The incoming administration faces two extraordinary economic challenges
AMERICA’S VOTERS did not elect Joe Biden because they thought he would be the best steward of the economy. The economy may well define his presidency nonetheless. Mr Biden will take office in January amid a crisis brought about by the pandemic, which is capable of causing immensely more economic harm before vaccination is widespread. He will also inherit a business landscape in the throes of a once-in-a-generation shift, as technology becomes more embedded in everyday life and in more industries—a shift that has been simultaneously hastened and overshadowed by the disease. Whether Mr Biden succeeds or fails depends on how he manages these twin sources of change.
The good news is that GDP has rebounded impressively from its collapse in the spring. The unemployment rate has dropped much faster than most forecasters expected, from 14.7% in April to 6.9% in October. Were private-sector employment to keep growing at the pace of September and October it would return to its pre-pandemic level in less than a year. On most forecasts America’s economy will shrink by less than any other big rich country’s in 2020—the euro zone will take almost twice the hit, for example. So far there is little sign of the economic scarring that was feared at the onset of the crisis.
Unfortunately this rebound is threatened by the winter wave of the virus. The logistics of rolling out a vaccine are daunting and at first only emergency workers and the most vulnerable will receive it. The spread of the disease will worsen before a mass inoculation can take place. Already more Americans are in hospital with covid-19 than at the peak of the outbreak in the spring, though many fewer are dying. Some parts of the country could soon face more restrictions and lockdowns. Others might experiment with letting the virus rip—an approach which could still bring about a sharp drop in consumer spending if people choose to stay at home in order to stay safe.
If the virus again puts the economy to the sword, it might not benefit from the life support it got in March in the form of lavish unemployment insurance and emergency loans for small businesses. Republicans in the Senate will probably support a limited second round of fiscal stimulus, but are in no mood for another blowout. A debate is raging about whether the Federal Reserve should extend its emergency lending into the new year. Job cuts by state and local governments, whose budgets have been hit by the pandemic, are already weighing down the labour market. They need a bail-out that Republicans do not want to give. Mr Biden’s first challenge will be to persuade Congress to keep the purse strings loose until the vaccine has brought about a full reopening.
At the same time the new president will need to grapple with the post-vaccine economy, which will look different from the one that entered the pandemic. The crisis has hastened the digitisation that was already poised to define business and investing in the 2020s. That trend will not fully reverse, even after the pandemic has subsided. Investors are still struggling to make sense of an economy in which intangible capital replaces the bricks-and-mortar kind, and in which network effects make incumbents more dominant and profits more enduring.
As technology permeates business, the nature of investment is changing. After the global financial crisis of 2007-09, the share of private non-residential investment flowing to intellectual property hit 30%. Soon it may breach the 40% threshold. In this world, Walmart must become an e-commerce giant, Ford must compete with Tesla to make electric cars, and computers must allocate capital. Even McDonald’s has been working on its digital strategy. The tech revolution will change the economy as much as the globalisation wave that defined Bill Clinton’s presidency in the 1990s. As it reshapes the labour market—blue- and white-collar jobs alike—it could tear at the social fabric, much as the automation of manufacturing jobs did.
America’s epidemic could be fading by the end of 2021. The tech surge will outlive Mr Biden’s presidency. Yet the same principle should guide him on both: that government must not resist economic change, but should instead help people adapt to it. One reason America’s economy is outperforming Europe’s is that its stimulus has done more to prop up household incomes than it has to preserve redundant jobs. Similarly, governments that respond to technological change by remaking safety-nets and rewriting social contracts for the new era will do better than those which seek to preserve obsolete models of capitalism and government.
There are thus reasons to worry that Mr Biden’s platform has a protectionist streak, a nostalgia for manufacturing jobs and an impulse to load firms with worthy social goals. One of his new-economy policies already looks like a flop: he wants to extend nationwide the regulations for gig-economy work that California voters rejected earlier this month. To succeed, Mr Biden will need to show competent crisis management. But he also needs to recognise the deeper changes taking place in the economy, and to help Americans profit from them. That is the way to raise living standards—and, as it happens, to succeed as president. ■