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Biden's Fast Start

ARTICLES - 9 February 2021

On the 2d of February Institut Montaigne welcomed Dr. Uri Dadush for a webinar to have a conversation about President Biden’s economic policies, the impact they are likely to have both domestically and internationally. At the time of our conversation Biden’s rescue and stimulus package of $1.9 trillion was countered by a much more modest Republican package of some $618 billion highlighting the almost unbridgeable gap in outlook and preferred remedies between the two parties. Hosted by Institut Montaigne senior fellow Soli Özel, Dr. Dadush answered questions and presented his evaluation on the package and the overall approach of the Biden administration to the economy. Expecting the American economy to register 5 to 6% growth for 2021 Dadush saw an investment program for infrastructure highly plausible. He also expressed his view that there will be a serious emphasis on a green economy approach. Dadush, who has written extensively on the rise of middle classes worldwide, reiterated his belief that the fall from middle class to poor status due to the pandemic that the World Bank recorded and warned about would be short lived. 

The following piece by Dr. Dadush is mainly drawn from this conversation, a version of which was also posted on the website of the Policy Center for the New South.

The new president of the United States has already issued over 40 Executive Orders reversing many of Donald Trump’s most contentious policies. Biden’s arrival will likely have a positive effect on healing internal and international divisions. His policies are also likely to boost US economic growth in the short-run and make it more equitable and sustainable. However, numerous obstacles stand in the way that could delay and dilute the impact of the new administration.

Biden’s executive orders essentially reverse many Trump policies and begin to put flesh on the bones of these major thrusts. 

Biden has assembled a strong and highly expert team of moderates. On economic policy the immensely capable Janet Yellen at Treasury (with Trump appointee Jay Powell at the Fed) is likely to trace a middle-of-the-road path supportive of growth, equity, and stability. On foreign policy, Anthony Blinken at State, Jake Sullivan at the National Security Council, William Burns at the CIA, John Kerry as Climate Ambassador and Lloyd Austin at Defense are all on the record as committed to rebuilding alliances. The first four are known internationalists as well as long-time Biden colleagues or allies.

Austin, a former general and the first black Secretary of Defense and tasked with managing a budget larger than the economy of Switzerland, is known as a sensible and effective leader. Biden is on his way to assembling the most diverse cabinet in history, with large representation of minorities and women. 

The overriding messages of the Biden administration as set out in his inauguration speech are:

  • priority to economic and health recovery 
  • unity, bipartisan collaboration, reduced inequality, social justice
  • reliance on science, data, and a commitment to honest communication, and
  • rebuilding on alliances abroad to deal with global challenges. 

Biden’s executive orders essentially reverse many Trump policies and begin to put flesh on the bones of these major thrusts. 

The new President builds on a slim majority in the House of representatives and has the deciding vote in the Senate where Vice President Kamala Harris can break the deadlock of an equal number of Republicans and Democrats. However, major legislation in the Senate requires 60 votes, so Biden must look for support from the Republican center.

A Far-reaching domestic agenda

Biden’s top priority is dealing with the pandemic by accelerating vaccinations, which entails the launch of a Federally funded and managed campaign, increased vaccine orders, and use of the Defense Production Act to galvanize the manufacturing chain of vaccines. Based on the administration’s target of 1.5 million vaccinations a day over the 100 days to April 21, 2021, which may well be exceeded, I estimate that nearly all the American vulnerable population that wants the vaccine will be fully immunized by that date, which will mean a big decline in disease, hospitalization, and death. The confirmation that vaccines work in real life, outside clinical trials, is already abundantly evident in data from Israel, the country that has made the most progress in vaccinations. 

Bringing the virus under control will accelerate economic recovery, the other main Biden priority. That will be further enabled by another 1.9 trillion $ (9% of GDP) relief and stimulus package, which is very unlikely to pass in its entirety but - with prior measures - may well boost the US economy to 5-6% growth in 2021. Because of its sluggish vaccination campaign, Europe, which is already mired in a deeper recession than the United States, will recover more slowly. 

Biden’s top priority is dealing with the pandemic by accelerating vaccinations to galvanize the manufacturing chain of vaccines.

Biden’s spending plans in coming years are big - to include a 2 trillion $ infrastructure package, increased financing of green energy, and expanded health-care coverage - much of it adding to the deficit and the debt. Large government deficits will persist but decline as a share of GDP as the economic recovery builds. Later in Biden’s term, the effect of higher spending on the deficit will be partly offset by increased taxes on wealthier Americans and on corporations. 

Biden’s economic team has largely bought into the controversial view, but one increasingly widespread among economists in the US and abroad, that increased government borrowing - even in the presence of high debt levels - is a sustainable and even optimal strategy at a time when the economy is depressed, interest rates are low, and inflation remains moderate. 

However, Biden’s plans will be opposed by two factions of a profoundly divided Republican party for different reasons. The large contingent of Republicans in Congress that are wedded to Trump’s base (whose core are less educated whites and evangelists) will oppose Biden’s promotion of civil rights and diversity (the race issue), his liberal immigration policies and his espousal of abortion choice. Moderate and conservative Republicans will oppose Biden’s tax increases on the wealthy, big spending, and climate policy on account of its cost and effect on the powerful fossil fuel industry. 

