Foreign Policy

Outlook for 2021: a fast restoration, however a lot of new financial issues

With 2020 passing like a bad dream and COVID-19 vaccines being distributed en masse, many economists believe that the global economic recovery in 2021 could prove to be the fastest in decades. But the pandemic and associated lockdowns will leave a grim legacy that could take decades to overcome, not least of which is worsening income inequality that is likely only to reignite populist politics in the United States and other major nations.

And even the election of Joe Biden as the next US president, an avowed internationalist, will not be enough to ward off the structural threats that still affect the economies of the United States and other developed nations. The 74 million Americans who voted for Donald Trump and the protectionist, neo-nationalist policies they both advocated are not disappearing – nor are the serious social and economic problems that underlie them.

After a bleak year in which almost every major economy contracted – with the exception of China – most economists expect growth to pick up again in 2021. According to the International Monetary Fund, global growth of 5.2 percent is forecast for this year. Other economists expect this year to be the countries with the strongest performers that imposed heavy lockdowns in 2020, led by the UK and Spain. For its part, China returned to economic growth last year and is expected to return to moderately strong GDP growth this year.

In the United States, after a devastating summer, the predictions are for a major rebound. "I expect we will see a significant economic recovery unless vaccination is screwed up or slowed down," said Andrei Shleifer, a senior economist at Harvard University. “I hope Biden concentrates on that and is otherwise very boring in the first few months, so that the minds and emotions calm down a bit. COVID is a great achievable victory for him in the next six months. Why should he do anything else? "

The fact is, Biden is unlikely to be able to do too much – both because of the potential of Republican obstructionism and because of the development of his own economic thinking since serving as Vice President of Barack Obama. Only after the January 5 runoff elections in Georgia will Biden know whether the Republicans will retain control of the Senate – essentially blocking its economic agenda – or whether the Democrats can wrest control and open the door to progressive legislation like a new tax Open tax credits earned on the rich and advanced.

But even if Biden has a relatively free hand, the new administration has already signaled that it will not simply revert to the centrist, blatantly pro-free trade policies of the former Democratic presidents. A once highly respected trade pact like the 12-nation Trans Pacific Partnership, which many economists saw as a much more effective way of pressuring China than Trump's trade war, may no longer be salvable in the US. (It's still a smaller pact with eleven nations without Washington's involvement.) And Biden has also expressed his support for protectionist measures like the "Buy American" legislation, suggesting that he would be willing to abolish Trump's China tariffs – at least initially – to maintain.

"We expect Biden's trade policy to break with the last four years, but not a return to the free trade agenda before 2016," Oxford Economics wrote in a recent report. "Big deals like NAFTA under Bill Clinton or the Trans-Pacific Partnership under Barack Obama have become unpopular across the political spectrum, which is likely to mean that President-elect Biden is far less for trade than he is as Vice-President."

If Trump's rise was fueled in part by income inequality, which worsened after the last recession in 2008-2009, when Wall Street was bailed out while middle-class homeowners didn't, then the ongoing inability to address those issues leads to problems resolve political issues – particularly in the US after unprecedented economic turmoil during the pandemic.

"The pandemic and recent recession have made the problem worse," said Mark Gertler, an economist at New York University. Those employed in white-collar jobs, such as those in the already high-paying tech sector, performed fairly well, while low-income workers, particularly in the service industry, scored the worst. Although department stores and grocery stores remained largely open, other retail, grocery, hospitality, entertainment and leisure industries suffered the biggest blow, affecting a much larger segment of the already suffering middle class, many of whom are also facing higher health insurance costs.

In a recent report, Massachusetts Institute of Technology economists David Autor and Elisabeth Reynolds conclude that the COVID-19 crisis is "causing economic pain in the short and medium term for the least economically secure workers in our economy, especially for the rapidly growing, but never exacerbated, high-paying service sector. "

Rather than promise a big boom after the COVID-19 recession, "the economy may be too sideways to fully recover," Gertler said. "We still lost 10 million jobs and no immediate new incentive."

