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Near-term economic challenges facing the incoming Biden administration

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Positive news regarding the effectiveness of the COVID-19 vaccine being jointly developed by Pfizer and BioNTech SE and some reduction in U.S. electoral uncertainty have recently given U.S. and global stock markets a nice boost. Despite the recent surge in the number of daily coronavirus infections in the U.S. and Western Europe, a note of optimism has started to creep into the collective psyche of financial market participants and the wider public. Yet, a few dark clouds remain on the horizon. Effective, timely and well-designed policy measures from the new Biden administration will be necessary to dispel lingering economic concerns and provide the necessary impetus for a strong and sustainable economic recovery.

The possibility of a new era of American leadership characterized by less divisive politics and rational decision making, along with a restoration of respect for key institutions and norms, has energized urbanites and the educated classes in the U.S. and allowed the rest of the world to breathe a sigh of relief. Meanwhile, the likelihood of a divided government (based on projections for Georgia’s run-off elections, Republicans are expected to retain control of the U.S. Senate) and the apparent repudiation of the progressive wing of the Democratic Party has given succor to those less enthralled by the prospects of a Biden presidency. Financial markets and the wider business community also appear to find the prospect of political gridlock resulting from a split mandate appealing. Whether a Republican Senate is hell-bent on obstructing a Biden administration at every turn or is willing to work together to establish consensus will determine the potential for reforms in key areas of bipartisan interest such as education, health care, environment, infrastructure and taxation.

Once the dust settles on the 2020 election, the incoming Biden administration will face short-term economic challenges on multiple fronts. Following a sharp third quarter rebound, the U.S. economy is expected to lose momentum in the fourth quarter amid a surge in coronavirus infections. While the labor market appears to be healing from the pandemic shock, the pace of improvement is expected to slowdown or even experience a reversal during the winter months. The initial pandemic shock and the resultant lockdown saw a loss of around 22 million jobs, and since then firms have added back around 12 million jobs. This still leaves a shortfall of around 10 million jobs in the U.S. compared to February 2020 levels. Crucially, as the long-term unemployment rate (those unemployed for six months or longer) rises, the labor market hysteresis effect (the phenomenon where some labor market participants face persistent unemployment, and, as they suffer from skill-deterioration and fading attachments to the labor market, their prospect for future employment dwindles) poses a risk.

Clearly, steps to rein in the rapid spread of the coronavirus will be needed and, in this regard, President-elect Biden’s inclination to utilize the expertise of scientists and public health officials is a welcome change from the haphazard and often nonsensical approach of the Trump administration. While blunt instruments such as nationwide lockdowns may be unnecessary and even counterproductive in fighting the second wave, encouraging widespread adherence to social distancing norms and pushing for mask mandates across all states may prove to be economically less damaging and yet scientifically sound and effective. To limit the economic pain arising from the expected economic slowdown associated with the second wave, the Biden administration may want to focus on providing direct and targeted relief to the worst affected and most vulnerable parts of the population. Lessons learned from the CARES Act stimulus program indicate that provision of direct stimulus checks to lower income households (which tend to display a high marginal propensity to consume) and extension of unemployment benefits provide sufficient income cushion to prevent a collapse in consumer spending. Complex measures to prop up businesses may be less effective this time around — besides the potential for fraud, it is hard for government officials to judge which businesses and industries might actually survive the structural transformations underway in the broader economy. 

To both aid local economies and help unemployed workers retrain and switch from distressed sectors to promising new ones, the next stimulus bill should provide significant assistance to regional public universities and metropolitan public universities. Many regional public universities are often located in small towns and less-populated counties, where they often act as an economic anchor — they are typically the largest employer within their locality, and many of these institutions are a critical cog in the local economic machinery. Moreover, as the U.S. further evolves into a knowledge-based economy and as job market polarization intensifies, it is necessary to offer pathways for first-generation college students, low-income students and minorities to move up the economic ladder and attain economic mobility.

To restore U.S. leadership over the liberal international order, the Biden administration should consider ending trade conflicts with close allies and rejoining the Trans-Pacific Partnership. A more effective approach to dealing with China will help the new administration reduce uncertainty and restore public support for engaging in free trade. The potential gains from America’s reengagement with the global economy can be quite substantial.

Overall, despite a few lingering challenges, a proactive and moderate Biden administration should be able to oversee a sustainable economic recovery in 2021. That’s because strong household balance sheets and ultra-accommodative monetary policy measures, along with potentially rapid development of vaccines, are likely to rejuvenate the U.S. economy following a winter chill.

Vivekanand Jayakumar is an associate professor of economics at the University of Tampa.

Tags #coronavirus #2019nCoV #contagion 2020 presidential election BioNTech coronavirus Economy of the United States Pfizer Political positions of Joe Biden Presidency of Donald Trump Recession Unemployment

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