Dawn in America! The population is being vaccinated at the rate of 2 million per day and growing, suggesting that the pandemic, in general, could be left behind in a few months (unless a premature reopening or immune variants to current vaccines do not cause another wave). The Centers for Disease Control and Prevention has previously said that vaccinated adults can safely socialize with others, with their children and grandchildren.
Economically, the Senate has passed a bailout bill that should help Americans weather the remaining tough months, allowing them to work and spend again, and the bill will almost certainly be signed in a matter of days.
Economists have seen the good news. Analysts polled by Bloomberg predicted growth of 5.5% for this year, the highest rate since the 1990s. I think they were conservative; Goldman Sachs thinks so too and expects 7.7% growth, which we haven’t seen since 1984.
But then what? I am very optimistic about the economic outlook for a year or two. In addition, however, we will need another major political initiative if the good times are to continue.
US President Joe Biden’s US bailout is what the name suggests: a short-term relief measure to deal with an economic emergency. Democrats are hoping certain things will become permanent – child tax credits, increased health insurance subsidies – but the bulk of the spending will disappear within a year.
And when big spending is behind us, there’s a good chance we will once again find ourselves in a state of “secular stagnation,” an old concept recently revived by Larry Summers. I know it’s just obscure jargon. But what this means is a situation in which the economy has persistent difficulties in maintaining full employment, even with extremely low interest rates. An economy in secular stagnation will still have good times every now and then, but politicians will have a hard time neutralizing bad news, like the bursting of a financial bubble.
It’s a bad place to be. There is growing consensus among economists that the United States economy spent most of the decade following the 2008 financial crisis producing less and employing fewer people than it does. should. We may – we may – finally have come close to full employment on the eve of the pandemic, but even that is not clear.
Exactly why we find ourselves in this situation is a matter of debate, but some factors are obvious. A drastic slowdown in the growth of the working-age population has reduced the demand for investment; the same is true with an apparent easing of the pace of technological progress. Whatever the reasons, the pre-pandemic economy has spent most of its time underperforming its potential.
And financial markets indicate they expect a return to underperformance when Biden’s initial success is behind it. Today, interest rates are, in fact, a barometer of economic optimism – and those rates have actually risen as the bailout has moved to the finish line. But the increase has been modest, comparable to the “collective panic” of 2013 (don’t ask) and insignificant compared to some interest rate hikes in the 1990s.
What the markets are actually telling us is that after the explosion they expect a return to stagnation – which, again, would be a bad place. How can we avoid it?
The answer is, in fact, obvious: a big public investment program, paid largely for the debt, but also with the possibility of new taxes, if it is really important. Such a program would have a dual function. Besides macroeconomics, we need to spend a lot to rebuild our crumbling infrastructure, tackle climate change and more. And public investment can also be an important source of jobs and growth, helping us escape the trap of stagnation.
The good news is that economists in the Biden government fully understand all of this and by all reports they are already in the process of developing a very ambitious infrastructure plan.
The bad news is that being able to approve this plan will be very difficult politically – possibly even more so than getting approval for the short-term economic bailout.
In a functioning democracy, developing a large public investment plan would not be difficult. “Every piece of research that I have analyzed,” wrote Gallup’s Frank Newport, “shows that Americans are extremely supportive of new government infrastructure legislation.” Remember, the Trump administration spent four years promising a plan for any day, but it never showed up.
But every piece of research I analyzed has also shown that Americans – including many Republicans – support the US bailout. But not a single Republican lawmaker voted for him.
Republicans are also likely to be strongly opposed to anything Democrats come up with for infrastructure. In fact, the very popularity of infrastructure spending will strengthen their opposition, because what they want above all else is to defeat the Biden government.
The big question, then, is whether Democrats will be able to stage yet another political miracle and pass a second round of crucial economic laws in the face of scorched-earth Republican opposition. The answer to this question will determine whether Biden’s success will last.
Translation by Luiz Roberto M. Gonçalves
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