A divided electorate means trouble for the US economy

A divided electorate means trouble for the US economy

The author is President of the University of Cambridge’s Queens’ College and an advisor to Allianz and Gramercy

Following the vote with the US President, three things are currently clear that pose problems for the US economy, and far beyond.

The 2020 elections confirmed that the US remains a deeply divided country, facing growing challenges that threaten both this and future generations. Despite a collective wake-up call in the form of a major health and economic crisis, the country appears unwilling and unable to take the crucial action needed.

The unwillingness is based on fundamental disagreements about how best to carry out economic and financial reforms while urgently addressing the threats posed by Covid-19. The inability stems from a likely divided Congress, where the damage to the most basic bipartisan labor relations in recent years has been compounded by last month’s rush to approve a new Supreme Court Justice. If Joe Biden takes over the presidency, it could be a difficult time before he moves into the White House. It is unlikely that there will be much collaboration between the Trump administration and its successor, adding to uncertainty over the next few months.

What is at risk here are not only longer-term reforms aimed at limiting further decline in productivity, but also economic uncertainty in households and worsening inequality. Also at risk are short-term health and economic efforts designed to help the nation recover from the significant damage caused by the first wave of Covid-19.

Second, the deep divisions also mean that the second wave, which is now gaining momentum, is likely to get much worse before a turnaround is in sight. A deeply divided configuration of individual states is likely to react differently to a virus that is common to all and knows no geographical borders. Since the Center was initially unable to impose a unified approach, even if so desired, the US is likely to repeat the UK experience where regional approaches fail. What followed were widespread lockdowns needed to protect the health system and restore a functional test-and-trace system that was overwhelmed by the ever-increasing number of infections, hospitalizations, and tragic deaths.

Third, the Federal Reserve is again being urged to do more with increasingly ineffective and inevitably biased policy instruments. Traditional monetary policy thinking will continue to give even more ground under your feet as the Fed is under pressure to insure risks that are difficult to assess, let alone properly underwrite.

This interference in an even larger experimental unconventional monetary policy will do little to really stimulate the economy. Instead, it is likely to create further distortions in financial markets, increasing the incentive to take irresponsible risk and misallocating resources across the economy. This will increase the risk of financial instability. In doing so, the already great divide between Main Street and Wall Street will increase and add political and social challenges.

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These three real and current challenges for the US economy create tougher prospects in the short and long term. This means less dynamic supply and less lively demand. The growth of the economic pie will not just be less than necessary. Nor will it achieve what the two sides of the political divide believe is possible under their different approaches, leading to a chaotic guilt game that will further undermine the social fabric.

The plight in the US is also problematic for a global economic recovery, which is now more likely to become more uneven and uncertain. America’s internal divisions will prevent its early resumption of its traditional role of informing, influencing, and sometimes imposing outcomes in multilateral economic coordination forums. They will also increase the risk of deglobalization and the further arming of economic and investment instruments.

Regardless of who ultimately wins this exciting election, a politically divided USA means a challenging domestic economy at a time when a second wave of Covid-19 is already disrupting activity in much of the West. Ultimately, science will force politics to act, but the risk of economic and financial disruption increases significantly.

Ultimately, the combination of yet another health emergency, a weakening economy, and heightened financial instability will force the U.S. government to take decisive action – but not in the face of significant damage to the lives, livelihoods, and mental well-being of this generation, and possibly future ones.

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