Biden is trying to reach out to Trumps’ base, but, as many supporters of the former President have become "radicalized" and believe the election was stolen, it is difficult to see him make big inroads. As the former President faces an enormously divisive trial in the Senate for fomenting insurrection, the anger and resentment among this large group is unlikely to abate soon. 

Under Biden, economic and social policy in Washington is already on the way to a big transformation. 

But Biden may succeed in striking deals with moderate Republicans on some issues. Whether the GOP remains united in opposition, systematically blocking Biden’s agenda in the Senate, or whether it splinters and cooperates selectively is the big question. A litmus test is the 1.9 trillion $ Covid recovery bill on which wide differences remain. 

But what is certain is that the tone in Washington has begun to change. Even without Republican support, using only executive action and procedures available to pass budget legislation in the Senate by simple majority, under Biden, economic and social policy in Washington is already on the way to a big transformation. 

A different interpretation of "America First

In a 180 degree turn from the direction set by his predecessor, Biden’s foreign policy will aim to reforge strong ties with the industrial democracies and to use multilateral institutions as a point of leverage to reestablish American leadership.

His executive orders in this space send a strong signal that the United States is again willing to work with other countries on the most pressing global issues. The decision to rejoin the Paris Climate agreement, the World Health Organization, and the Covax vaccine alliance are among the most important of these. Collaboration is also signaled by the decision to stop funding the border wall with Mexico, to absorb larger numbers of refugees, and to end a travel ban which affects mainly Muslim countries. 

However, Biden has given mixed signals on the crucial issue of trade. Though he has been critical of Trump’s tariffs, his team, which includes little known US Trade Representative-designate Katherine Tai, have spoken of a worker-driven, not investor-driven trade policy. This is code for a trade policy that insists on tough enforceable labor standards rather than one that opens America’s markets and provides access and protection for American investors abroad. Biden himself has emphasized that new trade deals, such as a Free Trade Agreement with the United Kingdom or rejoining the revamped Trade Pacific Partnership are not a priority. His "Buy American" executive order and the absence of any indication of when and whether tariffs on steel and other products from allies will be removed add to the concerns of America’s trading partners.

Still, even though trade is low on the priority list, it is difficult to imagine Biden pursuing Trump’s rogue policies at the WTO. The United States’ decision to support my former World Bank colleague Ngozi Okonjo-Iweala, the first African and the first woman as Director General of the organization, is an important first positive sign. Even though Biden’s is unlikely to be an enthusiastically globalist administration, I expect that it will support predictability in trade relations, and that a negotiated phase-out of Trump’s tariffs occurs over the next year or two. At a time when China, Europe and Japan are busy negotiating trade and investment deals on all fronts, the United States cannot afford to stay still for much longer. Yellen and Powell are likely to be powerful voices in support of the Bretton Woods Institutions, the IMF, and the World Bank, both of which view openness to trade and foreign investment as central to sustained economic growth.

Also unclear is how the new administration will deal with China. Biden has said on occasion that he views Russia, not China, as the US’s most dangerous adversary. However, he and his team have consistently identified China as America’s 21st century arch-rival. Still, the Biden team is keenly aware that Trump’s adversarial policies have entirely failed to isolate China and to induce reforms there, even as they have made China more defensive/aggressive and hurt American firms and consumers. 

Governments have learned a lot in the course of the pandemic on how to intervene so as to keep the economy going. 

There is no doubt that Biden can be expected to follow a tough line on China, including decoupling in sensitive technology areas. But he will also look to reestablish predictable trade and investment links, consistent with America’s corporate and consumer interests. Biden’s team understands that cooperation with China on the big global issues, such as climate, pandemics, and financial stability is inevitable if genuine progress is to be made. Outright armed conflict is a real possibility and must be avoided. That is the rational course. But the stance of the United States will ultimately also depend on that of China, and the willingness of its rulers to address the many security, trade and human rights concerns about its behavior that the US shares with its allies.

The end of the middle class?

The pandemic has prompted the idea that we are witnessing the end of the rise of the middle class in a secular sense. But the underlying trends of technology, demographics, education or investment, are proving otherwise. In fact, these trends are still pointing firmly upwards towards increases per capita incomes on average, and an especially rapid increase in large parts of the developing world, which will have a significant impact on the middle class. To a certain extent, although this may be controversial, the underlying drivers of growth may even have been accelerated by the pandemic. The rapid development of remote provision of services and remote work holds enormous promise both for globalization and increased integration of markets - whether financial, services or goods supply chains, while the breakout of biotechnology will have a major impact not only on health but also materials and agriculture.

Governments have learned a lot in the course of the pandemic on how to intervene so as to keep the economy going. We are likely to continue to have rapid economic growth in large parts of the world - by the standards of the last century or two - and the middle class will continue to rise. 

 

Copyright: Brendan Smialowski / AFP

 

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