For the first time since the election, Joe Biden spoke about his economic agenda on Monday. The event, which took place in Wilmington, Delaware, was perhaps overshadowed by the alarming rise in COVID-19 cases across the country, and by Donald Trump’s continued refusal to accept the election result. But Biden managed to make news by warning that more Americans may die if Trump doesn’t provide more coöperation to his transition team working on the coronavirus crisis. “We are going into a very dark winter,” the President-elect said. “Things are going to get much tougher before they get easier”
Biden was referring to the pandemic, but his remarks also apply to the economy, the fate of which is inextricably tied to the virus. In the short term, the economic prognosis is grim. As states introduce new restrictions on businesses—California, on Monday, announced that it was “pulling the emergency brake” on its reopening—there may well be another round of furloughs and layoffs. And this is happening at a time when many of the pandemic-support programs that Congress introduced in March are coming to an end. The federal extension of unemployment benefits to thirty-nine weeks, for example, and the Pandemic Unemployment Assistance program, which allowed gig workers to receive jobless benefits for the first time, will both expire at the end of next month. The deadline for new applications to the Paycheck Protection Program, which pays small businesses to keep workers on their payrolls, has already passed.
Biden pointed out that these coronavirus-relief programs are “keeping Americans afloat.” Extending them and providing more financial assistance to states and municipalities that have seen their tax revenues plummet in 2020 is not only the just thing to do: it would prevent further damage to the economy in the form of business failures, job losses, and insolvencies. Looking further ahead, Biden also outlined elements of the “Build Back Better” plan that he put forward during the campaign. He did not, however, dwell on the longer-term macroeconomic environment that his Administration will face, which, following the positive news from Pfizer and Moderna about the results of their vaccine trials, has become a hot topic of debate among economists.
As always, there are a range of views. During an interview with the Brookings Institution’s Hutchins Center on Fiscal and Monetary Policy on Monday, Richard Clarida, a former Columbia University economist who is the vice-chair of the Federal Reserve Board, laid out an optimistic scenario, in which the lifting of restrictions on travel and other activities generates an outpouring of demand. “There is an enormous quantity of pent-up saving,” Clarida said, pointing to estimates that American households have built up more than a trillion dollars in extra savings. “That is the only time in my professional career when disposable income actually went up in a deep recession. And a lot of that has been saved, a lot of that has been forcibly saved, because people haven’t necessarily been able to go out and spend all of that.” In their latest public projections, Clarida and his colleagues on the Fed’s policymaking committee predicted that G.D.P. would expand by four per cent in 2021 and that the unemployment rate, which is currently at 6.9 per cent, would fall to 5.5 per cent by the fourth quarter of next year. That would represent a decent recovery. But, in his interview, Clarida pointed to the possibility of even stronger economic outcomes, including some “very, very attractive” ones. “And obviously,” he added, “the odds of that have gone up relative to where we were before the vaccine news.”
Clarida’s comments jibed with the arguments of other optimists, on Wall Street and elsewhere. In a recent note about the prospects for 2021, the economics team at Goldman Sachs said that mass immunization and the removal of coronavirus restrictions “should fuel a mid-year consumption boom as restored opportunities to spend allow households to substantially lower their saving rates and spend accumulated excess savings.” One of the most upbeat economists is Tim Duy, a University of Oregon professor and Bloomberg contributor. In his most recent column, Duy cited the vaccine and pent-up savings as positive factors, and he also mentioned several other things that could boost growth going forward, including favorable demographics. Biden, Duy wrote, is “stepping into a dream scenario for economic growth on the other side of the battle with the Covid-19 pandemic.”
The sanguine analysis could turn out to be accurate, but other policymakers and economists emphasize a number of reasons for tempering our optimism. For one thing, it’s still unclear when a vaccine will be widely available. “Even in the best case, widespread vaccination is months into the future,” Jerome Powell, Clarida’s boss at the Fed, said in an online Q. & A. session on Tuesday. Secondly, although the optimists are surely right when they say that a vaccine will boost spending and growth, the magnitude and durability of this effect is hard to predict. Even as optimism rises, businesses from airlines to hotels to theme parks are warning that it could take years for activity in their industries to return to pre-pandemic levels. Some policymakers are issuing similar warnings. “The ascent out of this calamity is likely to be long, uneven, and highly uncertain,” Gita Gopinath, the chief economist at the International Monetary Fund, wrote in a blog post last month.
The task ahead is a large one. Despite the recent rebound in growth and employment, the over-all number of jobs in the U.S. economy is still about ten million below where it stood in February. The recent drop in the unemployment rate, which now stands at 6.9 per cent, has been accentuated, in part, by a drop in the workforce-participation rate, as many workers, particularly women, have stopped working to take care of their families. Moreover, the economic rebound was contingent on the huge and unprecedented fiscal stimulus—equivalent to more than ten per cent of G.D.P.—which is now running out. If a Republican-controlled Senate refuses to authorize more stimulus spending in the lame-duck session, and when the new Congress meets in January, then hopes for a post-pandemic boom could fade pretty rapidly.
Economists close to Biden are well aware of this danger. “We have to have fiscal policy, structural policy, other than just relying on central banks to achieve healthy growth,” Janet Yellen, the former chair of the Fed, who is reportedly being considered for the post of Treasury Secretary in the new Administration, said at the Bloomberg New Economy Forum, on Monday. At one point in October, the Trump White House indicated that it would support a new coronavirus-spending bill worth $1.9 trillion—roughly the same magnitude as the CARES Act, which was valued at $2.2 trillion. McConnell and his Republican colleagues dismissed this effort out of hand and proposed a “skinny” coronavirus-relief bill worth five hundred billion dollars. Last week, McConnell indicated that a bigger, broader spending bill is still off the table. Since then, there has been no progress. “Congress appeared nowhere close to passing another coronavirus relief bill . . . as infections surge across the country and new public health restrictions threaten businesses and jobs,” CNBC reported, on Tuesday.
It is still possible that the two sides will reach a meaningful agreement before the extended unemployment benefits and other coronavirus-relief programs expire. But the current deadlock certainly doesn’t bode well for that, or for the incoming Biden Administration’s hopes of passing an even more expansive stimulus package in January or February, which would provide ongoing support to the economy, as well as making it greener and more equitable. During the campaign, Biden proposed an ambitious ten-year spending plan, which, according to an analysis by the Penn-Wharton Budget Model, would cost $5.4 trillion and would be partly financed by some $3.4 trillion in new taxes, mainly on high earners. Given the results of the elections on November 3rd, there seems to be little prospect of the current Senate passing a spending proposal of that magnitude. Will the new Administration be able to enact any substantial stimulus?
After the Great Recession, the economic recovery was held back by Republicans in Congress, who forced the Obama Administration to agree to a premature tightening of fiscal policy, which crimped hiring and G.D.P. growth. Although the news about potential vaccines is highly encouraging, there is still a danger that history could repeat itself in the months and years ahead. For the immediate prospects of the Biden Administration, but also for the longer-term outlook of the economy, much depends on the January 5th run-off elections in Georgia, which will determine control of the Senate. Now, more than ever, economics cannot be separated from politics.
