For Joe Biden, today must feel like economic groundhog day. Twelve years ago, he became vice president in the immediate aftermath of the U.S. housing and credit market bust, which spawned the 2008-2009 Great Economic Recession. On January 20, 2021, he will assume the presidency when the United States and global economies again find themselves mired in a deep economic crisis. This time it will be in the immediate aftermath of the world’s worst health crisis in the last one hundred years.
Even before the Covid-19 pandemic struck, the U.S. economy faced serious challenges. President Trump’s unfunded 2007 corporate income tax cut had caused the U.S. budget deficit to balloon and the U.S. public debt to rise to worrying levels. Meanwhile, Mr. Trumps’ “my way or the highway” America First trade policy gave rise to protectionist policies abroad. At the same time, by alienating our economic allies and spurning the multilateral economic agencies, he seriously undermined the traditional U.S. international economic leadership role.
By plunging the U.S. economy into its worst economic recession in the past ninety years, the Covid-19 crisis has only added to the economic challenges soon to confront Joe Biden. Despite a better than expected economic bounce back from its March-April plunge, U.S. unemployment still remains stuck at around 11 million people and it is likely to rise further as a result of what health experts are warning will be a very dark Covid-19 winter. Meanwhile, the country’s public finances have been highly comprised, with the budget deficit reaching record levels and the public debt to GDP ratio now higher than it was immediately after the Second World War.
Two rays of light in this dismal economic landscape have been the recent passage of a U.S. $900 billion stimulus package and, more importantly, the prospect that the U.S. might acquire herd immunity by mid-2021. It will very likely do so a majority of the population will have been vaccinated by that time. That should allow the U.S. economy to resume its recovery from the pandemic’s devastation. However, it would be a mistake for Mr. Biden to underestimate the economic challenges that lie ahead in a post-Covid-19 world.
Among the more troubling economic fallouts from the pandemic has been the skyrocketing in domestic and international debt levels. The explosion in U.S. corporate debt levels is now prompting Ed Altman, New York University’s renowned economic bankruptcy expert, to warn of an impending U.S. corporate bankruptcy wave. At the same time, Carmen Reinhart, the World Bank’s Chief economist, is warning that it is only a matter of time before we have the worst emerging market debt crisis in the post-war period following those economies’ recent borrowing binge.
Faced with these daunting economic challenges both at home and abroad, the incoming Biden Administration can ill-afford to make economic mistakes.
After bringing the health crisis under better control until a vaccine is widely available by mid-year, Mr. Biden will need to chart the most delicate of budget policies. He will have to do so at a time that he is likely to have to work with a Republican Senate and at a time that the Federal Reserve has largely run out of ammunition.
On the one hand, Mr. Biden will need to strike bipartisan deals to make sure that a weak U.S. economy continues to receive adequate budget support to keep the recovery going. On the other hand, he will need to keep the more radical elements in the Democratic Party in check to ensure that the needed budget support is provided in a way that does not unnecessarily add to the country’s already very high debt burden.
With the real prospect of an emerging market debt crisis in the next year or two and with overseas support needed to get China to play by the international trade rules, Mr. Biden will need to mend fences with the country’s traditional economic allies and he will need to reassert the U.S. traditional world economic leadership role. He will also need to resist calls within his party for the continuation of a protectionist U.S. trade policy if he is not to further undermine the global trade system that has underpinned U.S. and world economic prosperity in the post-war period.
Mr. Biden’s choice of the moderate, highly experienced, and competent Janet Yellen as his Treasury Secretary bodes well for his navigating the difficult economic waters that lie ahead. However, he will also need a big dose of Irish luck if he is to bring the U.S. economy safely back to shore after having experienced its worst economic crisis in the past ninety years.
Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.