The US recovery’s promising moment

LAGUNA BEACH — President Joe Biden’s announcement that the US will have enough COVID-19 vaccines for every American by the end of May has contributed to a rising tide of optimism about the country’s economic prospects this year. This, and other good reasons to be hopeful about the economy, opens a valuable window for the administration to address the complex policy challenges it is facing in 2021 and beyond.

On the positive side, Biden’s vaccine announcement came on the heels of economic data that beat the consensus expectations of economists and market analysts. The latest figures show that personal income grew by 10 per cent between December and January, that manufacturing expanded by nearly 10 percentage points year on year, and that 379,000 jobs were created in February (well above the consensus expectation of some 200,000). In keeping with with these trends, the Federal Reserve Bank of Atlanta’s much-watched (and notably volatile) GDPNow model now estimates annualised first-quarter GDP growth to have reached around 10 per cent.

This notable economic pickup is being driven by the release of pent-up demand, both in the US and internationally, and by the fiscal stimulus package that Congress approved at the end of last year. Moreover, these public- and private-sector effects are both likely to intensify as vaccines continue to be administered more quickly, and as the Biden administration progresses with its two-stage rescue and recovery effort.

But three main challenges will need to be addressed quickly. First, progress toward increased vaccine availability is necessary but insufficient. To end the public-health crisis, stepped-up vaccine production will need to be accompanied by a high rate of vaccine acceptance, vigilant efforts to prevent a resurgence of infections, and ongoing resilience in the face of new variants of the virus.

Second, with competing signals from different labour-market data, the pickup in economic activity has yet to be accompanied by a sustained, strong rebound in employment. Moreover, the labour-force participation rate needs to recover more strongly.

The third challenge is highlighted by the debate among economists about whether the Biden administration’s proposed $1.9 trillion American Rescue Plan will lead to economic overheating. The fear is that the additional stimulus will trigger a spike in inflation and market interest rates, which could derail a sustained recovery and heighten the risk of financial-market accidents. Indeed, in recent weeks, there have already been two near-accidents that, fortunately, were countered by endogenous market flows.

In thinking about these challenges, one also must look beyond 2021. To develop into the type of recovery the US (and global) economy needs and is able to deliver, the current economic bounce will need to prove durable, inclusive, and sustainable. Policymakers will not only have to avoid some significant pitfalls this year; they will also have to do more to counter the pandemic’s lingering aftereffects, particularly those that could undermine households’ balance sheets and hamper productivity and growth both at home and globally.

Judging by the current course of the recovery, major headwinds could emanate from several sources. These include the likely widening of the economic, financial, and health divergence between advanced and developing economies; the deepening disconnect between Main Street (economic and social conditions) and Wall Street (financial asset prices); sovereign- and corporate-debt challenges (particularly in the developing world); and the social, political, institutional and economic fallout from the recent spikes in inequality of income, wealth and opportunity.

Good policy design and implementation can do a lot to minimise these risks. But sustaining the recovery will require an ongoing policy push. After the $1.9 trillion bill passes, the US will need to move expeditiously to enact the Biden administration’s second proposed fiscal package, which is aimed squarely at boosting longer-term productivity and inclusive growth.

Moreover, US policymakers need to look closely at the functioning of the labor market, both directly and in cooperation with the private sector. And they will have to embrace the delicate task of rebalancing the macroeconomic mix so that there is less reliance on unconventional monetary policies, particularly open-ended large-scale asset purchases and highly repressed policy rates, and more emphasis on structural reforms and macro-prudential measures.

After the annus horribilis of 2020, there is justifiable optimism about the US economy. A compelling vision of a much brighter future is coming into sharper focus. It can and should help policymakers to press ahead with preemptive action to mitigate the considerable risks on the horizon.

It would be a tragedy if world leaders were to repeat the mistakes of the post-2008 period, when it won the war against a depression but then failed to secure the peace through high, durable, inclusive and sustainable growth. The US plays a critical role in this regard. By seizing the moment, policymakers can spare the US, and therefore the rest of the global economy, that unnecessary risk.

Mohamed A. El-Erian, president of Queens’ College, University of Cambridge, is a former chairman of US president Barack Obama’s Global Development Council. He is the author, most recently, of “The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse”. Copyright: Project Syndicate, 2021. 

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