Much of what happens next will depend on who controls the Senate, GWSB’s Robert Van Order said.
By Briahnna Brown
If the Democrats cannot gain control of the Senate, it is unlikely that there will be any substantial fiscal policy expansion under President-elect Joe Biden, said Robert Van Order, the Oliver Carr Chair in Finance and Real Estate at the George Washington University School of Business.
Mr. Biden announced last week that he plans to nominate Janet Yellen, former chair of the Federal Reserve, as the treasury secretary, and Celia Rouse, who served as an economic adviser under Barack Obama’s administration, to lead the Council of Economic Advisers.
These historic picks—Ms. Yellen as the first woman and Ms. Rouse as the first woman of color in their respective roles—are expected to help with the country’s economic recovery in the wake of the pandemic. Dr. Van Order said that these are excellent choices for the cabinet because of their extensive knowledge and experience. Even though the incoming administration likely will try to undo some of President Donald Trump’s executive orders around the economy, he said, significant change cannot happen without legislation, which will be difficult even if the Democrats succeed in controlling the Senate.
Dr. Van Order spoke with GW Today about some of his predictions for Mr. Biden’s recovery plan, and what he hopes to see the president-elect do to stimulate the economy:
Q: What were some of the good and bad economic policies under Trump, and why were they beneficial or harmful?
A: Well, we had about a nine- or 10-year expansion until March. The economy was expanding when Trump became president, and he did help extend it. The tax cuts helped in the short run because they stimulated spending, but whether they're good in the long run is a different question because they'll constrain spending on other programs, and they have not had much effect on investment. Effects of Trump policy are not obvious overall. If you looked at the last three or four years of the previous administration and compared them with the first three years of the Trump administration, they would look very much the same in terms of GDP growth and jobs.
Q: What about when the pandemic hit? How did Trump handle the economic crisis stemming from the pandemic? What were some of the missteps, or if there were any positive strides, what were they?
A: The way most economists would put it is that the recession and the pandemic aren't separate things. Trying to expand the economy without controlling the pandemic doesn't make a lot of sense. I think what happened in the U.S., after March or so, was that the shutdown helped control the virus, but not by enough, and the economy reopened too soon. In terms of per capita deaths in the U.S. versus other countries, we're actually done pretty badly, and we didn’t do very well with the economy either.
The first part of the pandemic/recession was what I like to think of as paying insurance, compensating the victims of a catastrophe. The CARES Act shoveled out a lot of money, especially via expanding unemployment insurance. It was a good thing, and it helped. The problem is it mostly ended a few months later, so a lot of people are hurting. Now we are adding a second phase, which is more like a standard recession, and fiscal policy is less like insurance and is more for general stimulus. Of particular interest for the economy is helping state and local governments because they are actually more susceptible to recessions than are ordinary households. This is because most of them have balanced budget requirements. When their revenue goes down, they have to cut back on spending. Aid to state and local governments might be in the bill currently being debated.
Q: What are some of the things that you think Biden will try to do to get the economy back on track?
A: The best thing, if they could get away with it, would be to go back to the bill that was proposed in the summer that extended the CARES Act, maybe gradually phasing out some of the extra unemployment insurance, and going to another round of just sending money to almost everybody. If the Democrats win both seats in Georgia, fiscal policy will be easier; I doubt that if Republicans control the Senate much stimulus spending will happen. I think the vaccines will have a stimulus effect, people will be more optimistic, and they'll start spending. I think the economy will get better, but in terms of both the virus and the economy, the next few months are not likely to be very good regardless of the new administration.
Q: Do you have any predictions of how the Biden presidency will impact small businesses or international business relations?
A: On the international side, the story seems to be that they want to return, at least in part, to a rules-based international trading system, as opposed to the Trump version, which was a series of one-off deals country by country. I think that's a good thing. It'll probably stimulate trade all around. Exports stimulate the economy, but they’re only about 12 percent of the economy, so there's not a whole lot of juice there. But it's something that can be done in part without legislation.
Small businesses, in some ways, will come back because even though a lot of them have gone bankrupt, the human capital and the structures they used are still there. I think the restaurant business, for instance, will change, but vacant restaurant space can be brought back, and rents might be cheap. I don't think we're going to have much help from something like the PPP program for making loans to small businesses. It wasn’t very effective anyway. Outside of the administration, the Federal Reserve is doing as best it can to push money, but interest rates are so low now that it's kind of hard to push borrowers into borrowing anymore.
Q: Is there anything that you are hoping to see from the Biden administration?
A: What I'm hoping for, in terms of economics, is stronger fiscal policy, to the extent they can get away with it. I think this isn't the time to rescind the tax cuts, even though you might not like them in the long run, because that might slow down the economy. It is also not the time to be worrying about deficits. I hope they will do more to aid state and local governments, and I hope they will dismantle most of the recent trade policy.
I'm not totally optimistic, but I think economy will get better on its own as the vaccines kick in. However, I don't see that happening until well into spring. I think the period up to the inauguration will be tough, and help after the inauguration will be slow.