A paradigm shift in the making

Every 30 to 40 years, the pendulum that defines the balance between the state and the market will start to swing in one direction or the other, starting in the US. Under President Joe Biden, the US is currently experiencing its largest shift in recent decades toward state intervention.

The New Deal policies of the 1930s shaped much of the modern state in the US (FDIC, SEC, Social Security etc). In 1964-65, Lyndon Johnson’s “war on poverty” led to the last major increase in social programs and funding (Medicare, Medicaid), the cost of which was added to the large budget deficits stemming from a catastrophic war in Vietnam.

In 1980, the reverse process of reducing state intervention began with Ronald Reagan’s “conservative [or neoliberal by European terminology] revolution,” which marked the start of an era of suppressed social and investment spending in the US. From 4% in 1967, taxation on corporate profits as a share of GDP has remained below the OECD average since 1980, and collapsed from 2% to 1% of GDP under Trump.

Interestingly, the biggest shift of the American pendulum toward liberal – in the American sense – policies has been led by an elderly president who has spent his long political life in the moderate center.

This also indicates the pragmatic rather than ideological nature of this shift, in response to the urgent necessities facing America; to defuse the division and polarization and bridge the huge income inequalities of the last four decades; to stimulate with investment areas that are falling into decline and poverty; to reintegrate the radicalized blacks and marginalized, low-educated whites whose social subsidence has left them susceptible to the demagoguery of Trumpism; to allow the US to regain its global leadership role in digital technology, challenged by China’s dynamic advances in artificial intelligence; to return America to a leadership role in the green transformation of the economy, responding to a long-standing demand of its allies; and, finally, to strengthen the health system and protect lower-income groups from the largest pandemic of the last 100 years.

To do all this, Biden has adopted the heaviest spending programs since the days of Lyndon Johnson, with a plan to increase the tax rate for businesses and higher-income groups, bringing them close not to the levels of the 1960s (when the top rate reached 90%), but to modern European levels. In a momentous initiative, as announced by Treasury Secretary Janet Yellen, the US will support the Organization for Economic Cooperation and Development (OECD) in its efforts to establish a uniform minimum corporate tax rate of 21%.

That would allow the US and European governments to raise revenue from large multinationals, such as digital technology companies, which have exploited global tax competition to the extent that some pay no taxes at all.

These are developments of momentous implications for Europe and for Greece. The US is converging toward a “European” model of public spending and progressive taxation. For Greece, in particular, whose level of public debt precludes the possibility of a radical reduction in tax rates, the Biden initiative to establish an international minimum corporate tax rate could reduce the competitive pressure from countries with very low tax rates.

The European Union’s efforts to coordinate taxation weakens the negotiating position of tax havens such as Ireland, the Netherlands, Luxembourg and countries in Eastern Europe. It also puts pressure on Europe to implement a still more generous public investment program in the wake of its major recovery package, which now pales in comparison with Biden’s 2.8 trillion USD (to which another 2.2 trillion USD for the next eight years should be added).

An exciting footnote of this historical shift is the story of a grassroots movement launched by a courageous African-American woman. When Stacey Abrams lost the gubernatorial elections in Georgia, she started a massive door-to-door campaign to mobilize thousands of black voters to register to vote. Georgia is a conservative white state with a high concentration of blacks in Atlanta.

The great mobilization of black voters allowed Georgia to replace its two Republicans with two Democratic senators in the November 2020 elections, one of them African American. Thanks to them, the Democrats leveled out the Senate (50–50), giving Vice President Kamala Harris the casting vote. Without this narrow majority, President Biden would have been unable to get anything meaningful through Congress.

Of course, it is too early for statements of account. The overall impact of Biden’s initiatives on the economy remains to be seen. But if anyone tells you citizens’ votes don’t count, tell them about Georgia.

* George Pagoulatos is a professor at the Athens University of Economics & Business and visiting professor at the College of Europe.