During the eight years that President Obama and his team managed the economy, Americans were regularly assured that the president’s Keynesian policies would deliver striking growth in the years ahead. The growth repeatedly failed to materialize, and what followed was a master class in blamesmanship. No matter how far into the Obama term we were, the disappointing growth was a “new normal”– not the result of President Obama’s high tax and heavy regulatory policies. It was all the fault of the Bush administration. In some sense, Bush was portrayed for the entire eight years as a comic book villain. His policies were so terrible that they were able to overwhelm the economy for years.
Watching Vice President Biden prepare to be president gives one a strong feeling of déjà vu. Last week he called on Congress to pass Nancy Pelosi’s large and untargeted stimulus bill, chock-full of candy that is poison to Senate Republicans, such as a massive bailout for blue states. He added that it is going to be a “long dark winter” with the emphasis on long, and promised to return to his “Build Back Better” agenda of tax hikes and regulatory crackdowns as soon as possible.
Before they storm the castle, perhaps the Biden team should make a list of their assets. The first asset is a strong economy. The COVID-19 pandemic recession likely ended in the third quarter of this year, when real GDP advanced a whopping 33.1 percent. The Atlanta Fed’s GDPNow estimate for the fourth quarter suggests it will post growth around six percentage points. Combining the two, that means that the economy will about return to the level of GDP it posted right before the pandemic began, back when we had the strongest economy in generations. So the “back” part of the Biden slogan is superfluous, as the economy will likely be back before he takes office. As has been discussed at length in this space, that agenda doesn’t build at all, but rather subtracts from economic activity. So it doesn’t build, we are already back, and it’s worse than the status quo.
The second asset is a vaccine. We are very close to the widespread availability of two enormously successful vaccines. More could well be on the way. Most Americans should be able to receive them by the spring. This means that the acceleration in the economy that is currently underway should, if we leave it alone, pick up steam as things head back to a post-pandemic normal.
The third asset is a likely Republican-controlled Senate that has already shown that it is able to pass significant stimulus legislation. But it is not going to hand out cash to blue states willy nilly as the House Democrats have proposed.
Which completes the setting. The economy is carrying enormous positive momentum into next year. Since the case load is spiking now, there is some chance that lockdowns will get worse before they get better. Firms around the country need to tread water for a few more months, after which they can return to normal. The risk is that there is a wave of bankruptcies between now and the late spring, that is set off by a return to widespread shutdowns. To face this risk, the administration needs to show it is serious about finding a compromise stimulus package, and cognizant that a promise of massive tax hikes next year is a negative for business sentiment. Businesses that are just hanging on with hope of a brighter future could well give up if that future includes a government that taxes away all their profits.
Unfortunately, Vice President Biden has come out with exactly the opposite of this message. By sticking to the Pelosi bill, he fails to signal a willingness to compromise, suggesting to those holding out for another round of stimulus that they have little to hope for. And the future is dark as well, since the administration’s tax hikes are coming. In other words, he seems poised to fritter away all of the economic gains that the U.S. has achieved in the second half of this year. If the double-dip recession hits next year, Biden will remind us over and over that its Donald Trump’s fault. My guess is that he will find a way to mention Bush as well.