With the rollout of vaccines, the COVID-19 cloud over the economy should lift sometime around summer.
Ideally, between now and then, the foundation for sustainable private sector growth would be put in place. Unfortunately, the instincts of President-elect Joe Biden and his team of economic advisers are in different directions.
Here is what such a foundation would consist of.
What the post-COVID economy needs
Liquid capital investment markets. Flexible labor markets. Reasonable and consistent tax policies. Reasonable and consistent regulatory policies. Sound money. And stable government finances.
Biden’s announced policy preferences are contrary to each and every one of these foundational pillars. And he has assembled a team of economic tinkerers, not foundation builders.
Front-line health care workers: If COVID-19 kills me, take care of my dog
In the view of Biden and his team, the role of government isn’t to establish the foundation for sustained private sector economic growth and then allow markets to find their own paths. Instead, the role of government is to drive, direct and manage the private economy through macroeconomic policies, both fiscal and monetary.
What Biden will do instead
Biden wants to increase taxes on corporations. He also wants to increase taxes on the wealthy, both income and capital gains. All of which reduces the pool of investment capital, as well as its potential returns. Investment capital is what fuels private sector economic growth.
His platform included a blizzard of new regulatory initiatives, covering the gambit from energy to labor. A closely divided Senate will make it difficult to pass legislation implementing much of this, so the Biden administration is likely to push the edges of its executive authority.
Which will invite litigation and create regulatory uncertainty, which was a major reason economic growth was so sluggish during Barack Obama’s second term.
It's a bipartisan budget blowout
In response to COVID-19, there has been a bipartisan blowout of the federal budget. Deficits have been at eye-watering levels not seen in peacetime.
Now that there will be a Democrat in the White House, congressional Republicans will undoubtedly redeploy their feigned alarm over debt and deficits. But, even if they retain marginal control of the Senate, they won’t be calling the shots.
Biden has a big spending agenda. There’s no chance that there will be movement toward putting federal government finances on a more responsible and sustainable footing by summer. If anything, the uncertainty inherent in a federal government spending trillions more than it collects in revenue, with no plans to bring them into better alignment, will hang even more heavily over the private sector economy.
Biden’s tinkerers don’t think the job is to establish a solid foundation and then get out of the way. They believe that the job of the federal government is to continuously finetune the economy, smoothing out market fluctuations.
That, however, is beyond government’s ken. And the effort means a steady overhang of uncertainty, while predictability and consistency are what foster private sector economic growth.
The Fed is compounding the problem
Unfortunately, the Fed is also in the hands of tinkerers these days. And enablers.
The Fed is largely financing the debt the federal government is racking up. It is continuing its buying spree of treasury and mortgage debt. It promises low interest rates into perpetuity. That creates froth in asset prices.
No one knows what the consequences will be or when they will manifest themselves. But that’s not establishing sound money as a foundational pillar for private sector economic growth.
As vaccinations roll out, there will undoubtedly be a surge in economic activity, as people feel safer engaging in interactions of all kinds.
Don't expect a rapid economic recovery
I doubt, however, that there will be a V-shaped recovery, with a quick return to a pre-COVID economy.
The finances of many small businesses, and not a few large ones, have been devastated. Many sectors of the economy will have to be recapitalized.
And chances are there will need to be at least a modest redeployment of labor. Post-COVID, there will be fewer jobs in some sectors and more in others. And a residual increase in remote working means that even the location of some quantity of jobs will change.
These transitions would occur quicker and more productively if the foundation for sustainable private sector economic growth were established by summer.
Biden and his tinkerers, however, will be trying other things.
