By Greg Ip 

Joe Biden has been here before. Twelve years ago, as Barack Obama's newly elected vice president, Mr. Biden inherited an economy laid low by a once-in-a-century crisis.

The good news is that, unlike then, the recovery from the pandemic-driven economic contraction is now under way and with vaccines about to be approved, an end to the latest crisis is in sight. The bad news for Mr. Biden is that while he and his team want to accelerate the recovery, they may not be able to do much about it. Monetary policy is largely exhausted and fiscal policy is at the mercy of Congress.

In 2009, Democrats controlled both the House and Senate. If Republicans win at least one of two runoffs in Georgia next month, they will retain control of the Senate, where they will likely take a harder line on deficits than they did under President Trump.

The emphasis Mr. Biden has placed on the recovery can be seen from who he has asked to steer it. If confirmed, Janet Yellen would be the first practicing economist to serve as Treasury secretary in two decades. She has spent her career in academia and government, including as head of the Federal Reserve, studying and managing the balance between unemployment and inflation.

Today, it is clear which is the priority. Like the financial crisis 12 years ago, "The pandemic and economic fallout...have caused so much damage for so many," she said Tuesday. "It's essential that we move with urgency. Inaction will produce a self-reinforcing downturn causing yet more devastation."

When Mr. Biden took office in January 2009, the recession had been under way for a year and would last five more months. Economic output was 5% below its potential. Unemployment had topped 7%, on its way to 10%.

By contrast, the pandemic-induced recession probably ended last spring. The economy is operating at about 3% below potential, and unemployment has dropped from 14.7% in April to 6.9% in October. The crisis is far from over, with infections and hospitalizations at or near records, but several vaccines have proven effective in trials and could be widely available by midyear.

The strong economic recovery to date is in part thanks to hefty, bipartisan aid. The $2.2 trillion Cares Act and several other stimulus bills together exceed the aid enacted during Mr. Obama's administration. Policy makers learned from the 2008-09 crisis "that it is critical to do something large," Jason Furman, an economic adviser to Mr. Obama, wrote this week in Foreign Affairs.

Yet while the economy is in better shape than what Mr. Obama faced 12 years ago, it is far from home free. Some economists say the current surge of infections and restrictions on activity could stall activity just as Mr. Biden takes office.

Meanwhile, he inherits far less in the way of policy tools. In Jerome Powell, Mr. Biden will be aided by a Fed chairman as eager to help as Ben Bernanke was then. But Mr. Powell is largely out of ammunition. Short-term interest rates are already close to zero and long-term rates are under 1%. By contrast, in 2008-09 they were around 3%, enabling the Fed to push them lower through large-scale bond-buying.

Mr. Biden faces other obstacles neither Mr. Trump nor Mr. Obama did. In 2009, "we got complete cooperation from the outgoing administration," Mr. Furman said in an interview. President George W. Bush, at Mr. Obama's request, asked Congress to release $350 billion of bailout funds that Mr. Obama used to rescue banks and car manufacturers.

By contrast, Treasury Secretary Steven Mnuchin said he will wind down market support programs funded by the Cares Act on Dec. 31 and told the Fed to return around $430 billion in unused funds. Trump-appointed regulators are rushing to privatize Fannie Mae and Freddie Mac, which could weaken the support their mortgage guarantees provide to the housing market.

The same low interest rates that have left the Fed out of ammo make fiscal stimulus more affordable and potentially more potent. The holdup isn't the financing, it is the politics. Mr. Furman wrote that the Cares Act didn't reflect another lesson from 2009, that "responses to disasters need to be long-lasting." The law's support largely expired after four months, leaving "a paralyzed Congress and president unable to agree on action."

While another economic collapse is unlikely, economists project more stimulus would hasten the drop in unemployment, minimizing the harm to workers' long-term incomes and job prospects.

Republicans are open to more stimulus, just not as much as Mr. Biden's team is likely to think sufficient. Having blessed a ballooning deficit under Mr. Trump by voting for steep tax cuts and spending increases, Republicans are pivoting to fiscal rectitude just as Mr. Biden takes the reins. The next president should "realize how serious the debt crisis is and how important it is that we put measures in place to address it," John Thune of South Dakota, the No. 2 Republican leader in the Senate, said recently.

"The Republican party is, fundamentally, a small government party," said Jon Lieber, an analyst for Eurasia Group and former aide to Senate Majority Leader Mitch McConnell. "Trump's contribution was to make deficits great again. Now that he's out as leader of the party, that underlying policy commitment [to small government] rises up again." If Republicans retain the Senate, "It's going to be really hard to do any legislation."

Write to Greg Ip at greg.ip@wsj.com

 

(END) Dow Jones Newswires

December 02, 2020 11:35 ET (16:35 GMT)

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