Adam Posen Has a Warning on the Danger of Bidenomics

Episode Summary

Executive Summary: The episode centers on a wide-ranging Jackson Hole conversation with economist Adam Posen about U.S. industrial policy, trade, China, supply-chain resilience, and the inflation and productivity consequences of larger fiscal states. Posen argues that current policy overuses targeted subsidies and nationalism, risking corruption, retaliation, and weaker global technology diffusion, while better solutions would emphasize public goods, competition, and openness.

Main Topics: Critique of U.S. industrial policy (Priority: 5/5): Posen warns that CHIPS/IRA-style policies can become corporate favoritism, politicized vote-buying, and corruption-prone when tied to nationalist procurement rules. Manufacturing nostalgia vs. economic reality (Priority: 5/5): He argues the political romance around restoring manufacturing jobs is misplaced: manufacturing remains important, but employment is structurally smaller because productivity has risen sharply. Supply-chain resilience and diversification (Priority: 4/5): The pandemic exposed fragile, organically evolved supply chains, but resilience should be understood as costly insurance and diversification rather than simple reshoring. China strategy and deglobalization (Priority: 5/5): Posen says the U.S. is not just reacting to deglobalization but has been withdrawing from it for decades; he prefers a 'suction' strategy that attracts capital and talent away from China over broad containment. Inflation and fiscal-monetary tensions (Priority: 4/5): The conversation shifts to how sustained fiscal expansion, industrial subsidies, and low unemployment complicate central banking and could re-ignite inflation. Productivity and public investment (Priority: 4/5): Posen sees weak productivity as a long-term technology shock and argues governments should buy 'expensive lottery tickets' through universities, R&D, infrastructure, and skills investment. Trade conflict and geopolitical risk (Priority: 4/5): He cautions that escalating economic conflict, sanctions, and subsidy races can spill over into military tensions and broader geopolitical hostility.

Key Arguments: Targeted industrial policy is vulnerable to corruption and international backlash when it directs money to specific firms and uses nationalist purchasing rules. Public investment works better when aimed at infrastructure, universities, R&D, skilled immigration, and enabling systems like grids and charging networks. Manufacturing remains important for advanced economies, but the political goal of restoring broad-based factory employment is unrealistic because manufacturing’s value added has stayed high even as jobs fell. Supply chains became fragile organically through cost-cutting and decentralization, so resilience is valuable but should be treated as costly insurance rather than a free productivity gain. The U.S. has already been withdrawing from globalization for 20+ years through fewer trade deals, less immigration, and lower foreign investment. The biggest China risk is not cheap exports anymore but strategic competition in high-tech sectors and political intervention at home under Xi. Instead of broad containment, the U.S. should try to attract capital, talent, and investment out of China to create pressure on the regime. Sustained fiscal expansion across major economies may raise the equilibrium burden on central banks and leave them with less room to manage inflation shocks. Weak productivity growth is likely a global technology problem, not just country-specific underinvestment, so policy should raise the odds of breakthrough innovation rather than promise it. Trade conflict can worsen geopolitical conflict; economic barriers and sanctions are not guaranteed to promote peace and may instead increase military hostility.

Data Points: Manufacturing share of U.S. employment at its peak: "never got much above 30%" - Posen’s point that nostalgia overstates how many workers manufacturing ever supported. Current U.S. manufacturing employment share: 13% - Used to show manufacturing remains significant but is no longer a mass-employment engine. Estimated job impact of industrial policy: "a few towns, several hundred thousand people" - Posen argues the policies may help some places but won’t transform the whole economy. U.S. unemployment rate: below 4% - A low unemployment backdrop heightening inflation sensitivity. Prime-age labor force participation: back up to pre-COVID levels - Evidence of a strong labor market in the inflation discussion. Potential increase in public spending: 1.5%, 2%, maybe even 3% of GDP - Posen’s estimate of higher spending pressure over coming years across major economies. Productivity slowdown start: roughly 2004 - He cites this as the beginning of the long productivity weakness. China population: 1.4 billion - Used to explain why China’s participation in the global economy remains unavoidable.

Pivotal Quotes: "I think the biggest thing is where I think the Biden administration is right is the U.S. had to do something constructive on climate. I mean, it's an emergency." — Adam Posen: Explaining why some intervention was needed even if he dislikes the policy design. "What you want to be doing is having the government buy really expensive lottery tickets." — Adam Posen: His metaphor for smart public investment in innovation, universities, and infrastructure. "There is a very high likelihood that if we have escalating barriers and sanctions and restrictions and hostilities in the economic sphere, that it will spill over and pump up hostilities in the military sphere." — Adam Posen: His warning that trade wars can intensify geopolitical conflict.

Implications: Listeners should expect more debate over subsidies, supply chains, and China policy. The episode suggests future winners will be countries and firms that combine open competition, broad public investment, and resilient diversification without sliding into protectionism.