Economy To Recover At Warp Speed

This is the 12th day on which Joe Biden has been the most powerful man in the world. 

So powerful that he can demand the opening of schools, not so powerful that he can prevent the teachers’ unions from ordering their members to stay home despite evidence that the spread of the virus is no greater in schools than in the local community. 

So powerful that he has put a $1.9trn relief plan before the congress, demanding a quick vote, not so powerful as to prevent congress from deciding on a more leisurely schedule.

So powerful that he rules the Democratic Party, not so powerful as to be able to persuade its congressional leadership to forgo a senate impeachment trial that will impede his drive to unite the country and absorb time the senate might better devote to enacting his legislative proposals. 

So powerful that he can order the border patrol to suspend deportations for 100 days, not so powerful as to be able to prevent a Texas court from blocking implementation of that order. 

So powerful that with a stroke of the pen he can cancel the 875-mile Keystone XL oil pipeline from Canada and have America re-join the Paris climate accord, not so powerful that he can force other nations to take steps that would elevate those moves from mere gestures to effective measures to slow global warming.

Don’t mistake these checks on the President’s power for an inability to redirect long-standing US policies. Trade might be the best example. After decades of ignoring Chinese trade tactics that violated WTO rules, destroyed American manufacturing and the communities dependent on it, Trump hit the communist regime with tariffs, which Biden plans to retain, at least for now. But he also plans a fundamental shift in policy. Hollywood and its complaints about theft of intellectual property, and investment bankers’ eager to set up shop in China will no longer get more than a polite hearing. 

Some months ago former treasury secretary Larry Summers told me we need more attention to what benefits Detroit and job creation and rather less on “intellectual property protection for Mickey Mouse and Hollywood movies.” Recently, Jake Sullivan, President Biden’s National Security Adviser, added investment bankers to those whose concerns should be downgraded. “Why should it be a US negotiating priority to open China’s financial system for Goldman Sachs?” All part of the new administration’s “complex review” of China policy, which includes a delay in the implementation of Trump’s ban on American investment in companies with ties to the Chinese military.

So out goes attention to whingeing Wall Street barons and Hollywood moguls, in comes concern for horny-handed sons of toil* like Biden’s oft-referenced father. And an executive order that tightens rules requiring government agencies to “buy American”. Such purchases add up to billions of dollars, and will increase if the President can push his infrastructure/Recovery programme through congress. By which time there is every likelihood that the economy will be booming, and participating firms will have some difficulty procuring the stuff they need to build roads and bridges and solar panels and wind machines and whatever else the politicians include to satisfy their multiple constituencies.

Even now, before an added relief package is approved, the supply side of the economy is under strain. My local Starbucks cannot maintain adequate supplies of energy-giving drinks, while less consequential shortages of such commodities as lumber and steel are concerning industries from home builders to auto makers. 

The idea that there is a large army of unemployed labour available to help the supply side react to the massive injection of demand from cash-rich consumers ($1.4trn savings in the first three quarters of last year were double those in 2019), banks with excess reserves, and corporations sitting on record piles of cash is quite simply wrong. The out-of-work come primarily from the travel and hospitality sectors. Even if they eschew the pleasures of the enhanced unemployment benefits Biden has in mind, and do return to the labour market, unemployed pizza deliverers and hotel clerks cannot make up for shortages of roofers or of lumber to build homes at a rate now topping last year’s by 12.8%, and predicted by National Association of Realtors chief economist Lawrence Yun to jump 21% this year, or have the skills to help replenish inventories of steel which are now at their lowest level since 2004, a problem for auto makers. Michael Fitzgerald, managing editor at S&P Global Platts, reports that “almost every [automotive] plant in North America is at risk of slowing or shutting down.”

Despite anaemic growth of only 1% in the final quarter of last year – following a 7.5% jump in the previous quarter – almost three out of four business economists expect the availability of vaccines to return the economy to its pre-pandemic level by late 2021, and Goldman Sachs has raised an earlier 2021 GDP growth forecast from 5.9% to 6.6% (vs. consensus forecast of 4.1), assuming passage of a fiscal package of $1.1trn.

Even that might be over-shoot. Douglas Holtz-Eakin, former Director of the Congressional Budget Office, now president of the American Action Forum whom I have always found to be sensible and fact-driven, notes that fourth-quarter 2020 GDP was only $119bn below pre-pandemic, full employment 2019. “Do we need $1.9 trillion to deal with that problem?” And Mark Zandi, of Moody’s Analytics and a Biden favorite, puts the gap between where the economy now is and its full potential at between 4% and 5%, while the President’s proposal would add 8%-to-9% to GDP. Nevertheless, “It’s better to err on the side of too much rather than too little. Interest rates are at zero, inflation is low, unemployment is high. You don’t need a textbook to know this is when you push on the fiscal accelerator. Let’s go.” Images of Thelma & Louise, in their car, on the edge of the Grand Canyon, jamming on the accelerator to escape reality, come to mind. Whether this is what Janet Yellen had in mind when she recommended that we “go big” is unknown. 

Congressional approval will come later rather than sooner if Biden insists on including items the left has been seeking since long before the word “pandemic” entered everyday usage. Among others: an increase in the federal minimum wage, improved health care for women, an increase in the child tax credit for low-income families, expanded paid leave, and income transfers from well-run to profligate states, the latter by crippling fossil fuel industries located in red states, and by ending Trump’s ban on cash to “sanctuary cities”. 

Democratic “progressives” will not be satisfied with cancelation of a pipeline, restrictions on oil and gas drilling on federal lands (which account for 9% of U.S. oil production), and a host of policy changes that favour the LGBTQ community and the Palestinians. Cries of “I want some more” will be heard in the corridors of power. Alexandria Ocasio-Cortez is already urging Biden to declare a national emergency so that he can more or less rule by decree, rather than seek legislative support.

For Biden’s left, increase of appetite grows by what it feeds on.   

*The pipeline estimates it would have employed 11,000 workers this year, most on a temporary basis. Biden’s energy czar, drawing on his deep knowledge of the skill required for these jobs, suggests these “people got to work to make solar panels.” First Solar, the only American manufacturer among the world’s top ten, does most of its manufacturing in Malaysia.