A Contested Election and an Uncertain Future

President Biden can help make the world a safer and more prosperous place given four years, but that’s different from saying that he can quickly end the recession and the pandemic. A column by Barry Eichengreen.

Barry Eichengreen
«Republicans can argue that the end of the Covid-19 crisis is on the horizon and that the economy will recover on its own.»

Forecasting the economic consequences of a U.S. presidential election is never easy. It’s especially hard when the political outcome itself remains uncertain. We still don’t know whether or not Donald Trump will concede defeat and if there will be an orderly transition. We don’t know whether the U.S. Senate will remain in Republican hands or if two runoff elections in the State of Georgia in January will produce a Senate split 50/50 between the parties, with Vice President Kamala Harris casting the tie-breaking vote.

The most likely scenario remains that President-Elect Biden is inaugurated next January 20th and that the Senate is controlled by the Republicans. Trump will do everything in his power to resist the inevitable. And the power of even a lame duck U.S. president should not be underestimated.

But it will be hard for him to hold out indefinitely. And even if he resists the advice of his daughter and son-in-law, attempting to obstruct an orderly transition of power would see the entire country up in arms. At the point where it is no longer be safe for him to go golfing, Trump will give in. (Our 45th president has his priorities.) It’s extraordinary that we actually have to discuss such scenarios. But there you have it.

Divided government likely

In Georgia, the Democratic Senatorial candidates benefit from the fact that the state has become more suburban and ethnically diverse. Former gubernatorial candidate Stacey Abrams has done a formidable job of mobilizing new Democratic voters. Nonetheless, it is likely that the electorate will reiterate its preference for divided government. With Democrats controlling both the House of Representatives and the White House, keeping the Senate in Republican hands will provide a check on more ambitious elements of the Democratic Party platform. The Democrats were not able to unleash a «Blue Wave» (it was more like a «Blue Ripple»). This is a reminder that the majority of Americans remain skeptical about the Progressive Democrats’ agenda, whether it involves a Green New Deal or defunding the police. More likely than not, divided government will result.

Republicans in the Senate will then recover from their recent bout of amnesia and rediscover the virtues of fiscal discipline. The question is whether this will mean a small fiscal stimulus, on the order of $500 billion to $1 trillion, or instead no stimulus. I’m betting on no stimulus. With the announcement of Pfizer’s successful Phase 3 vaccine trial, Republicans can argue that the end of the Covid-19 crisis is on the horizon and that the economy will recover on its own.

This, clearly, is a misapprehension. It will take months, quarters or even years to manufacture, distribute and administer a vaccine to a sufficiently large share of the population that it effectively suppresses Covid-19. The World Health Organization tells us that immunity against measles requires 95 per cent of a population to be vaccinated, while the comparable ratio for polio is 80 per cent. Covid-19 is highly contagious, so the analogous number is likely to be in the same range. We also have the dispiriting news, courtesy of the Pew Research Center, that only 51 per cent of Americans are likely to take a vaccine when one is available, and that the remaining 49 per cent question its safety and efficacy. Evidently, the same polarization that divided the country during the election has contaminated attitudes about a vaccine.

Room for maneuver will be limited

All this suggests that it will not be possible to end the pandemic in the same way one can turn out a light by flipping a switch. This reality in turn implies that a Congressional decision not to provide additional fiscal support to the economy will put the incipient recovery at risk.

In principle, the Federal Reserve could compensate for this Congressional inaction by attempting to do more. This would have unwelcome repercussions in Europe, insofar as further monetary stimulus by the Fed will push down the dollar against the euro and the Swiss franc. In any case, the prospects for Fed action are uncertain. Some of the central bank’s current programs, such as those under which it buys municipal bonds, require guarantees from the Treasury Department that compensate the Fed for any losses on those investments. And the Republican Senate is pushing the Treasury to revoke those guarantees on the grounds that the vaccine now makes such policies redundant. A Biden Treasury would ignore that pressure. But it will be more than two months until there is a Biden Treasury.

Calling a G20 summit

The new administration can make more of a difference on the international economic front, since a president can take a variety of foreign economic policy actions without the assent of the Congress. But here too, Biden’s policy room for maneuver will be limited. Everyone in Democratic circles, from former Treasury Secretary Lawrence Summers on down, is urging Biden, as one of his first acts, to call a G20 summit and recommend that the assembled countries commit to concerted fiscal support. But if the U.S. itself can’t credibly commit to such policies, given Republican opposition, the Administration will be in no position to assemble a fiscal coalition of the willing.

Thus, any belief that the Biden Administration can magically fix the immediate problem of global recession is mistaken. That said, the new Administration can take a number of steps that improve global economy prospects in the longer run. First, it can issue regulatory directives encouraging U.S. financial firms to renegotiate emerging market debts, and penalizing them if they don’t. It is now than six months since the G20 urged the private sector to extend financial forbearance to emerging markets hit hard by the Covid crisis, and the private sector has done exactly nothing. It is past due time.

Second, the Biden Administration can rejoin the Paris Climate Accord. Even the majority of the American electorate, which is not exactly in the enlightened vanguard on such matters, realizes that climate change is an existential threat, and that no country is likely pay to significantly reduce emissions unless other countries do the same. This is an area in which the United States once helped to lead. It can do so again.

Rejoin the World Trade Organization

Third, the United States under Biden can take a more predictable approach to trade policy and can rejoin the World Trade Organization. To be sure, the pandemic has laid bare the downside of globalization. It has reminded firms and governments that they need to take «just in case» as well as «just in time» approaches to production and investment, given the risk of disruptions. But saying that global supply chains will be shorter and feature more built-in redundancy is different from saying that they will disappear. Their disappearance is implausible, given real and evident efficiency advantages. In fact, the principal threat to global supply chains and to globalization generally has been Trump’s erratic and unpredictable resort to tariffs, and his refusal to help build a rules-based trading order fit for 21st century purpose. Biden can put an end to this.

President Biden can help make the world a safer and more prosperous place given four years. Unfortunately, that’s different from saying that he can quickly end the recession and the pandemic.