international analysis and commentary

The unpredictable political economy of a US recovery

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There has possibly never been a more difficult time to predict the future of the United States’ economy than right now – seven months into the coronavirus pandemic. In the past two decades, we have grown used to the American economy’s enormous and mostly unexpected falls, and to its rapid and robust recoveries, thanks to the sturdy help of the Federal Reserve and to a general confidence in the resilience of the system. This time, however, it is far harder to feel confident that there will be a rapid “V-shaped” recovery any time soon – or to expect such a recovery to be the engine of global growth, as it has always been.

In fact, after nearly an eleven-year-long economic expansion, the longest in US history, data and scenarios do not provide much reassurance: the total output of goods and services fell at a rate of 31.4% in the April-June quarter and, despite an expected strong rebound, GDP is set to still shrink by around 4% this year, with millions of people permanently unemployed and business bankruptcies at record levels. To make matters worse, many uncertainties mark the path of the recovery.

First and foremost, at the time of writing, we still do not know who will win the presidency, and the person who gets the job could make a difference for a number of reasons. Under Donald Trump’s presidency, markets have rallied and the President has repeatedly boosted that a great year is going to come after the pandemic. The truth is, though, that America’s growth does not need a hyper capitalized Wall Street, but stronger salaries, a fairer tax system and cracking down on inequalities across the country. This is a matter of enhancing economic power at all levels in a virtuous circle.

The World Trade Center building stands over an emptied 7th Street in New York City, March 2020

 

America has fostered islands of richness that physically exclude those who are marginalized from the new gold rush – the digital revolution, the financial sector, the tourism carnival. San Francisco and New York City provide clear examples of such marginalization, and its consequences. The pandemic has brought many to leave the cities for smart working in less populated and less expensive places, depriving metropolises already brought to their knees by social unrest, human costs and the financial strain due to medical challenges. This could translate – and possibly will in New York City – into a need for a federal bailout, which President Trump is not willing to concede. If we multiply this dynamic by a number of cities and counties around the country, we will face a harsh scenario for economic recovery.

The man in the Oval Office will also have to take some urgent and rapid decisions on climate policies and related investments. The future president will have to decide whether to finally align the United States with most of the rest of the planet (including oil sanctuaries such as Saudi Arabia), acknowledging that the world in 20 years will be reaching its oil consuming peak and then shifting to green sources.

In September, the Business Roundtable, representing corporate America, said it supported carbon pricing. A green new deal, similar to the one Ursula von der Leyen is proposing in Europe, could unleash massive infrastructural investment, which the United States desperately needs – not least to boost its recovery. But, again, views on those issues vary greatly between the two contenders for office.

The stimulus bill currently held hostage for political gambling also adds to the uncertainty: Trillions of dollars in government aid to households and businesses has already dried up, and without a second injection it is hard to see events turning around. According to data provided by the digital platform Yelp, nearly 163,700 businesses represented on the platform have closed since the pandemic outbreak in March, 60% of which are not planning to reopen. Around 12.6 million people were unemployed in September, 7.9% of the working population. There were 6.8 million in February, before the COVID-19 outbreak. In the absence of a vigorous stimulus package, it is hard to see how to fix it.

Nonetheless, in order to launch the bill, some degree of harmony and common goals are needed in the political spectrum, as happened in 2008 when George W. Bush and Barack Obama agreed on the Troubled Asset Relief Program. This is quite the opposite of the current situation, with the serious risk of not having an elected president in office due to a foreseeable legal war.

Even if a newly reinvigorated America were to bounce back to pre-COVID-19 output levels, it is difficult to imagine who would be buying on the global market. Most of the world is struggling to recover from the economic consequences of the pandemic, and whatever space is left for exports and attracting investments has been forcefully occupied by China, the first nation to recover from the coronavirus.

It is worth to say that this scenario is the consequence, at least to some extent, of foreign policy choices undertaken first by Barack Obama and then reinforced by Donald Trump: the withdrawal from many strategic areas, such as Africa and the Middle East, left a void that is now filled by China.

Last but not least, in this discouraging list of uncertainties, for both the economy and democracy, we do not know how long the coronavirus will stay with us, impeding the economy to regain strength. Industries and businesses already devastated by the crisis will have to reinvent themselves: Airline passenger traffic remains at about a third of pre-pandemic levels; restaurants, according to data provided by OpenTable, are 42% below last year’s levels. Industries are affected by restrictions and money shortages, which could change sometime along the way, if the health crisis will improve. But the psychological effects of the pandemic – the fear of sitting close to a stranger, to name a very easy one – will persist, affecting a broad range of business, from ride hailing to tourism.

 

Such psychological adversities can be overcome – and this has happened in the past, such as in the aftermath of the 9-11 attacks – if there is a strong government response, injecting trust and confidence in the population. A strong administration is also needed to face the challenges posed by the new tech giants and their dominance over the American economy: The digital sector is by far the only one enjoying true momentum, as market capitalizations show. Its strength, though, often collides with the need of more open, fully competitive markets: Antitrust laws are essential to opening up the country to fresh energies and ideas.

It is not easy to imagine a solid, undivided administration any time soon. Or, at least, soon enough to give us some reassurance on a recovery that should pave the way for a real transformation of the American economy, for the better.