Biden’s bigger challenge

Two cheers for Biden's economic choices – but the hardest part is still to come

In 100 days, President Joe Biden has not only blotted out the political nightmare of the last four years and restored due process to US government. Remarkably, he has rewritten the economic orthodoxy of the last 40 years from top to bottom.

Deficits? Who cares? Not the IMF, which looks benignly on Biden’s three-legged plan to spend an astonishing $5.5tn, equivalent to some 35% of annual US output, on economic stimulus, including direct payments to families, rebuilding US infrastructure, and on supporting families, especially poorer ones. Biden’s intention to raise taxes on the rich and on corporations to help pay for it likewise fails to raise institutional hackles (although Republicans predictably declare themselves shocked, shocked): tax cuts are now judged to aid trickle-up rather than down, and inequalities – strongly fanned by the covid pandemic – both within and between countries, hold growth back rather than abet it.

n effect, Biden has cancelled the old Washington consensus and replaced it with a de facto new one – an activist state, progressive taxation, green infrastructure spending, support for trade unions, a global minimum corporate tax rate that has been resisted for years, and a winding back of globalisation, particularly in relation to China, to boost supply-chain resilience. Industrial and even employment policy hover in the wings. 

Of course, this is not to say that President Biden will automatically get all his initiatives through a finely-balanced Congress; mid-term elections, just two years away, could set the counter back to zero. Yet it is already clear that a reform-bent president has shrewdly leveraged the circumstances to change the terms of the debate. He has made clear that the current situation renders half measures worthless, and some hitherto unusual remedies both obvious and, dare one say it, oven-ready. 

Covid has played into this. On the one hand, a successful vaccination campaign that had already begun has redounded in Biden’s favour. The pandemic makes much needed health spending a no-brainer. It also encourages experimentation: as Larry Elliott noted in The Guardian, furlough schemes to subsidise the wages of those unable to work ‘are not the same as a basic income, but they are similar enough to get people used to the idea’.

Yet even if, as we fervently hope, Biden’s reforms are adopted and take strong root, there is one glaring hole in the programme through which unless stopped half the potential benefits will leak away. It’s the last economic taboo, so completely internalised and embedded in the national psyche that it’s never up for political discussion. It is of course the need to challenge the status of the corporation and the way it is managed.

Think about it. The corporation is the intermediary through which the lofty abstract economic ambitions – levelling up, building back better, full employment, decarbonisation – are translated into what actually happens to real people in real places on the ground. It’s the engine room of the economy. And management is the operating system that governs what it does and how it does it.

The trouble is that our managerial software hasn’t been upgraded for four decades. It is now so far out of kilter with the wider economic and social interest that the engine is producing as many if not more problems than solutions – including some of those that current reforms seek to address. One issue is that most companies now only create good full-time jobs (what most people want more than anything else in the world, according to Gallup) as a last resort. Another is declining innovation rates as companies plough investment into short-term efficiencies and share buy-backs rather than R&D. 

A third, and perhaps the most spectacular, is inequalities of all kinds, but particularly income and wealth: as Thomas Piketty put it in Capital in the Twenty-First Century, ‘In all the English-speaking countries, the primary reason for for increased income inequality in recent decades is the rise of the supermanager in both the financial and nonfinancial sectors.’ In the US, supermanagerial bonuses have soared by 1000 per cent over the last three decades, compared with a 116 per cent hoick in the minimum wage.

So the corporate OS urgently needs to be rewritten. But for all the well-meaning initiatives on both sides of the Atlantic – the Purposeful Company initiative in the UK, the US Business Roundtable’s declaration in favour of more inclusive business aims, BlackRock’s call for social purpose – it’s hard to imagine it will come about through self-regulation. As Tariq Fancy, formerly BlackRock’s head of sustainable investing, notes, fund managers and finance professionals are trained and incentivised to chase yield and profits, and most companies ‘are still profit-seeking machines, built from the ground up as a collection of legal and financial incentives to make a healthy profit’. Expecting a market to self-correct its distortions in these conditions is fantasy. Governments haven’t hesitated to legislate changed social and economic behaviour by their citizens to deal with the Covid crisis; they alone can alter corporate and management behaviours by changing the incentives and legal provisions that caused them. 

Yes, but… can they? Tackling the management challenge is a bigger and more contentious test than fashioning a spending programme, yet in the long term even more important. Try a thought experiment. Imagine a Biden, or any other, administration attempting to redraw the corporate rulebook, knowing that in question would be the business model, and outsize profits, of giants including Silicon Valley titans with a collective worth of some $8tn, more than the GDP of many countries, with lobbying and legal firepower to match. Is it even possible? Have we left it too late? Just asking.

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