Will Joe Biden’s economic plan really rescue the US economy?

It’s clear the world’s largest economy is in need of major support, writes Ben Chu. But is the $1.9 trillion Biden plan sufficient to transform the situation?

The first hurdle is defeating the virus (REUTERS)

The incoming Biden administration has produced what it describes as an “American rescue plan” for the domestic economy.

And there’s no dispute among economists that the US economy is in need of major support.

As Joe Biden is inaugurated as the 46th president in Washington on 20 January, the level of US economic activity is well below where it was at the end of 2019 thanks to the historic and ongoing shock of the coronavirus pandemic.  

The official unemployment rate currently stands at around 7 per cent, double that of 12 months ago.

Moreover, the US labour market seems to be slipping backwards, with jobs shed in December for the first time since the cataclysm of April which sent unemployment in America shooting up to heights not seen since the Great Depression of the 1930s.

In December the OECD was projecting the US economy would grow by just 3.2 per cent in 2021, failing to compensate for the 3.7 per cent slump in 2020.

That would not be a strong recovery –  and things have since worsened as the epidemic has tightened its grip on the US.

But will the Biden plan – spearheaded by his choice of Treasury secretary, Janet Yellen – transform the situation? Will it rescue the US economy?

The first thing to note is that the unexpected victory of two Democrats in Georgia’s run-off elections for the Senate earlier this month – giving Democrats control of the upper chamber - has made it much more plausible that the Biden White House will be able to take major fiscal action to support the US economy.

The ability of ultra-partisan Senate Republicans to obstruct assistance has diminished, if not wholly disappeared.  

What about the substance of the Biden plan?

There is a major focus on getting on top of the pandemic, with $70bn (£51bn) earmarked for vaccinations and testing.

The Biden team says it wants to vaccinate 100 million Americans in the administration’s first 100 days.

If the key to unlocking the economy is defeating the virus, the returns on this investment could be vast.

But the biggest budget line in the proposal is to give $1,400 to every adult American, on top of the $600 payments approved in stimulus bill in December.

This would support household incomes and consumption and, thereby, the overall economy.

Analysts at Oxford Economics estimate that these cheques alone would increase US GDP growth in 2021 by 0.7 per cent.

A proposed increase in unemployment benefits by $400 a week until at least September instead would also help to sustain demand. 

There is also $350bn in the Biden plan for  states and local governments, which have been financially drained by slumping local tax receipts. That federal support should prevent them being forced to lay off public sector workers such as fire fighters and teachers and curb the upward pressure on US unemployment

Other proposed measures such as small business loans and an extension of a foreclosure moratorium until September should help prevent small firms going under, again stemming a potential cascade of economic distress.

The rescue plan is certainly large. At $1.9bn, it is equivalent to around 9 per cent of American GDP. Coming on top of $3 trillion of support legislated last year, it would take total US state stimulus in the pandemic to a quarter of the size of the economy.

But is it well directed?

Most analysts are pleased at the Biden plan’s fiscal expansion – and reject concerns about inflation or rising government debt as badly misplaced at a time when the US economy is operating well below capacity and interest rates are at close to historic lows.

“The economy needs to rev its engines through this recovery to maximize growth potential in a world that continues to suffer from secular headwinds,” says Christopher Smart of the Barings Investment Institute.

“This means plenty of government spending at least until both the unemployment rate and the [labour force] participation rate are back to pre-crisis levels.”

“One may not agree with all of [the plan], but I feel we are back into the realm of reasonable policy discussions,” says Olivier Blanchard, a former chief economist of the IMF and now senior fellow at the Peterson Institute for International Economics.

The Biden team also intends to bring forward a separate bill next month aimed at increasing federal spending on infrastructure and clean energy, in line with Biden’s election manifesto.

The prospects of seeing this delivered are, though, lower.

While the short-term household stimulus can probably be delivered through a “reconciliation” process in the Senate – which requires only a bare majority of votes in the 100-seat chamber – infrastructure spending would still require a 60 per cent majority, meaning a number of Senate Republicans would need to be persuaded to vote in favour.

That’s not impossible, but it’s a much higher political bar to clear.

The Biden team has a freer hand to support the US economy in the short term than it dreamed of only last month.  

Yet the tragic reality is that if the post-Trump Republican opposition remains determined only to cynically obstruct and wreck, rather than cooperate and observe the rules of the political game, the longer term hopes of the Biden White House to secure the health of the US economy will remain fragile.