President Biden And The 2021 Economy

The mainstream media would have us believe former Vice President Joe Biden will be inheriting a badly damaged, COVID-riddled economy which may struggle for years to recover. Many in the media claim Biden will take over an economy much like the one Barack Obama had when he took office in January 2009, following the 2008 housing bust and subsequent financial crisis.

Mr. Biden echoed this dismal economic assessment during the campaign because it made President Trump look bad and inept. But that’s simply not true. In fact, Joe Biden will be inheriting one of the strongest economies in years – if we get the COVID-19 pandemic under control in the first half of 2021 as is expected.

The current economic cycle is in no way like the one President Obama inherited and may be poised for a rapid rebound in 2021 and beyond, assuming we get the much-heralded COVID vaccines just ahead. Here are some major reasons for such optimism about the economy.

First, there is nothing fundamentally “broken” in the economy that needs a long time to heal. And unlike the last two recessions, there was no obvious financial bubble driving excessive activity in any one economic sector when the pandemic hit early this year. There is no excessive investment that must be unwound, and the financial sector has escaped largely unharmed.

Second, the indiscriminate nature of the shutdowns this past spring provides the economy with a solid base from which to grow. The economy collapsed in the spring because, in the effort to get ahead of the virus, we shut down over a third of all businesses for several months.

This created a lot of opportunities to rebound when the unnecessary causalities of the shutdown came back online and began to grow despite the virus. That process will continue and should even strengthen once the virus is on the decline.

Third, household balance sheets were not crushed like they were in the last recession. Instead, the opposite occurred. Reduced spending, fiscal stimulus, rising home prices, and a buoyant stock market have all helped push household net wealth above its pre-pandemic peak.

Fourth, the demographics are incredibly supportive of growth. During the last recovery, the economy was still adapting to the Baby Boomers retiring from the workforce, with a much smaller cohort of Generation X’rs behind them. The larger Millennial generation was just entering college at the time.

Now, the Millennials are entering their prime home-buying years in force and will be moving into their peak earning years. The resulting strength in housing is fueling higher home prices and durable goods spending, and we are just at the beginning of this mega-trend. Housing activity should hold strong for the next four years and even longer.

Fifth, household savings have grown by more than a $1 trillion, this year alone, providing the fuel for a hot economy on the other side of the pandemic. Sooner or later, that money is going to come out of savings and go into the economy, and I expect much of it to flow into sectors like leisure and hospitality where there is considerable pent up demand.

Finally, I believe US consumers will feel much more confident when the election is settled, whichever way it goes. While the 73+ million Americans who voted for President Trump won’t be happy if Joe Biden prevails, as looks increasingly likely, I believe they will return to their old spending habits before long.

And the 79+ million who voted for Mr. Biden are obviously elated and should be increasing spending just ahead as well. Thus, the economy Mr. Biden will inherit looks very strong indeed, once COVID is on the decline next year.

While the presidential election should be certified by this time next month, we won’t know the balance in the Congress until January 5 (or a day or so after) when the runoffs for two Senate seats in Georgia are settled.

Remember, the Republicans have to win one of those two Georgia runoffs to maintain majority control in the Senate. If the Democrats win both those races, then the Senate will be split 50-50, which means Vice President Kamala Harris will be the tie-breaker – thus giving the Dems control of the Senate.

These are the two most important Senate races in decades. If the Dems win them both, that means total Democratic dominance in Washington – the Senate, the House, and the White House – and President Biden will be able to implement the most liberal elements of his agenda.

Those include raising the corporate income tax significantly, raising taxes on high-income individuals and families, doubling the capital gains tax rate, some type of Medicare For All, and significantly increased government regulations on business – just to name a few.

A new study from the Hoover Institute released last week concluded that if President Biden is successful in implementing these policies, they will have a damaging long-term impact on the economy. I will summarize the Hoover Institute study for you next week.

Disclosure: None. 

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