The hangover awaiting Biden: Deep wounds from Covid-19

Much of Biden’s early economic success will hinge on his ability to get Republicans — assuming they maintain control of the Senate after two Georgia run-off elections — to sign off on another large relief bill.

But hope for a large stimulus under divided government is not especially widespread, this year or next. Many Washington observers believe Biden will only get a smaller amount through a GOP Senate.

“My base case that I’ve told clients is we get a skinny stimulus, regardless of any potential outcome,” said Tony Fratto, managing partner at Hamilton Place Strategies and a former White House and Treasury official under President George W. Bush.

Joseph Brusuelas, chief economist at consulting firm RSM, expressed optimism that the Biden administration would be able to boost the economy through some legislation early on in his presidency. Beyond stimulus, he said the government could move on infrastructure, including by establishing an independent infrastructure bank to finance projects, as well as on trade policy.

“We hear one of the first things that is going to be done is to reach out and mend fences with trade partners” other than China, he said. “That’s really important. We’re all going to need the trade channel to grow our way out of the pandemic-induced recession.”

“I think that chances are better than most people think around infrastructure,” he added. “Insert joke here — infrastructure week has become a joke in Washington — but administrations in the first few months tend to get their way. This is a place of bipartisan convergence.”

But Brusuelas said ultimately the most important factor in the recovery is controlling the latest wave of the virus, pointing to roughly $4 trillion in economic activity that is still being held back by the health crisis, most of which should come back when the pandemic is over.

Biden should also continue to get significant help on the economy from the Federal Reserve. The central bank is expected to keep interest rates near zero for years and continue snapping up large amounts of U.S. government debt, which will bolster any efforts to increase the deficit to aid the economy. It’s weighing new measures that could aid the economy even further.

One outstanding question, though, is whether the Fed will scale back any of its emergency lending programs, with Republicans such as Sen. Pat Toomey (Pa.) calling for those programs to wind down at the end of the year as currently scheduled.

Key debt markets have been working relatively smoothly since the Fed launched an aggressive suite of actions in March and April. But if those markets lose the reassurance that the central bank could step in to help municipal governments or corporate bonds, some jitters could return, particularly if default rates rise.

“There is a lot of optimism in markets right now so the end of the facilities might not bring an immediate response,“ said Julia Coronado, president of MacroPolicy Perspectives. “But if the resurgence of Covid-19 dampens the recovery or the vaccine roll-out runs into challenges, markets could tighten more aggressively than if the Fed’s backstop were in place. We would be losing an insurance policy.”

Fed Chair Jerome Powell told reporters last week that the central bank and the Treasury Department were “just now turning to that question” of whether to extend the programs and had not made a decision. Meanwhile, Sens. Chuck Schumer (D-N.Y.), Mark Warner (D-Va.), Sherrod Brown (D-Ohio) and Elizabeth Warren (D-Mass.) called on the Fed to expand the central bank’s programs for state and local governments — which have been slammed by budget cuts due to tumbling tax revenue, forcing widespread job cuts — as well as for small and midsize businesses.

“We strongly believe that the Federal Reserve and Treasury should extend these critical facilities and that financial institutions should continue processing applications unabated for as long as these programs remain operational,” they wrote in a letter last week.

The aid for small and midsize businesses is especially critical as the winter months descend and outdoor dining and drinking is no longer possible in many big northern states. For the moment there is no more emergency federal loan money flowing to smaller businesses through the Paycheck Protection Program. And uncertainty in the sector is rising.

A recent Goldman Sachs study found that 96 percent of those surveyed said it was critical for Congress to approve more relief. Only 60 percent of small businesses owners who have managed to survive so far said they expect to make through the end of the year, lower than the 68 percent who thought they could make it in the early stages of the epidemic back in April.

The worry is even higher among minority-owned businesses. Among Black business owners, 61 percent in the Goldman survey said they had to forgo paying themselves compared to 52 percent overall. And 49 percent said they had to lay off workers or cut pay compared to 42 percent overall.

The lack of new stimulus, increase in virus cases and fears about more small business damage have led economists to scale back hope for economic growth in the fourth quarter after a strong rebound in the third. The Atlanta Federal Reserve’s model now expects growth of 3.5 percent on an annualized basis in the fourth quarter, down from the 33 percent annualized snap back in the second quarter. Even after that third-quarter surge, the economy was left with a hole not far from the one it had in the final year of the 2007-2009 recession.

It’s not at all clear Biden is going to get much help from Republicans to try and quickly boost that growth rate. “I don’t expect congressional Republicans to give him a grace period, but they should,” said Fratto. “There are going to be people saying, ‘This economy was roaring back under Trump, but then look at the fourth quarter, when it became clear Biden would win, it stalled.’ We know that’s not what happened, but that’s partisan politics.”

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