Obama's chief economist: Neoliberalism is the only game in town | Jason Furman

Neoliberalism is often used as a slur by critics. Indeed, the blame for just about every major political crisis we live within is placed at the feet of neoliberalism. But, is neoliberalism really to blame? And what exactly are we blaming? In this recent IAI Live interview, Jason Furman, Obama's chair of the Council of Economic Advisors, argues that it was Biden's break with neoliberalism into unpopular, expensive, industrial policy such as the Inflation Reduction Act that cost him the election. With Trump deploying a similar 'spend now, fix later' approach to government, Jason argues that both parties' break with neoliberalism could sow the seeds for a US version of a Liz Truss moment.

In a recent IAI Live opening interview, the New York Times’ Eshe Nelson interviewed Harvard Professor and former Chair of the Council of Economic Advisers under President Obama, Jason Furman about the state of the US economy, why Biden may have lost, how Trump’s economics are playing out and ultimately whether we have an alternative to neoliberalism.

If it was any part of Trump’s economics that won him the election, it was the broad notion that he would change things up. To his voters, the greatest crime Kamala Harris could perpetrate would be more of the same. Indeed, Biden won his election on a platform of increased spending and industrial policy, which, as you’ll see, Jason blames in part for the inflation crisis and Biden’s ultimate defeat. If Biden’s break with neoliberalism led to Trump's election, and as Jason argues, Trump’s policies won’t make this much better, then we’re left in a quandary. What do you do when dominant economics is unelectable, but it’s the only way we’ve got? At least, according to Jason….

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Eshe Nelson: On industrial policy, we did see a lot of other countries also kind of take up this mantle, as well as the U.S. It became very popular very quickly. It felt like lots of things got brought under the umbrella of national security, and to have governments choosing the industries that they wanted to support. Where do you think is the right balance there? For example, semiconductors as an industry, I've heard arguments on both sides in terms of it being a national security risk voices versus not. And within that, how do we pick the things that we think are strategically important and go for them versus what we've had for kind of the last couple of decades?

Jason Furman: So microchips are a good example. And, you know, first of all, how you think about it matters. And so the way you should think about it is that your industrial policy is a minus for jobs, and it's a minus for the economy. Why? Because you're diverting resources from their highest and best uses and instead sending them to something less important because the government's telling them to do that.

It's not a great job strategy to give tens of billions of dollars to microchip companies, but then there's something on the plus side of the ledger, which is that you get more resilience, you get more national security. And the question is, does that, when you do the cost-benefit analysis, does it come out ahead? I think largely it does. I think microchips are an important enough thing. We don't like getting 90% of the advanced ones from a single island that's in a dangerous part of the world. And so, being willing to incur costs to be able to produce more of those in the United States seems to me a worthwhile investment. But I don't think there are a whole lot of other examples that I follow.

Maybe drones would be another one where I'd like to see more drone production in the United States. I'm nervous about how reliant we are on the Chinese for that, not because I think they make great or bad drones, nor because I think drone making is a great job to have. It's really national security.

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Eshe Nelson: And so then, when it comes to like clean energy infrastructure or technologies, do you feel like that's an example where maybe that cost-benefit analysis doesn't work out in its favor?

Jason Furman: Yes, I'm not positive, but I am skeptical that it matters a whole lot where you're making the solar panels and where you're making the wind. I just want to see us producing clean electricity. I don't really care about producing the things that are needed to produce clean electricity. I think we should get those as cheaply and efficiently as we can.

I'm sort of unwilling to write off neoliberalism until you have something to replace it

Eshe Nelson: So what kind of policies can you advocate for now? I ask this because, at the moment, it sounds like you're saying yes to more neoliberalism, but the U.S. economy that we're in at the moment doesn't seem to have a huge amount of public demand for considering anything that looks like a constraint.

That doesn't appear to be the most popular set of circumstances. So, what do you think could actually succeed and what do you think are the kind of policies that really work, will grow the economy, but are also popular?

Jason Furman: There have been a hundred obituaries of so-called neoliberalism written, but we don't have an alternative that anyone likes. What Biden did was extremely unpopular. What Trump is doing is so far unpopular, and I would not be surprised if it becomes more unpopular over time. And so, you know, I'm sort of unwilling to write off neoliberalism until you have something to replace it. So there's been a lot of criticism of it, but none of it has created any type of coherent, effective way to govern. And that delivers results that people like and want to see more of.

It's possible that at some point, there would be an event like you had in the U.K. with Liz Truss, where there's a real, immediate and clear response.

Eshe Nelson: You've warned about fiscal irresponsibility from both parties. Do you have any idea why no one cares anymore about what is going to happen with the deficit? And I guess I would just kind of add to that, not just that why people don't care, but to how far do you think it can go? I mean, we have this year started to see some market nervousness or strains around U.S. assets, which again, I feel like the role of the dollar and where that goes up.

