[Global Column] Biden Administration's Fiscal Policy and the Shift in Economic Paradigm

One hundred days have passed since the inauguration of the U.S. Joe Biden administration, which emerged during the global COVID-19 pandemic.

At this 100-day mark, the most prominent aspect of the Biden administration is its economic policy. In his first joint session of Congress speech on April 29, President Biden described the current economic situation as "the worst economic crisis since the Great Depression." The 2008 global financial crisis was called the "Great Recession" because it was the most severe economic crisis since the Great Depression of the 1930s. Before the scars of the Great Recession caused by the 2008 crisis could even fade, the world is now facing the worst economic crisis since the Great Depression again. In other words, within just over 20 years, we are experiencing the two largest economic crises since the Great Depression.

Janet Yellen, the U.S. Secretary of the Treasury, stated that in this worst economic crisis since the Great Depression caused by COVID-19, "the wisest thing to do now is to act big." Accordingly, the Biden administration is pursuing large-scale fiscal policies. First, the $1.9 trillion American Rescue Plan was passed by Congress to respond immediately to the COVID-19 crisis. Additionally, President Biden announced plans to push forward the $2.25 trillion American Jobs Plan for infrastructure public investment and the $1.8 trillion American Families Plan for human capital investment. If the Biden administration’s policies proceed as planned, approximately $6 trillion worth of mega fiscal policies will be implemented.

The Biden administration’s large-scale fiscal policies are based on the current macroeconomic environment. Even before COVID-19, low inflation and interest rates persisted, leading Jerome Powell, Chair of the U.S. Federal Reserve, to point out difficulties in adequately responding to recessions through monetary policy alone. Therefore, as former Treasury Secretary Lawrence Summers noted, fiscal policy is the only viable response to the current economic crisis. Furthermore, as Secretary Yellen mentioned, low interest rates reduce the interest burden on government debt, facilitating the implementation of expansionary fiscal policies. Of course, if such expansionary fiscal policies eventually cause inflation that forces the Federal Reserve to raise interest rates, the Biden administration’s economic policies will face significant challenges.

Although the Biden administration’s economic policies are grounded in low interest rates and inflation, this could also trigger a major paradigm shift in the economy. The Biden administration’s economic policy may signal the return of Keynesian economics, which emphasized active government intervention after the Great Depression of the 1930s. In fact, Jared Bernstein, an economic advisor to the Biden administration, stated that to overcome the current economic crisis, we must look to Keynes. Since the 1980s, the neoliberal era emphasizing small government and market efficiency has prevailed. However, the 2008 global financial crisis severely undermined the legitimacy of neoliberal policies, and faced with the COVID-19 economic crisis, governments are once again stepping to the forefront of economic management. This will likely have a considerable impact on South Korea’s economic policies in the future.

Jae-Hwan Jung, Professor, Department of International Relations, Ulsan University