Just before the New Year, Trump signed a new $ 900 billion COVID-19 bailout package after months of stalemate – and it happened exactly as the benefits of the previous $ 2 trillion plan expired at the end of the year. An expansion of unemployment insurance and a moratorium on evictions and debt settlements will alleviate some immediate pain and remove some of the worst effects of inequality – but they will not address the underlying problems, particularly due to the pandemic-triggered recession, unlike most previous ones Downturns left the rich untouched.

“I'm concerned about the longer term downside risk. The millions of people who have lost a ton of wages – I'm not sure they will come into the post-pandemic world with a ton of financial resources. And I'm worried their spending won't go up, ”said Wendy Edelberg, a former chief economist with the Congressional Budget Office. “I worry that we've lost hundreds of thousands of small businesses. In a typical recession, even those who keep their jobs will see an impact on their wealth and long-term earnings. This recession was unusual in that wealth went unpunished . "

The most likely outcome: an even greater social polarization, such as that led to the rise of Trump and other nationalist demagogues.

The picture is similar in Europe. Admittedly, the European Central Bank and the European Union rushed to put together a massive bailout early on by adopting a new EU budget that alleviated the immediate economic threat and helped bridge the gap between northern and southern Europe. But the second wave of the pandemic, including a new round of lockdowns, closed businesses, and rising unemployment, poses problems similar to those in the United States.

"The EU had a pretty good year compared to the US. Even so, the second outbreak of the pandemic was not handled very well, with more unrest and resentment," said Harold James, Princeton University political economist.

And that doesn't even count the almost certain disruption caused by Brexit. As December ended, the UK and the EU signed an eleventh hour trade agreement that regulates their future relationship. The pact does not impose tariffs or quotas on goods and British Prime Minister Boris Johnson declared it a great victory. However, the long-belated Brexit deal, largely approved by Parliament on December 30th, does not appear to cover services such as finance, which account for the vast majority of the ailing UK economy and most of its trade with the EU. Nor will British citizens enjoy their previous rights to live and work in the EU. And the EU still has trade and economic battles with Washington that cannot be resolved with a Biden wand.

"It would be a long way off for the EU or the UK to believe that they have a very special relationship with Biden," said James, who specializes in transatlantic relations. The Europeans, who saw US politics as a whole turned upside down in Trump's first term, now know how short-lived the promises of even a committed internationalist can be – and they have 74 million memories of the possibility of another whiplash in the near future . And no matter how much Biden wants to bring Europe to justice in trade disputes rather than beat it up, Brussels just has different priorities.

“The great Atlantic tensions will be competition and technology policy. The EU has a much more aggressive campaign against the big tech giants (liquidation and fine) than the US is ready, ”James said despite recent federal lawsuits against Facebook and Google.

And there is another terrifying economic legacy from the pandemic that could pose a major challenge for Biden in the future. Months of virtual work during the pandemic has begun to change work patterns, which will ultimately have a disproportionate impact on the already struggling working classes.

"There will be some significant shifts in where the jobs are," said Edelberg, now the terribleHead of the Hamilton Project at the Brookings Institution. "We will not unlearn all new business methods after the pandemic. There will be a lot more remote working, a lot less business travel and there will likely be a lot more automation in different sectors."

Or, as Oxford Economics recently wrote in another report, "The trauma of lockdown may encourage companies to use more labor-saving technology to limit future disruption from social distancing."

This includes, for example, more automated pay machines in stores and other retail stores, accelerating the need for millions of workers to move into new sectors. This, in turn, will create the need for large federally funded retraining programs – exactly what has been conspicuously absent in recent decades when both Democrats and Republicans underestimated the devastating effects of globalization and technological advancement on the industrial working class.

The Biden transition team has made it clear that ambitious retraining programs as well as a meaty infrastructure bill that could rebuild a crumbling nation and serve as a fiscal stimulus are high priorities. However, the new president will have a harder time pushing through progressive tax laws, such as his proposed new tax on the rich, expanded earned income tax credits, and new tax credits for health insurance, childcare, elderly care and home ownership.

With ultimate control of the Senate still uncertain, will Biden have the political clout on Capitol Hill to make all of this possible? Or will the political deadlock mean another lost decade of growing inequality, political polarization, and ultimately a renewal of Trumpism?

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