Page 8 - ISQ January 2021

INVESTMENT STRATEGY QUARTERLY

“ The Fed’s employment goal has been made ‘broad-based

and inclusive.’ Low unemployment significantly benefits low-income
communities. The Fed will no longer tighten because unemployment
falls to a certain level. ”

ending in September, vs. 2.7% in the year before. Productivity figures will look ahead to the 2022 mid-term and 2024 elections. Still, we
have also been distorted by the loss of low-wage, low-productivity should see more cooperation on the world stage.
jobs, but assuming a moderate underlying trend of 1.0-1.5% implies
little inflation pressure from labor costs. LESSON LEARNED

The incoming administration will likely focus on healthcare issues, The study of past pandemics shows that economic activity eventu-
preventing the spread of the virus and distributing vaccines. Economic ally recovers after the crisis has passed. Importantly, we should be
policy efforts beyond that will depend on the makeup of Congress, better prepared for the next one.
but we are unlikely to see major tax increases or big spending plans
(other than immediate pandemic-related support). If, as expected,
social distancing remains elevated in early 2021, economic growth KEY TAKEAWAYS:
will be weaker. Federal aid should focus on supporting the long-term • Most likely, the level of GDP will match the fourth
unemployed and small businesses. quarter of 2019 level by the middle of 2021, but that
will still leave us below trend (that is, without the
Federal support will also be important for state and local govern- pandemic, output would have been growing due to
ments, helping to ease budget strains from lost revenue. These population growth and productivity gains).
strains were a significant issue in the 2008 financial crisis, despite
federal aid in that recession, and dampened the pace of growth • Fiscal support was critical in offsetting the worst of
in the early years of the economic recovery. State and local the pandemic, but it added to the federal budget
governments employ about seven times as many workers as the deficit, which had been trending at $1 trillion per year
federal government. In the recovery from the financial crisis, we before the pandemic.
lost teachers, police and fire personnel, and had only reached • At some point, lawmakers should work to have fed-
the pre-crisis level of state and government payrolls in the year eral debt rising no faster than nominal GDP, keeping
before the pandemic. the debt to GDP ratio stable or declining over time;
however, now is not the time.
The Biden administration will have a longer-term focus on issues
such as climate change, income inequality, and antitrust regula- • Federal aid should focus on supporting the long-term
tion. Trade policy was a major issue in the Trump administration. unemployed and small businesses. Federal support
Tariffs are paid by US consumers and businesses. They raise costs, will also be important for state and local governments,
invite retaliation, disrupt supply chains, and add uncertainty, helping to ease budget strains from lost revenue.
dampening business investment. Tariffs may be rolled back, but
bashing China plays well politically, and the folks in Washington

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