News and Analysis
Yesterday, vice-chairman of the Board of Governors of the Federal Reserve, Richard Clarida, reiterated the Federal Reserve’s call for continued stimulus spending to reboot an American economy severely slowed down by a government-ordered commercial lockdown resulting from efforts to stem the virality of Covid-19. In describing combined fiscal and monetary efforts to reboot the economy, Mr Clarida shared the following:
“Although spending on many services continues to lag, the rebound in the GDP data has been broad based across indicators of goods consumption, housing, and investment. These components of aggregate demand have benefited from robust fiscal support—including the Paycheck Protection Program and expanded unemployment benefits—as well as low interest rates and efforts by the Federal Reserve to sustain the flow of credit to households and firms. In the labor market, about half of the 22 million jobs that were lost in the spring have been restored, and the unemployment rate has fallen since April by nearly 7 percentage points to 7.9 percent as of September.”
Mr Clarida challenged naysayers who had argued that interest rate cuts, asset purchases, and loan programs would not facilitate growth in gross domestic product by reminding them that the unemployment rate has fallen almost seven percentage points since April and that the labor market has replaced almost half of the 22 million jobs lost last spring. But even at this rate of progress, Mr Clarida made it clear that it may take another year before the American economy gets back to its previous 2019 peak.
The Federal Reserve’s decision to modify its inflation target policy, where inflation may be allowed to run moderately over two percent and federal funds rates remaining relatively unchanged (0 to .25%) over the next three years, is expected to result in an unemployment rate of four percent and inflation returning to two percent.
Assuming the polls hold and Joe Biden is able to take over the Oval Office on 20 January 2021, a first glance expectation is that Mr Biden will pursue spending bills that, in addition to increases in transfer payments, will increase pools of public capital available for access by private firms or private-public partnerships. Mr Biden’s “Build Back Better” initiative appears, in theory, to call for creating these opportunities.
One potential area for increasing pools of public capital is the financing of energy infrastructure projects. According to language from his campaign platform:
“Biden will immediately invest in engines of sustainable job creation – new industries and re-invigorated regional economies spurred by innovation from our national labs and universities; commercialized into new and better products that can be manufactured and built by American workers; and put together using feedstocks, materials, and parts supplied by small businesses, family farms, and job creators all across our country.”
Mr Biden may not have much re-creating the wheel to do. The United States Department of Energy has a number of financing programs in place that can be used to finance these endeavors. For example, the federal government offers what it calls a “Small Business Toolbox” that helps small businesses, no matter their experience level with government contracting, navigate the requirements for financing.
Mr Biden will have to finance these procurement programs so that these programs can turn around and finance the private companies ready to carry out the federal government’s energy infrastructure agenda. If the Federal Reserve remains on its modified inflation glide path, Mr Biden will have three fiscal years of low interest rates to borrow the funds necessary for his energy infrastructure plans and create the collateral employment of labor that may come along with it.
Mr Biden is likely praying that the “blue wave” narrative, where the Democratic Party sweeps the White House and the Congress, comes to fruition in November. With both chambers of Congress under Democratic control, there may be greater ease at delivering the necessary government financing for his initiatives. If he learned anything from the Obama administration’s first term in office, it is the need to move fast during his first two years to secure the necessary spending bills.
If Mr Biden does not get the “blue wave” then he will have to apply his ‘across the aisle” skills to get Republican senators to buy into his infrastructure plan.
Meanwhile, America is going through a structural employment shift, one that many wage earners will not recover from. Shrinking tax bases due to lower labor force participation and increased tax bills for those who are still working but making less money doth not make a certain second term.