Christmas came to America early this year. The Grinch-in-Chief abandoned his efforts to steal not only Christmas but the election, and allowed the transition to proceed as he turned his attention to his 2024 campaign. The about-to-be-President of the United States showed that he meant it when he declared himself a moderate, as that term is understood these days. Elizabeth Warren, the wicked witch of the north who planned to ride her broom into a clean sweep of Wall Street’s evil-doers remains grounded in Massachusetts while a seemingly nice little grey-haired old lady from Brooklyn plans to move into the Treasury. Americans will soon have a choice of vaccines, thanks to Trump’s Operation Warp Speed and the skill of Big Pharma, operating with government cash and without miles of government red tape.
Most focus is on Joe Biden’s choice of Janet Yellen as his secretary of the Treasury. A perfect resume – distinguished academic, chair of the Federal Reserve Board; sure-fire confirmation; much to like by both conservatives and reasonable progressives (and by The New York Times’ Paul Krugman, which perhaps should worry some of us); reassuring to markets, which soared on the news. She is for free trade, against capital-depleting bank share buybacks, worries about fiscal deficits and wants a price put on carbon.
Add Yellen to news about vaccines and the gloomy forecasts of a few months ago are being revised. Most forecasters are expecting a dip in the first quarter of 2021 – a 1% contraction in GDP according to JPMorgan economists – with everything then coming up roses. The bank’s economists expect growth of 4.5% and 6.5% in the second and third quarters, with job gains in the millions by mid-year. Goldman Sachs says the economy “will get worse before it gets better,” but will grow at a 5.3% rate in 2021. Trump vexed the Biden team with his ungracious departure – like the one he faced four years earlier from Clinton supporters – but he willed his successor a robust economy.
Many cash-rich consumers, savoring unimpeded freedom to spend, and eager to get back to their offices, cinemas, gyms and bars, and away from kids, pets, latex wardrobes, will provide a boost to offset any tax increases Biden can push through congress. Jim Paulsen of LeutholdGroup LLC says the $2.5 trillion in extra savings that consumers have accumulated is “the fuel for a growth bomb waiting to explode.”
Leisure travel should resume quickly once the virus is contained, while Zooming will remain a substitute for business travel that cannot meet new tests of cost-effectiveness. Airlines will have to make do selling more cheap economy-class and fewer pricey mogul-class seats. The rush to restaurants whenever restrictions are lifted proves the enduring attraction of that form of socializing, although some will continue to surrender to the compulsion to flaunt the home-cooking skills developed under the duress of lockdowns. Hospitals will resume profitable elective surgeries, but many physicians will find tele-medicine a force to cope with, especially from patients who realized during the lockdowns that hour-long waits while thumbing through dated magazines are not medically necessary antecedents to being seen by a competent physician.
Perhaps the most profound change next year will be how the economy is organized if Biden has his way. Labour markets will be restructured to increase the power of trade unions and the sellers of Labour, and decrease the power of its purchasers. Big business will face more antitrust scrutiny than in decades, with Silicon Valley high on the target list. Government’s long arm will replace the invisible hand in markets essential to national security.
Financial markets will be more closely regulated, something Yellen favours, and monetary and fiscal policy – the Fed and the Treasury – will be more closely coordinated. Powell is a pragmatic investment banker/lawyer picked by Trump to replace Yellen as chair of the Fed rather than nominate her for another term (unusual) when her term expired. Yellen is a genuine Keynesian, shaped by her Yale mentor, James Tobin, picked by Obama to head the central bank after a career in several key economic policy positions. The Fed chairman and the to-be Secretary of Treasury have good relations. Both favour low, stimulative interest rates, both want a new relief package, both believe the usual measures of the health of the labor market often understate slack and overstate tightness.
Both are where Biden would like them to be – believers that deficits can stimulate demand, and low interest rates can drive up asset prices and spending. Whether in the end the incoming President will be well served by two policymakers who are focused on the demand side of an economy clearly suffering from supply-side constraints – both Best Buy and Peloton can’t meet the demand for their products – is an open question. Both worry that the pandemic has hit hardest those least able to bear the blows. Families that can work from home are in good shape, others have seen their jobs and businesses destroyed. Attention must be paid.
In addition to a solid base on which to build an economic expansion, Trump has left Biden a strong hand when dealing with China and Iran. Bloomberg Businessweek reports, “Some Biden backers and former trade negotiators relish the leverage the president has created with his tariffs.” China wants the Trump tariffs gone, Iran wants the Trump sanctions gone. That should enable Biden to extract concessions for re-entry into the Paris accord and the Iran nuclear deal. He can demand elimination of China’s competitive advantage in Paris, the end of Xi Jinping’s trade rules for thee but not for me, and better behavior from Teheran. Unfortunately, the vainglorious John Kerry, who handed China its climate-deal advantage and gave Iran plane loads of cash, will be a key member of Biden’s negotiating team.
Biden’s job is to use the assets willed to him by Trump, and with the help of such as Yellen and Powell, er, Make America Great Again – Biden prefers Build Back Better – this time embedded in international institutions, with myriad allies, a greater eye for social justice and, later rather than sooner, a sustainable fiscal position, a long-standing Yellen goal that is anathema to Democratic “progressives.“
The squad” – AOC, Ilhan Omar and Rashida Tlaib – has warned Biden not to give his former chief of staff, Bruce Reed, a job because he is “a deficit hawk”, which at some point Yellen will inevitably become. Omar told the press that she is “proud to join Justice Democrats [a progressive grouping] and our progressive coalition in saying no to deficit hawks.” At this writing, Reed, head of the center-right Democratic Leadership Council and dubbed by some “Mr. Austerity”, is virtually the only senior member of the campaign staff not to have been named to a White House job.