Joe Biden’s economic challenge

On January 20, Joe Biden will assume the presidency at a highly inauspicious time for the U.S. economy. The U.S. will have yet to recover fully from its worst economic recession in the past 90 years, economic policymaking will most likely be complicated by a Republican-controlled Senate. And, if the health experts are to believed, the U.S. will be in the tight grip of a dark COVID winter.

The good news for Biden is that real help is on the way in the form of highly effective vaccines. It is now expected that by May or June most of the U.S. population will have been vaccinated against the virus. That will allow the total lifting of COVID-19 related restrictions and will allow the public to fully resume normal economic activity.

The bad news for Biden is that until the vaccine is widely distributed, the pandemic’s present sharp surge could lead to another leg down in the U.S. economy. That in turn would risk further scarring the U.S. economy with serious household and corporate debt problems that would likely constitute a strong headwind to the economic recovery. It would also likely heighten the longer-run emerging market and European debt related risks to the U.S. economy. 

Highlighting the risk of a double-dip recession in the early part of next year is the widespread rolling back of the earlier lifting of pandemic related restrictions. Even before the expected holiday spike in new COVID-19 related cases from their already record-high levels, California appears to be well on its way to another economically damaging lockdown. At the same time, meaningful pandemic restrictions have been tightened in many other states, including Illinois, Michigan and New York. 

With hospitals across the country already under severe strain, by the time Biden assumes office one must expect a further tightening of COVID-related restrictions in many more parts of the country. That in turn is bound to deliver another body blow to the already fragile travel, hospitality and entertainment industries. It is also likely to lead to a further rise in unemployment from today’s still very elevated levels.  

Experience with earlier deep recessions suggests that there is a significant delay between the recession and the wave of bankruptcies and defaults caused by the recession. This has to be of particular concern in today’s highly indebted U.S. economy. Even before the pandemic, U.S. corporate debt was at record levels. Meanwhile households had taken on record amounts of auto, credit card and student debt. After the pandemic, those debt levels have jumped to even higher levels.  

It is not only at home that Biden needs to be concerned about high debt levels. It is also abroad that he need worry about debt problems that could trigger an international economic and financial crisis.

According to the World Bank, the perfect economic storm that the pandemic has visited on the emerging market economies is likely in time to cause a record wave of emerging market debt defaults and rescheduling. At the same time, the depth of the European economic recession and the economic policy response to that recession has put systemically important countries like Italy and Spain on clearly unsustainable public debt paths. This heightens the odds of another round of the European sovereign debt crisis later next year.

All of this would suggest that in his first year in office, it will be anything but plain economic sailing for Biden. Considering the treacherous domestic and international economic waters ahead, Biden was wise to choose for his Treasury secretary someone as competent and experienced as Janet Yellen to help him navigate those waters. But it remains to be seen whether Biden will manage to get a Mitch McConnell-led Senate onside to return the country to full employment and prosperity. 

Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.