Biden to Have a Better Economy in 2021 Than in 2009, But Worse Options -- Capital Account
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
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
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
"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 firstname.lastname@example.org
(END) Dow Jones Newswires
December 02, 2020 11:35 ET (16:35 GMT)
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