Biden Takes The Reins

On Wednesday, Joseph Robinette Biden Jr. will become the 46th President of the United, a testimonial to the enduring strength of America’s democracy, its resistance to assaults from without and within. His immediate priority is to persuade congress to pass his American Rescue Plan, a $1.9tn relief bill that will add $1,400 to the $600 every American household has received, beef up state unemployment benefits, and more, including some long-time progressive goals such as an increase in the minimum wage to $15 and earmarking funds for under-served communities.

The spending, paid for with borrowed money, puts flesh on the bones of an economic theory that holds that with interest rates close to zero, it is virtually costless for the government to borrow money that will speed the transition from a pandemic-crippled economy to one that will lead the world. All benefits at little or no cost. Nothing radical here: we’ve heard this for years from former treasury secretary Larry Summers, a moderate Democrat whose opposition to Modern Monetary Theory (MMT) has made him anathema to Biden’s left.

Less theoretically unimpeachable is the call for another one-time payment. Stanford’s John F. Cogan and John B. Taylor (senior fellow at the Hoover Institution and Stanford economics professor, respectively) point out in a Wall Street Journal op ed that recipients use such windfalls either to pay down debt or add to savings. A National Bureau of Economic Research survey found only about 15% of recipients of previous one-time payments “mostly spent it.” Not much immediate growth bang for those bucks, and it is immediate growth that Biden aims at to get us from where we are to an economically viable vaccinated world.

That done, in his State of the Union message in February, Biden will lay out his American Recovery Plan, to “build back better”. This is the massive infrastructure plan much talked about but never enacted, apparently to be financed by raising taxes on high earners and on corporations. Neither group of geese to be plucked will hiss loudly.

The high earners recognize that unless something is done to narrow inequality, the system that has enriched them might not survive. And big business would not be harmed by an increase in its tax rate opines Larry Fink, chairman and CEO of Black Rock, the largest investment management company in the world with $6.5 trillion in assets under management. Smaller companies, Fink suggests, need tax relief to recover from the devastation of Covid shutdowns, an idea that might find its way into the Biden proposal because he sees small businesses as “engines of growth” that employ half of America’s workforce.

Biden has a good chance of taking his party into the 2022 mid-term elections, only 21 months away, with a reasonable claim that both his Rescue and Recovery Plans have succeeded, although whether he can reach his goal of 100mn inoculations in his first 100 days is far from certain.

He has inherited ample supplies of vaccines, thanks to Trump’s Warp Speed programme of government support of Big Pharma, and will benefit from distribution errors already made as local officials moved up their learning curves. If he gets what he is requesting from congress, he will have $400bn to spend on distribution of vaccines. That should move things along, assuming the federal government can come up with plans more efficient than those devised by politicians familiar with local conditions.

The chances that the economy will be improving are also good. Biden has inherited a Janus-faced economy, which along with the battered face of the present includes a smiling face of the future. Retail sales fell 0.7% in December, for the third straight month. New jobless claims are running at their highest level since the dog-days of August; the number of Americans collecting state unemployment benefits (over 5 million), is down from over 10 million in September but remains above pre-pandemic levels of about 1.7 million. All the benefit programs combined record about 18 million claimants.

Biden says 14mn Americans are falling behind in their rent. Some 100,000 restaurants – one in six – have failed; 12,000 stores, a record, have locked their doors; and researchers at Harvard-based Opportunity Insights report that over 28.8% of small businesses were closed by mid-November. Meanwhile, higher income families work from home, monitor their children’s on-line educations, have no trouble meeting their mortgage obligations, and many have been enriched by rising share prices. Which explains the new President’s efforts to direct funds to so-called under-served communities and groups.

The other, future side of the Janus coin is all smiles. Forecasters surveyed by The Wall Street Journal expect the economy to grow by 4.3% this year and the unemployment rate to drop to 5.3% by year-end from 6.7% in December and a peak of 14.8% in April 2020.  Data gatherers at HIS Markit report that the manufacturing sector is experiencing its strongest growth since September of 2014. They expect nonfarm payrolls to increase by 6.7 million by year end, bringing the unemployment rate to 4.3%. The crystal balls of other forecasters tell similar stories. The housing boom continues. Consumers are already sitting on piles of cash, including some unspent relief money, with more to come from Biden’s relief package. Non-financial corporations are also flush with cash, a record $2tn waiting to be deployed. Banks are awash in loanable funds as the appearance of vaccines allows them to reduce reserves.

Biden says the new spending will pay for itself in jobs – a claim derided when Trump made it for his tax cuts -- and produce a fairer distribution of incomes and opportunity. Federal Reserve Board chairman Jay Powell, says he sees “no obvious imbalances that threaten the long-run expansion, you really can’t identify something that can blow up the expansion.”

I can. It is true that inflation has been tame. And it is possible that excess capacity and a reserve army of the unemployed with the necessary skills will keep prices from rising. But with a federal deficit that totaled $3.3tn in the twelve months ending December, triple the figure of a year earlier and 15.8% of GDP, something about too many newly printed trillions chasing too few goods comes to mind. Prices for food at home rose 3.9% last year; used car prices have risen as people scramble for private transportation; the Case-Schiller home price index rose 8.4% in past twelve months and, report economists at the Lindsey Group, prices of existing family homes rose by double-digits in 65 of the country’ metropolitan areas; automakers are shutting down production lines because of a shortage of chips; inflation expectations popped past 3% in August before easing a bit; commodity prices are up. David Leduc, head of fixed income at Mellon Investment believes “there is definitely the potential for more inflation in the medium-term.” If prices do rise above the Fed’s old target of 2%, the Fed says it will be pleased rather than, as in days of yore, worried. “Now is not the time to be talking about exit” from easy money policies Powell said last week.

Nor is it a time to cavil. After years in which neither party cared to do so, an invigorated new President has appealed to America’s better angels. That might prove more important than how a few odd trillion in spending is financed.