Page 10 - ISQ October 2020

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Economic Outlook:

Through the Pandemic and Beyond November

Scott J. Brown, PhD, Chief Economist, Raymond James

Many factors feed into the relative strength or weakness While the increase in government borrowing is worrisome to
of the US economy, but the president traditionally many, the real danger is not doing enough to support the
economy in the near term and ending support too soon. The gov-
receives the credit or blame. Fiscal policy – taxes and
ernment is nothing like a household. The federal debt does not
government spending – have an important role in eco- need to be paid off. The government has no problem borrowing.
nomic activity, and confidence can drive consumer However, the federal budget was on an unsustainable track
spending and business investment decisions. However, before the pandemic. The national debt was rising faster than
nominal GDP. To get back on a sustainable trajectory, with debt
Congress controls the purse strings. The president does
rising no faster than GDP, we’ll need more tax revenue or less
not have the ability to fine tune the economy, but who- spending. These will be difficult choices. Prior to the COVID-19
ever wins the White House will face a number of pandemic, non-defence discretionary spending (which excludes
challenges in dealing with an ongoing pandemic and Social Security, Medicare, defence, and interest rates) was just
record levels of government borrowing and spending. 2.8% of GDP.

FACTORS OF THE RECOVERY
THE FEDERAL BUDGET DEFICIT
The cornerstone of the Trump administration’s economic pro-
gram was the Tax Cuts and Jobs Act of 2017 (TCJA), which What happens in 2021 depends on more than
lowered the capital gains tax rate and reduced federal tax rates who wins the White House.
for most households and businesses, but also restricted deduc-
tions. The drop in the capital gains tax rate was meant to spur
capital spending, but business borrowing costs were already What happens in 2021 depends on more than who wins the
low and firms were already generally flush with cash before it White House. During the Clinton years, a divided government led
was signed into law. While some households paid less in taxes, to a budget surplus. Republicans didn’t get big tax cuts. Demo-
the reduction in deductions meant that others paid more. GDP crats didn’t get big spending increases. In contrast, in the current
growth in the first three years under Trump was not much dif- situation, a divided government makes it harder to get things
ferent than in the final four years under Obama. TCJA added done. One party rule (the same party controlling the White House
substantially to the federal budget deficit, which exceeded $1 and both chambers of Congress) will most likely lead to higher
trillion in the 12 months prior to the pandemic. taxes or cuts to entitlement programs, depending on the out-
come.
Fiscal support to address the impact of extreme social distancing
added further to the deficit, bringing the 12-month total to nearly The Federal Reserve will continue to do its part beyond
$3 trillion in August. In any downturn, fiscal policy can play an November, keeping short-term interest rates low, through 2023.
important role in reducing the damage. Without it, temporary The Fed’s recent changes to its stated policy objectives had
impacts can lead to more permanent damage. Businesses fail. already been underway in practice over the last couple of years.
Workers lose job skills. However, in applying fiscal support, there Specifically, the adoption of a flexible average inflation targeting
are always questions of how big it should be and how long it framework means that policymakers will allow inflation to
should last. Ideally, the degree and timing of support should exceed the 2% goal following a period of inflation below 2%, but
depend on measures of job distress, such as the unemployment this will not be done in a mechanical way. Judgement will drive
rate. However, lawmakers have not been able to agree on that. policy decisions.

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