar Moderna vaccine) means that we should not panic about variants. The best bet is still that the U.S. has seen its last big wave of COVID. Still, we should continue to put shots into arms as fast as possible.
Overall adjustment: A slight decrease in pandemic optimism due to partisan vaccine refusal, but still very optimistic.
Stagflation or just a blip?
The U.S. economy didn’t do as well in April as most were expecting. Only a meager number of jobs were created, compared with the large number that most had forecast. The cause is not yet clear, but the lingering effects of the pandemic and school closures and the continued special unemployment benefits are the two main hypothesized culprits (it might be both). Both of those factors will be transitory. But if it’s something else that we haven’t realized yet, we could be looking at a longer, slower recovery than we had expected.
Meanwhile, consumer prices rose in April at their most torrid pace in a long time, which is not incredibly torrid, but is still well above the Fed’s target. This inflation isn’t worth worrying about yet — it’s just due to supply bottlenecks. But if those bottlenecks persist and the above-target inflation persists for several months, and the Fed does nothing about it, it could convince people that the Fed is no longer as dedicated to price stability. Then we could be in trouble.
In other words, it’s likely that both the slowing recovery and rising inflation are blips, and will resolve themselves within a few months. But we have to at least recognize the possibility that we’re entering a new era of stagflation. And since stagflation is one of the thorniest and most annoying macroeconomic situations — you can’t get out of it with fiscal or monetary stimulus without making the inflation part worse — we should make sure that that it doesn’t happen. This means having the Fed maintain its credibility as the main line of defense against inflation, and using a variety of methods to both help and lure Americans back to work.
Overall adjustment: Slight downgrade of economic optimism due to recent monthly numbers, but still optimistic overall.
Will Biden rise to the moment?
The biggest concern is that Biden will not turn out to be the transformative president that I and many others were hoping when he did his initial blitz. Biden’s willingness to use reconciliation to shove through a big bold bill with very little compromise (the $15 federal minimum wage being the only big concession) seemed to indicate that he was rising to the moment of history, instead of being the cautious incrementalist that most people expected him to be back in the primaries. His flurry of equally bold additional initiatives — infrastructure/investment, the care economy, immigration, and policing — promised the most transformative agenda since the New Deal itself. Meanwhile, Democrats in Congress were planning their own big moves. These included voting rights initiatives. They also included the Endless Frontier Act, which would have increased science funding substantially — not as much as we need, but enough to make a difference. Another is voting rights.
Unfortunately, every single one of these initiatives has either stalled due to the filibuster, has been massively watered down by compromise, or is in danger of being watered down.
Voting rights has stalled due to Republicans’ filibuster power. There is no chance of convincing 10 Republican Senators to vote for a bill that would weaken the Republicans electorally. So that leaves filibuster reform. But two centrist Dem senators, Machin and Sinema, have refused to allow filibuster reform so far. That’s pretty much game over for voting rights.
It’s also probably game over for large-scale immigration reform. Opposition to immigration in all forms, legal and illegal, high-skilled and low-skilled, employment-based and humanitarian, has become a wedge issue for a substantial fraction of the GOP. That faction is probably powerful enough to force Mitch McConnell not to allow any major immigration reform during Biden’s term. The administration is now saying it will try to break the bill up and pass it piecemeal, which is generally an indicator that nothing major will get passed.
I always basically expected this to happen. But I expected better on the economic initiatives; Biden might be able to use reconciliation to pass his infrastructure/investment plan (and possibly also the care jobs plan), just like he passed the COVID relief bill. But it seems he’s already watering his investment proposals down in a doomed attempt to win Republican support. Why he’s doing this is beyond me; it seems like a repetition of Obama’s mistakes in 2009, when he chased the evanescent specter of bipartisanship and ended up watering down both the stimulus and Obamacare.
One of the biggest things Biden has offered to drop from the bill is science funding. The plan initially included $250 billion in research-related spending over 8 years — not enough to return us to the spending levels of the Cold War, but enough to make a difference in our innovation and competitiveness. But Politico reports that Biden is now offering to slash this all-important piece out of the bill and shift it to the Endless Frontier Act instead.
Except the Endless Frontier Act, which just passed out of Senate committee under the new name of the U.S. Innovation and Competition Act, has already been completely gutted. Sam Hammond of the Niskanen Center has the depressing details:
Following a flurry of Senate Commerce Committee amendments, the $100 billion originally envisioned for the [new Technology] Directorate dropped to just $29 billion over five years, with $54.9 billion reassigned to the NSF-proper. Of that $29 billion, only 15% or $4.35 billion is reserved for the Directorate’s core R&D mission…
But at least the NSF is getting a big boost, right? Wrong. The $54.9 billion to the NSF replaces their existing funding rather than being a supplement. That leaves only $12.9 billion in new NSF funding, of which $8.23 billion is tied to promoting STEM education. In short, what was sold as a ~$100 billion boost in federal support for R&D is now less than $40 billion in new spending, of which less than $10 billion is reserved for anything resembling research or development.
In other words, new federal R&D spending isn’t going to be $31 billion a year or $12 billion a year; it’s going to be about $1 billion a year, which is to say, pretty much nothing.
The collapse of initiatives to increase R&D spending is also the only reason to be pessimistic about the wave of technological progress that I’ve been predicting. All the basic breakthrough technologies — batteries, mRNA, and the rest — are just as present now as they were three months ago. But if the U.S. government is not actually willing to shell out more money on R&D, that is somewhat bad news for medium-term technological progress. Yes, private-sector research, the existing NSF and NIH budgets, and other countries can carry the burden they’ve been carrying, but we’re passing up a golden opportunity to push progress forward faster.
So Biden’s legislative agenda appears to be teetering on the brink of collapse.
It’s worth noting that even the most transformative presidents usually get less done than we thing — the New Deal was basically over by 1937 and never managed to spend enough to end the Depression, while Reagan failed to cut government spending and ended up reversing a fair amount of his initial tax cuts. But if the COVID relief bill is the only major bill Biden passes, then barring a major war, he will not be a transformative president along the lines of FDR or Reagan.
Overall adjustment: Significantly less optimistic about Biden’s legislative agenda, but only slightly less optimistic about technological progress.
Getting back on track
So how do we get the optimism train back on track? Unless the macroeconomic forces of stagflation really do intervene, the main obstacle is — surprise! — partisanship. A chunk of Republicans are refusing vaccines, and the Senate GOP is blocking most legislation. Biden needs to give up on the dream of bipartisanship earlier than Obama did, and focus all his efforts on passing at least one more big reconciliation bill. The science funding that was stripped out of the Endless Frontier Act, in particular, needs to be fully restored and even increased. Meanwhile, states need to use every trick in the book to increase vaccination rates.
I’m still optimistic about where America is headed. But especially when it comes to government investment, my sunny outlook has been a bit tempered in the last month.