Lessons from Bidenomics ahead of the midterms

“Should progressives utilise scarce political capital on running the economy hot to reduce inequality? And if not, where should they concentrate their efforts? As minds turn to the midterms Adam Aboobaker and Peter Skott suggest that the recent experience with “Bidenomics” ought to give progressives pause. Over seven decades ago Gösta Rehn and Rudolf Meidner, economists associated with the Swedish Trade Union Confederation, outlined a macroeconomic strategy for maintaining low inflation, full employment, high growth and low levels of income inequality. Over the course of their lifetimes, they lived to see this very successful paradigm partially dismantled. In large part, the principal economic architects of the Swedish model saw this outcome as the result of failure to adhere to their simple warnings about running labour and goods markets too hot through excessive stimulus of aggregate demand. For Rehn and Meidner, full employment would not be sufficient to generate sustainable compression of the wage distribution, and a pure wage struggle may be a risky basis for programming a progressive economic vision in the context of dangers from inflation and international competition. Writing in 1993, Meidner commented that Swedish governments had neglected the warnings about inflation and tolerated periods of excess demand. This “failure of the stabilisation policy”, he argued, “has been a decisive reason for the shrinking popular support for the social democrats, for the enfeeblement of the unions and for the continuous decay of the Swedish Model as a whole.” America’s recent experience bears out these warnings. It is now widely recognised, by Stefanie Stantcheva and others, that inflation was a significant factor behind the Democrats’ poor performance in the presidential elections in 2024 and the return of Donald Trump to the White House. Inflation imposed cognitive costs and anxiety, with little or no gain in real wages for most workers, despite rising nominal wages. This pattern beckoned an easy rhetorical victory for Republicans, who effectively associated the economic policy of Joe Biden, termed “Bidenomics”, with the cost-of-living crisis. Democrat-aligned discussions have shown little recognition of the limitations and dangers of expansionary policies and “tight” labour markets. This is a reason for some concern as we approach the midterms – a critical moment where Democrats may wish to assert a new positive vision for the economy. Instead, policies associated with a hot economy have been seen as promoting real wages increases and lower wage differentials. Analysis has shown that America did experience a remarkable compression of wage inequality between 2019 and 2023. We explore the sources and policy implications of this compression in a recent working paper . Our core argument is that the recent compression in wage inequality in America cannot be uniquely attributed to how “tight” labour markets have been. Looser than it looked The story emphasising labour market tightness as the reason for the compression has timing problems. A large part of the compression happened during the first half of 2021, with COVID still a major factor and only shortly after Biden took office, when all standard measures of tightness were low. The problems also show up in a simple graph. Using the relative wages of those at the 90 th indexed against those at the 10 th percentile, there are no clear cyclical patterns (figure 1). More importantly, in the recent period we see evidence for a very strong compression of wage inequality, coinciding both with a slackening in labour markets (2020-2021) and subsequent tightening (2021-2022). Figure 1: The 90/10 relative wage and employment rate, United States, 1993-2023 Using state-level unemployment data and microdata from the Current Population Survey , our more systematic study of wage dynamics accords with our doubts. Across an array of estimations, we do not find evidence in line with the proposition that the recent compression of wage inequality was driven by the degree of labour market tightness. Instead, the evidence suggest that special circumstances must have been at play. Several factors contributed to the compression. The various fiscal policy packages during COVID introduced measures that directly improved the relative position of low-wage workers. Flat-rate supplemental federal unemployment insurance meant that most low-wage workers benefited financially from becoming unemployed, and uniform stimulus checks and other provisions in the packages also generated disproportionate improvements in their financial position. These policy interventions raised the reservation wage and strengthened the bargaining position of low-wage workers. A revaluation of the health risks of many jobs during COVID, meanwhile, may have added to workers’ wage aspirations and resolve, while the public praise of “hero workers” in the health and service sectors plausibly contributed to the general acceptance of wage increases as being fair. This acceptance also made it easier for employers to pass on increasing costs and reduced their resistance to wage increases. The wage compression is unsurprising in light of these special features of the recent period. But a wage compression is not unambiguously associated with improved distributional outcomes in other dimensions. Tight goods markets and profitability Real wages are determined by conditions in the markets for both goods and labour. Nominal wages tend to rise in a tight labour market, but strong aggregate demand pressures also typically raise markups, prices and profitability. The importance of this interaction between goods and labour markets is reflected in the post-pandemic movements in the functional income distribution, overall income inequality and real wages. The profit share increased significantly, and income inequality widened, while many workers experienced falling real wages, despite nominal wage gains. Neither the median weekly earnings of full-time employees nor the average real wage of nonsupervisory workers was significantly higher at the time of the election in November 2024 than when Biden took office in January 2021; real wages, by contrast, had risen significantly during the first Trump presidency (figures 2-3). Thus the claims of the economist Paul Krugman in the New York Times in 2023 and 2024 of biased media and partisanship as the only reasons for the unpopularity of Bidenomics appear not just condescending but also empirically unfounded. Figure 2: Median weekly earnings, United States, 2015-2025 Figure 3: Average hourly real nonsupervisory earnings If not jobs, then what? If a narrow focus on running the economy hot in order to gain wage increases is a dangerous folly for progressives, where should an alternative vision be sought as we head toward the mid-terms and the national campaign trail in 2028? While a pure wage struggle may have limited effects on the distribution of income, merely leading to inflation, the likelihood of sustained improvements towards a more equal society is enhanced if the focus is shifted towards fighting for public provision and funding of essential goods and services like health care, education, childcare, public transport and recreational facilities. Large gains can be made if increased decommodification of these areas – providing the services based on need rather than ability to pay – is combined with improved social insurance (unemployment benefits and paid sick leave, for instance). But the changes will not come without a sustained push from social movements, political organisations and labour unions. Another point of focus ought to be the fight for institutional changes that challenge corporate power. In contrast to the characterisations of inequality as the inevitable result of impersonal market forces, power relations play a crucial role. And power balances can be influenced by institutions, policies and technologies. The policy response to the pandemic – unprecedented levels of unemployment benefits and large “stimulus” checks – was a “power biased” intervention. The unusual aspect of the dynamics is that this time the power bias moved in favour of the bargaining position of low-wage workers. A forward-looking conclusion is for policy-induced institutional changes that continue the shift in this direction through strengthened antitrust, wage and tax policy. The recent appointment of Lina Khan, a former commissioner of the Federal Trade Commission, to the transition team of Zohran Mamdani, the new progressive mayor of New York City, is a signal in the right direction. But a meaningful programme for challenging corporate power is deserving of elevation again to national level politics, especially as a basis for drawing a meaningful contrast with the priorities of the current administration. In short, inequality is multi-dimensional – addressing it requires institutional, policy and political changes that go far beyond running the economy hot. A hot economy may generate price-setting power for firms that dominates any strengthened resolve for workers’ capacity to set wages in line with their goals and targets. Bidenomics came up against that reality through a historic repudiation at the polls, and a strategy for a progressive economic programme should build out of this realisation going forward. This article gives the views of the author, not the position of LSE Business Review or the London School of Economics. You are agreeing with our comment policy when you leave a comment. Image credit: Consolidated News Photos provided by Shutterstock. The post Lessons from Bidenomics ahead of the midterms first appeared on LSE Business Review .

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