By summer, however, as shutdowns will have ended, more than 100 million Americans will have been vaccinated, and another government rescue package will have been approved (see below). At that point, look for the economy to come roaring back as workers return to the office and consumers begin to satisfy a year’s worth of pent-up demand for fashion, entertainment, restaurant meals and travel.
Pay no attention to economic Cassandras who will inevitably point out that output or employment remains where it would have been if there had never been a pandemic. You’ll know the storm has passed when the unemployment rate falls below 6 percent, business spending on capital equipment surges and a new restaurant opens up where your old neighborhood favorite used to be.
2. From Congress, another dose of fiscal ‘stimulus’
Winter shutdowns will bring fresh demands from populists on both the left and right for another trillion dollars of government spending to alleviate the economic suffering of ordinary Americans. These calls will be supported, in turn, by liberal economists who cling to the mistaken belief that the failure to pass a large enough stimulus in 2009 doomed the Obama presidency and needlessly delayed the economic recovery.
In fact, while millions of Americans are struggling economically, many millions more still have their jobs and their paychecks or retirement checks and are doing just fine. Which is why the situation calls not for another trillion dollars of economic stimulus, but for several hundred billion of generous but well-targeted relief for workers who are unemployed. A strong rebound in the second half of the year should allow such relief to be phased out as economic conditions improve.
If the politics of the moment demand additional spending, as I suspect they will, then money would be better used for public investments with good long-term payoffs — transportation infrastructure, green energy projects, revival of old industrial cities. Sending $2,000 checks to every American regardless of need is neither necessary nor progressive.
3. From the Fed, never-ending doses of cheap credit
Although few people realize it, the Federal Reserve continues to pump 120 billion freshly printed dollars into the economy each month despite abundant evidence that whatever shortage of capital there might have been has long since disappeared. And it’s not just the Fed. Over the last year, central banks around the world have boosted the money supply in the global economy by $14 trillion.
Fed officials would have us believe that all this money printing has been necessary to sustain economic activity through the pandemic. But whether intended or not, the bigger impact has been to create gigantic bubbles in stock and credit markets.
How do we know these are speculative bubbles? We know it because there is no rational explanation for the fact that Tesla, a company that only turned its first annual profit a year ago, now has a higher market value than General Motors, Ford, Fiat Chrysler, Volkswagen, Daimler and Toyota combined. We know it because, in the middle of a pandemic and a global economic downturn, there have been record or near-record levels of new stock and bond offerings and debt-fueled corporate acquisitions. We know it because investors are using record amounts of borrowed money to buy stock at prices that are higher (relative to company profits) than at any time since 1929. And we know they are bubbles because purely speculative assets such as gold and bitcoin are now trading at all-time highs (a bitcoin bought for just over $5,000 in March is now trading at nearly $29,000).
Once the pandemic recedes and a sustained recovery has begun, the Fed should move quickly to signal its intention to wind down this policy of “quantitative easing.” But at this point, even a hint that the Fed might wind down its money printing and bond buying would cause interest rates to spike and send stocks into a tailspin. With both business and government hopelessly addicted to its cheap and plentiful credit, look for the Fed to concoct ever more creative rationalizations for delivering the next fix.
4. Commercial real estate crash, averted
Early on, most predictions (mine included) were that commercial real estate was headed for a bloodbath. It wasn’t just that tenants would stop paying rent for a few months — the effects were going to be much bigger than that. Suddenly, everyone understood that with the rise of telecommuting, demand for office space could fall by a much as a third. The explosion of online shopping and the demise of several big department stores looked like the death knell for the suburban shopping mall. Apartment and condo development ground to a halt as residents fled to single-family homes in the suburbs or weekend retreats in the country. And in the age of Zoom, how many hotels catering to business travelers could survive? In short, for anyone who owned, developed, invested in or financed commercial real estate, the post-pandemic future was looking very bleak.
But as has happened in the past, commercial real estate is proving to be remarkably resilient. Delinquencies, defaults and bankruptcies are all up, but not catastrophically. Instead, leases are being renegotiated, loans extended and unpaid debt converted to ownership shares. And while property values have fallen, they are not in free fall, thanks in part to the large number of well-financed investors looking to snatch up prime property at bargain prices.
Some think it’s only a matter of time before “extend and pretend” gives way to the inevitable wave of forced sales that cause the bottom to fall out of the real estate market. But others see in the tectonic changes brought on by the pandemic a golden opportunity to repurpose old buildings, reconfigure economic geography and bring new residents and new businesses into urban markets that had become too expensive.
The thing to remember about commercial real estate is that there is so much wealth tied up in it, so much profit to be made from it, so many tax advantages associated with it, that even if values tumble and cash flow is interrupted, you can still come out a winner. All it takes is a little patience, perseverance and the willingness to throw a bit more money into the pot. As long as there are enough people in the industry who understand that — and as long as refinancing continues to be cheap and readily available — there’s a decent chance that a full-blown crash can be averted.
5. The business lobby finally breaks with the Republican Party
The conventional wisdom is that Joe Biden’s fantasy of bipartisan cooperation is about to founder on the rocky shoals of Mitch McConnell’s stubborn partisanship. The result: four more years of policy gridlock and government dysfunction.
There is, however, one interest group that has both the clout and the incentive to liberate us from unsatisfying political equilibrium and create the political space for moderates of both parties to come together. The only question is whether big business will have the courage to do it.
Back in the day when Congress actually got things done, one reason was that the business lobby was pretty effective at working both sides of the aisle, using its influence to broker compromises that, if not ideal from a business perspective, were good enough. Politicians willing to support such compromises were rewarded in all sorts of ways that went well beyond political contributions at election time.
But starting in the mid-1990s, the Republican caucuses in the House and Senate offered business leaders a choice: Either work with us exclusively in return for getting just about everything you want, or continue to play footsie with Democrats and we won’t lift a finger on your behalf. One by one, all of the major business organizations came to see it as an offer they couldn’t refuse.
For a while, it worked out spectacularly well for the business lobby — regulation was curtailed, taxes cut, unions busted, lawsuits curtailed and trade liberalized. But as the Republican caucuses were gradually taken over by their more radical and populist members, business leaders grew increasingly uncomfortable with this political marriage of convenience.
Major disagreements opened up on everything from trade, immigration, climate change, health care and education to gay rights, women’s rights, civil rights, even the minimum wage. It isn’t just that business leaders now find themselves on the wrong side of history on issues important to customers and employees. It is also that the government inability to deal with changing technology and threats has put their companies at a competitive disadvantage on world markets.
With razor-thin majorities in both houses of the new Congress, moderates of both parties now have the chance to take back power from party caucuses dominated by their radical wings. Those moderates, in turn, are the natural political allies of a business lobby that in recent years has ventured out to support a few Democrats and backed a few bipartisan initiatives, but has stopped short of challenging Republican leaders on a make-or-break issue.
Will it happen in 2021? My sense is that it can, but only with the leadership of a dealmaking president willing to buck members of his own party and govern from the center. The challenge for Joe Biden won’t be in striking acceptable compromises with the Business Roundtable or the Chamber or renegade Republicans from the House and Senate. That’s easy. The hard part will be telling Elizabeth Warren, AOC and the liberal commentariat that he’s moving forward without them.