On Tuesday, as Biden introduced his economic brain trust in Wilmington, Del., Yellen labeled the pandemic recession “an American tragedy” and urged a swift response. “It’s essential that we move with urgency,” she said. “Inaction will produce a self-reinforcing downturn causing yet more devastation.”
The Biden team’s push for government borrowing to fill the pandemic-size hole in the economy also reflects a broader shift in some leading economists’ view of public debt. By cutting interest rates to near zero — and all but exhausting its conventional tool kit — the Federal Reserve has made such borrowing more attractive and left the nation’s fiscal authorities in Congress with a greater role in propping up the economy, they say.
But prominent Republican lawmakers are balking at Democrats’ $2 trillion proposal for additional pandemic relief, saying annual budget deficits that add to the government’s debt bulge must be trimmed.
At stake in the debate are the hopes of millions of jobless Americans for an early return to the workforce along with the economy’s long-term health, economists said. Failure to provide additional government stimulus would probably drag out the recovery, threaten more small businesses with closure and force state and local governments to proceed with major layoffs, economists said.
“We need a bridge to the vaccine, and fiscal stimulus can provide that bridge,” said Nathan Sheets, chief economist for PGIM Fixed Income. “Are there issues in the long term with the level of debt? Yes, but we need to make it through these short-term challenges with the economy intact.”
When the pandemic hit in March, Congress and the administration moved quickly to provide roughly $3 trillion to cushion the blow. But subsequent talks over additional money for extra unemployment benefits, small-business loans, and budget aid for state and local governments have run aground.
Prospects for resolving a months-long stalemate between the two parties may turn on the outcome of two Senate runoff elections in Georgia on Jan. 5. If Republicans win at least one of the two seats, as expected, they will retain control of the Senate, dimming hopes for an additional multitrillion-dollar measure.
“The politics of a divided Washington are going to make it very difficult to agree on much of anything,” said Eric Winograd, senior economist for fixed income at AllianceBernstein in New York. “Republicans in the Senate seemed reluctant to pass more stimulus when there was a Republican president. They are likely to be even more reluctant with a Democratic one.”
Indeed, Sen. Lindsey O. Graham (R-S.C.), slated to chair the Senate Budget Committee if Republicans maintain control of the upper chamber, told reporters after the Nov. 3 election that he wants to “finally begin to address the debt.”
Likewise, Sen. John Thune (S.D.), the No. 2 Senate Republican, said he expects to focus next year on curbing spending on entitlement programs, adding: “I think that’s kind of getting back to our DNA. … I think spending, entitlement reform, growth and the economy are all things that we’re going to have to be focused on.”