Here are the economic challenges facing Joe Biden – and how he should tackle them

Joe Biden in his acceptance speech in Delaware at the weekend declared his goal was to “repair” the US economy. But in what ways, precisely, is the American economy broken?  What should the incoming president’s economic priorities be?  And given that Mr Biden will inherit a divided Congress, which will severely limit his freedom of manoeuvre, how should he go about the task?

There’s no question that the US economy remains very far from a healthy state.

It grew strongly in the third quarter of 2020 after its record collapse in the second quarter, but the level of activity was still around 3.5 per cent below its peak at the end of last year. And more recent data shows signs of the momentum slowing.

The news of the development of a successful vaccine on Monday sent share prices soaring in anticipation that it would allow normal economic activity such as travel to resume, but for now the epidemic is surging again in the US, with daily new cases passing 100,000 last week.

“The first order of business [for Biden] is of course what he’s already started with, which is putting in place a national pandemic programme. That is the biggest thing you can for the economy,” says Adam Posen, President of the Peterson Institute for International Economics.

Randall Kroszner, a former member of the Federal Reserve’s board of governors and now at the Chicago Booth School of Business, stresses that bolstering America’s testing and tracking infrastructure to enable adequate monitoring and suppression of outbreaks is crucial.

“Proper expenditure on data collection and dissemination, proper expenditures on health – those are things that would be the highest priority to get the economy on track,” he says.  

Next, say many economists, is help for the unemployed. The US unemployment rate has come down from a peak of 15 per cent in April, but still stands at almost 7 per cent - with 11 million out of work - and many analysts think that number is likely to understate the true level of joblessness in the economy. Moreover, the economic distress of these workers has spiked.  

The CARES [Coronavirus Aid, Relief and Economic Security] Act - a package of financial support to jobless workers and struggling businesses worth around 10 per cent of US GDP - was passed by Congress in March but much of that support ran out in the summer and talks between the President and the Democrat-controlled House of Representatives to extend it broke down in the weeks before the election.

It’s for this reason that most economists think a priority for Joe Biden has to be to extend that stimulus, which includes fiscal support for US state governments.  

Mr Biden wouldn’t formally take office until 20 January 2021 but he can still exert pressure on Congress to take action before then, possibly in the coming weeks.

Before the election the Democrats in the House of Representatives had been proposing a $2trillion package of support. But the Republican-held Senate and Donald Trump had blocked that, claiming it would unduly benefit Democrat-supporting cities and states.

Any package that emerges will likely, according to experts, be closer to $1trillion and would not include fiscal assistance to hard-pressed US state governments. Analysts say would be far less than ideal, but much better than nothing.

“If there’s nothing more there’s going to be a lot of unnecessary suffering,” says Mr Posen.

“If we get something that emphasises unemployment extensions and is in the $750bn plus range we can survive without more fiscal [stimulus] – but time is of the essence.”

Beyond the immediate stimulus, Mr Posen think the top priority of the incoming Biden Administration should be to reverse many of Donald Trump’s damaging executive orders, particularly on environmental and health care regulation, which can be done with the “stroke of a pen in the first 48 hours”.

Biden’s manifesto included plans for a major step up in federal clean energy infrastructure investment and increases in taxes on the well-off. But most of that will be unrealisable if, as expected, Republicans retain control of the Senate and are able to vote down new legislation.

“A lot of what Biden does has to be done through executive orders, or who he appoints at semi-independent agencies,” says Mr Posen.

The best hope for new economic legislation, say analysts, is likely to come in areas where there is some degree of agreement between Democrats and Republicans, such as corporate tax reform.

“There may be ground for working with the Republican Senate to have a tax system which tries to provide the right incentives for investment in productivity growth while raising more revenue,” says Mr Kroszner.

Adam Posen thinks further moves to prevent US-based multinationals, particularly big US tech firms, from registering their profits overseas might be an area where Democrats and Republicans could work together, as well as possibly on new anti-monopoly regulation of the digital giants.

“That will get support from Republicans because they don’t regard tech as their friend, you might even see legislation” he says.

Most analysts think Biden could help the US economy by ending Donald Trump’s self-harming trade wars. He could unilaterally drop many of Trump’s tariffs on countries in Europe and Asia, although restrictions on technology transfers to China might well remain given the bipartisan hostility to the regime in Beijing.

“This is the right time to resist protectionism, to enforce existing trade agreements, and to pursue sectoral regulatory agendas in areas like finance and technology,” says the former US Treasury Secretary Larry Summers, though he also advises against seeking new trade deals at the behest of US corporations.

Some also think Biden, though he will be unable to impose a domestic carbon tax, should contemplate so-called border adjustment taxes on imports made with carbon-intensive production methods abroad, something that was in his manifesto. However, they think this should be done under the umbrella of the World Trade Organisation, rather than in defiance of it.

Another area of economic policy that many experts identify as of major importance is immigration, which the Trump administration has crushed down, with net inflows falling from 1 million to 600,000 a year since 2016.

“All limits on immigration should be halted immediately and replaced with policies that are as permissive as possible under existing law,” says Jason Furman, the former top economic advisor to Barack Obama.  

“The US economy is sustaining long term damage from restrictions on immigration that are deterring talented people from coming to the country and contributing to US economic growth.”

Yet while all of this from the Biden Administration would help, few economists, sadly, believe it would amount to anything close to the “repair” of the US economy, with its chronic problems of inequality, under-investment, inadequate education and healthcare and a lopsided taxation system.