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The writer is President of Queens’ College, Cambridge University, and Advisor to Allianz and Gramercy
When Joe Biden became vice president 12 years ago, he joined an administration struggling with a major heart attack in the form of the financial crisis. Today, the new president is leading a country facing not one but several self-reinforcing crises. Responding well will require complementing smart economic policy design with nimble political maneuvering at a time when financial markets remain focused on a “pedal to metal” Federal Reserve.
The major challenge in 2009 was to stabilize dysfunctional financial markets threatening to tip the world into depression. This goal was achieved through a combination of extraordinary monetary and, to a lesser extent, budgetary responses. Barack Obama’s administration avoided a major economic calamity. But losses in the 2010 midterm elections closed his political window for major legislation, and he was unable to provide a solid track for high growth that is both inclusive and sustainable.
In fact, today’s financial markets are working too well. The terms are extremely loose: interest rates remain extremely low, asset prices are reaching record highs, and funding is plentiful for companies that can access financial markets. The financial system challenge for Mr Biden is not a short-term need to deal with immediate dislocations, but the longer-term problem of connecting hot markets to economic realities.
Recent data confirms that the The US economy is slowing, hit by higher infection rates and deaths from the pandemic. The inequality of income, wealth and opportunity, already high in the United States, got worse. Confidence in institutions has been undermined. And, although we all face the common problem of a changing virus, international efforts to coordinate policies have been difficult.
These crises feed off each other, threatening vicious circles. It is no wonder that the risk of “scarring” – in which short-term economic problems become nagging long-term obstacles to social well-being – has become such a concern.
I have argued before for a four-pronged approach: providing immediate financial assistance to vulnerable segments of the population, improving our fight against Covid-19, tackling household financial insecurity and boosting productivity and growth potential, notably through a recovery sustainable green.
The $ 1.9 billion tax package recently announced by Mr. Biden seeks to address the first three of these issues. Additional fiscal stimulus packages, slated for February, would target the fourth.
There is no doubt that some will be concerned about the effectiveness of some of these measures, as well as the long-term implications for deficits and debt. Yet the most pressing issues lie elsewhere. Will the razor-thin Congressional majority allow the stimulus to pass in time? Will there be enough “early wins” to facilitate the national unity needed to overcome the health crisis in particular? And how will the markets react?
Mr. Biden’s two-part plan for fiscal stimulus is an attempt to reduce the risk of opposition in Congress. But finding ways to build and mobilize national unity will likely prove difficult. Large swathes of the American population feel marginalized, undermining collective efforts to address common challenges – as we see in attempts to slow Covid-19 infections and increase vaccine uptake.
The question of markets is perhaps the thorniest of all. Fed officials recently felt compelled to adopt a your even more accommodating despite favorable signs of a significant fiscal effort, dynamic capital markets and higher asset prices.
Reacting to a week-long 20 basis point increase in longer-term government debt yields, Fed Chairman Jay Powell felt the need to reassert central bank alignment. If the rise in yields were to continue, it would increase borrowing costs and risk shaking the two major principles that have supported dynamic stock markets: that there is no alternative to buying assets. riskier and that stocks are cheap based on discounted cash flow models. But the Fed’s constant reassurance only boosts investor confidence that there are only advantages to investing in markets increasingly disconnected from economic reality.
Early signs suggest that policy design is unlikely to be the biggest obstacle to the success of the Biden administration. But smart economic policy is a necessary but not sufficient condition to improve both the financial and medical well-being of America and the global economy. The new team also needs a high degree of political agility and a much greater sense of national collective responsibility, both political and social.
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