WASHINGTON — Despite the ongoing turbulence caused by the coronavirus pandemic and the shock of war in Eastern Europe, the American economy is in sound health, top Biden administration economist Jared Bernstein asserted in an end-of-year interview with Yahoo News.
The upcoming year may not be one of blockbuster gains or growth but will instead, Bernstein predicted, see the American economy avoid both the inflation that haunted 2022 and the recession that materialized later in the year as the Federal Reserve raised interest rates to stem price increases.
“I think there are reasons to be optimistic,” Bernstein said. “There are tailwinds and headwinds in this economy, and I spend my days tracking both of them,” he added. In his view, the headwinds are subsiding (inflation, still high, is falling) while the tailwinds are picking up (the pandemic is over, sort of).
Twelve months from now, Bernstein and other economists want nothing more than for the U.S. economy to be coasting along at cruising altitude, a year remarkable only for how unremarkable it is. That, in 2023, is what winning may look like.
“It’s going to be gloriously, boringly normal,” University of Michigan economist Justin Wolfers recently predicted. “I’m not saying there’s no recession. But if there’s a recession, it’ll be a boring recession. And if it’s a boom, it’ll be a boring boom.”
Critics counter that confidence in Biden’s management of the economy is unwarranted. In particular, they argue that it was Biden’s spending, not the pandemic or the war, that caused inflation to spike in the first place. That argument has been challenged by the fact that other countries currently have much higher inflation rates, meaning that the problem is global.
Some of the criticism is reserved for Federal Reserve Chairman Jay Powell, who has acknowledged that, throughout 2021, he did not see inflation coming. Biden frequently voices his respect for the Fed’s independence when asked about the health of the economy. Whether intentionally or not, the president thus reminds people that, if the recovery goes astray, Powell should shoulder some of the blame.
The most obvious danger facing the U.S. economy in the coming year is a recession; A Bloomberg poll of economists says there is a 70% chance of one in 2023. Huge job cuts at some of the biggest Silicon Valley firms have led to the by-now-familiar exchange of of I-told-you-so recriminations and nothing-to-see-here reassurances in Washington, where every new shred of economic news is often regarded as a referendum on the White House.
Voluble and opinionated, the 67-year-old Bernstein was trained in the double bass at the Manhattan School of Music before eventually exchanges notes for numbers. He worked as Biden’s chief economist during the first term of the Obama administration, pushing progressive policies in ways that put him at odds with centrists like Timothy Geithner, who served as President Obama’s treasury secretary during the financial crisis of 2007-08. In 2011, Politico deemed Bernstein the administration’s “lost liberal voice.”
Today, Bernstein serves on the president’s Council of Economic Advisers, which also includes Heather Boushey and Cecilia Rouse, its chair. His large, sparse quarters in the Eisenhower Executive Office Building overlook the West Wing. On his bookshelf, works by liberal Sen. Amy Klobuchar of Minnesota and libertarian publisher Steve Forbes share space. And in his quick and discerning mind, forecasts from Goldman Sachs compete with reports from China’s manufacturing sector to paint a picture of the global economy that is, on the whole, a lot clearer — and brighter — than it has been in recent years.
Bernstein believes that the economy is already transitioning from the unsustainably torrid job gains of 2022 to a more measured pace, its guardrails set by a Federal Reserve that has raised interest rates by 425 basis points this year.
“I think there are reasons to be optimistic that the path to a steady and stable transition is plausible and credible,” Bernstein says. He points to a recent analysis by Goldman Sachs economist David Mericle, which contends that “an extended period of below-potential growth can gradually reverse labor market overheating and bring down wage growth and ultimately inflation, providing a feasible if challenging path to a soft landing.”
In these queasy moments of the initial descent from the pandemic, every new development is subject to anxious scrutiny. Among the most scrutinized is the number of jobs the economy adds per month. There is well-founded concern that Powell will look at the monthly jobs reports, see an affront to his anti-inflation policies and react by raising interest rates. With borrowing money becoming ever more expensive, the thinking goes, employers will start to lay off workers instead of hiring them.
The Fed “sees the labor market as the mechanism by which they can solve the inflation problem,” economist Neil Dutta of Renaissance Macro told the New York Times after it was revealed that November saw a gain of 263,000 jobs, a pace probably too brisk for Powell.
Daniel Bachman, an analyst with the financial risk management firm Deloitte, predicts that 2023 could be a “growth recession” year, a necessary corrective that will see hiring and economic growth lose ground — without plummeting. Even so, he does not believe the slowdown will resemble the kind of recession that followed the mortgage crisis of 2007.
“So far, it’s safe to say that the recession is mostly in people’s minds,” Bachman wrote.
In the broadest sense, the Biden administration is asking Americans to accept a 2023 that may feel tougher than it should as the price of foundational stability. And if economics has always been a matter of faith, it is especially so right now for White House figures like Bernstein, who do not come from the academy or high finance but are true believers in Democratic economic policy.
“I think the general trend is our friend, and that the data flow has been complimentary to this framework,” he says — as one expects he would.
Just how much patience Americans are willing to show in 2023 is a question that could be answered with the presidential election in 2024, a fact of which the White House is well aware. For three years, people have been battered by lockdowns, shortages of goods and other disruptions. Relief packages have come and gone. Gas prices spiked but are now falling. Supply chains convulsed, but the kinks eventually resolved. Will the new year bring fresh chaos, or will the economy — both at home and across the globe — return to normal?
“Some of this stuff you can’t make up. I don’t know what normal is anymore,” McKinsey senior partner Daniel Swan told the Associated Press.
The White House has said more or less the same, though more gently. They want Americans to remember that the persistence of the coronavirus pandemic and Russia’s invasion of Ukraine presented such enormous economic shocks that they would take more than a few months to handle.
Bernstein argues that the Biden administration is, in fact, dampening those shocks one by one. He points to administration efforts to “unsnarl” supply chain problems — problems exemplified by images of cargo ships waiting off the California coast — and the release of 180 million barrels of crude oil from the Strategic Petroleum Reserve.
The latter of those decisions has helped, along with other developments, bring the price of gasoline to below $3 a gallon in many parts of the country.
“That’s breathing room,” Bernstein says.
Much as the Biden administration is stuck between inflation and recession, it is also caught between moderates who favor fiscal restraint and progressives who charge that inflation concerns led the Biden administration to back away from its social priorities, which would have required trillions more dollars.
With Republicans having retaken control of the House of Representatives, the White House does not expect any of its legislative priorities to be realized. Instead, it wants to see the legislative accomplishments of 2022 translate into real-life benefits for ordinary people.
“He deeply, deeply cares about implementation,” Bernstein says. He describes how, after the passage of the American Recovery and Reinvestment Act in 2009, Biden would often call small-town mayors to see how they were using federal funds, lest the Obama administration be portrayed as wasting government dollars.
“I vividly recall him hauling us all into his office and saying, ‘I don’t want to hear about one dead tree being planted,’’ Bernstein says.
Today, he’s confident that the seeds for the economy’s new normal have already begun taking root and that, in the new year, the hundreds of billions of dollars already devoted to spending on infrastructure, green energy and infrastructure will begin paying dividends.
That prediction is nothing if not confident. It will soon become apparent if it also turns out to be true.