German alternative reserve currencies are also arguments that have been had for decades. And we kind of do end up back with more dollars. I've had a lot of people tell me this year that it felt different. It really did feel different the way Treasuries and the dollar and other U.S. assets were moving all at once. Do you do you see real limit that might force people to care more about fiscal responsibility?

Jason Furman: I think there's a limit somewhere. It's not clear where we are relative to that limit. We're absolutely on an unsustainable fiscal path right now. It's likely somewhat more unsustainable because of the so-called one big beautiful bill.

Interest rates are higher as a result of it, but they're not sky high like they were some time ago. I expect more upward pressure on interest rates over time. Maybe that will get people's attention. It's possible that at some point, there would be an event like you had in the U.K. with Liz Truss, where there's a real, immediate and clear response.

We've seen that happen before in places like Canada and the like, but I wouldn't necessarily count on it. The dollar is just enormously dominant in so many different respects in the global economy. And yet you can see some cracks here and there. But our ability to make large mistakes and only suffer the sort of small growing, eventually the medium consequences should not be underestimated. That means there's not the same feedback here that there is in an emerging market or even in the U.K.

That if something comes up, we don't have a mechanism for replacing our leader the way that the United Kingdom did and does. We don't have a parliamentary system that can react very quickly.

Eshe Nelson: So it sounds like a kind of slow walking into this kind of economic about economic situation as opposed to what happened in the UK. I'm based in London, so I do remember the Liz Truss moment of 2022. It's more slow and you still end up maybe in a similar place, but you just don't get that immediate shock of something that forces a prime minister out, for example. The advantage of having very big, strong market reactions is that it tends to lead to some sort of political change. If you have a very slow-moving reaction, it sounds like you're saying it may be harder to spot, harder to reverse or change course.

Jason Furman: I'm also worried, though, that if something comes up, we don't have a mechanism for replacing our leader the way that the United Kingdom did and does. We don't have a parliamentary system that can react very quickly. And so at some point, there'll be some forcing event. How the system gets together, reacts and responds makes me nervous. So in some sense, we're not too far economically from safety. It's not that hard to pass a law that does some combination of tax increases and spending cuts that would total enough to make our debt sustainable. But, you know, that's me speaking as an economist. How our political system does that is, you know, too hard a problem for me to solve.

Eshe Nelson: I want to end on tariffs because we are kind of right in the middle of getting these. Do you see any sort of coherent, I guess, ideology underlying Trump’s Liberation Day policies? And my addition to that question is, what does it mean for the US relationship to other countries? Do you have thoughts on those kinds of implications of not just how the U.S. interacts with other countries going forward and vice versa, but how other countries will start to react with each other? I mean, I just got back from a forum of central bankers in Europe, and it was just all the talk about what Europe can do to use this moment.

Now, we've heard that before, but there was a level of kind of optimism and clarity and agreement to some extent that I don't want to over-egg. But people kept telling me it felt different to them.

Jason Furman: I think there's a consistent rationale behind these tariffs, but it's not a coherent rationale. And the consistent rationale is that the world is zero-sum, that other countries are taking advantage of the United States, and that they do this through tariffs.

I were Europe, I would probably feel I should retaliate. I'd probably have a hard time restraining myself from retaliating.

And if we have tariffs, we can solve the problem in almost every step. And what I just said has been debunked over and over again by economists, but these views the president has held for decades. He is not as responsive to markets as he was in his first term, but he's still somewhat responsive. And so there's his id on the one side and markets on the other side.

And they have been in a tug of war and it has done comparatively better in his id has done comparatively better in his second term than in his first. And with that, the economic consequences will be comparatively larger in this term than in the first term in terms of the rest of the world. Yeah, I mean, if I were Europe, I would probably feel I should retaliate. I'd probably have a hard time restraining myself from retaliating. The problem is that retaliation has the same economic logic that Donald Trump has, which is to say, it hurts Europe as much or potentially even more than it hurts the United States. And so, unless you think the retaliation can get the United States to stop, you're just adding more pain and suffering as opposed to using this as an excuse to make all the changes and do all the things that have long been on the to-do list for Europe. But it's not getting done.

Eshe Nelson: Yeah, I mean, I've heard the analogy of this kind of idea of free riding, and some economists say, well, it's always been in the US's interests to be driving this bus. I wonder what it if it's possible to have a world where the US is not engaged in the kind of multilateral organizations that trade is how it kind of wields a stick that drives other countries away and towards each other, looking to create alliances that don't involve the U.S. Or if that's just as you say, the dollar is still so dominant that that is an unlikely version of events.

Jason Furman: I think there are limits on the degree to which the rest of the world can get together around the back of the United States, but it can still do more of it. And you've already been seeing that. I mean, you've been seeing Europe even before this latest round, reaching trade agreements with countries around the world. I expect the UK to be doing that. And certainly China is doing this on some days, trying to do that, and on another day is undermining that with its heavy handedness. So yeah, I expect to see more happening around the United States, but not like a brand new, incredibly effective organization that doesn't include the United States.