Editor’s note: In a detailed analysis of the economy as Joe Biden is sworn in as president and with a deeply divided Congress awaiting him, a team of experts at the Kenan Institute of Private Enterprise – part of UNC Kenan-Flagler School of Business – spell out challenges and opportunities to improving the US economy. This portion of the report focuses on the politics – and the need to make deals.
CHAPEL HILL – Although the legislative environment is fast moving, the economic proposal from the incoming Biden administration looks to provide a much larger and more broadly based stimulus. And herein lies an opportunity to find a bipartisan deal that can lead the way to additional success down the road.
In fact, the central provisions in the plan are unequivocally critical for the economy in 2021. The first and most important efforts center on controlling the pandemic. This is the most essential provision and represents the only avenue to a sustainable recovery in 2021. Accordingly, our analysis suggests that a competent and coordinated vaccination operation should allow most U.S. businesses to begin resuming in-person operations late in the second quarter. This would lead to a swift normalization of business activity in the third quarter. However, an improved vaccination rate is a linchpin behind this conclusion, so the Biden plan must effectively correct the shortfalls uncovered in the course of the current rollout.
Second, the Biden proposal carves out $350 billion for state and local government budget relief. Although state government support proved controversial throughout 2020, the election outcomes make support significantly likelier. Furthermore, it’s important. For perspective, according to the Urban Institute, total state tax collections were down 3.2 percent year-on-year from March 2020-November 2020, with 29 individual states suffering declines, some significantly so. Although there are legitimate complaints about the degree to which state governments responsibly manage their budgets (hence the earlier disagreement), a significant positive multiplier effect is clear in that an injection of federal money will prevent layoffs of critical public sector workers.
Third, we stress the importance of further support for small business through a $50 billion top-up for PPP loans. Our analysis shows that small businesses have never really recovered, on average, in a manner commensurate with large businesses. As the pandemic wore on in the second half of 2020, small business activity plateaued and then distressingly trended down. Given that small businesses employ roughly one-half of the U.S. labor force, a legitimate question is whether the additional PPP support will be enough.
Although the new Biden proposal also provides a $1,400 direct payment to households in addition to the $600 appropriated in the December aid bill (as well as an extension of unemployment benefits), we are less optimistic about this proposal. Of course, direct payments are very important for certain highly-affected households, but they will likely have a limited effect on the overall economy. The correct lens through which to evaluate any stimulus effort is through the so-called “multiplier effect”—simply put, what additional economic activity the stimulus engenders so that there is a snowball effect well beyond the government’s initial injection. Given that most households will save some or all of these funds, the overall bang for the buck is likely muted; a key takeaway from the first wave of aid in spring 2020 was a significantly elevated savings rate. In contrast, given the fact that the proposed extension of unemployment benefits targets directly affected households, it is likely to be more effective from a multiplier perspective.
Finally, a comment on the Federal Reserve is warranted. The reality is that further monetary stimulus will likely produce little effect (and risk elevated inflationary pressures going forward). The central banks of the world have largely shot their bullets; indeed, the Fed has thrown the gun. It is instead the job of the U.S. federal government to build a bridge to the other side.
Either a lot of things will get done, or nothing will get done
Given the paper-thin margins in Congress and the life-altering events of January 6, there is a unique opportunity to get a lot of things done. One vote in the Senate and a handful of votes in the House can make a difference.
Let’s hope our leaders rise to the challenge, exercise their lethargic legislative muscles of constructive debate and collaboration, and build bipartisan consensus by hitting singles and not swinging for the fences of partisan policy-making homeruns
We challenge President Biden and the 117th Congress to heal this divided country, touch all the bases, and walk it down the middle, member to member, one bill at a time, one solution at a time. The stakes are high—the future success of America. Batters up, let’s play ball!
