The writer is president of Queens’ College, University of Cambridge, and adviser to Allianz and Gramercy
The US presidential vote that concluded last night was still too close to call on Wednesday morning. It may well remain this way for a while. Yet — and, I suspect counter-intuitively for many — regardless of who ultimately wins, three things are clear at this stage that spell trouble for the US economy, and well beyond that.
The 2020 election has confirmed that the US remains a deeply divided country facing mounting challenges that threaten both this and future generations. Despite a collective wake-up call in the form of a severe health and economic crisis, the country seems both unwilling and unable to embark on the decisive measures needed.
The unwillingness comes from fundamental differences of views on how best to pursue economic and financial reforms while urgently dealing with the threats from Covid-19. The inability is due to a probably divided Congress, where the damage of the past few years to the most basic of cross-party working relationships has been accentuated by the past month’s rush to approve a new Supreme Court justice.
What is at risk here is not just the longer-term oriented reforms seeking to limit another move down in productivity, yet more household economic insecurity, and a worsening in inequality. Also at risk is the short-term health and economic effort to help the nation recover from the considerable damage that the first Covid-19 wave left in its wake.
Second, the deep divisions also mean that the second wave that is now gaining more momentum is likely to get a lot worse before a turnround is even in sight. A deeply divided configuration of individual states is likely to adopt varied responses to a virus that is common to them all and knows no geographic borders. With the centre initially unable to impose a uniform approach, even if it wanted to, the US is likely to repeat the experience of the UK, in which regional approaches fail. What followed there were widespread lockdowns needed to protect the health system and restore a workable test-and-trace system overwhelmed by ever-rising infections, hospitalisation and tragic deaths.
Third, the Federal Reserve will be pushed yet again to do more with increasingly ineffective and inevitably distortionary policy tools. The traditional monetary policy mindset will continue to give even more ground as the Fed faces pressure to insure risks that are difficult to price, let alone underwrite properly.
This venturing into even bigger experimental unconventional monetary policies will do little to genuinely stimulate the economy. Instead, it is likely to create further distortions in financial markets, increase incentives for irresponsible risk-taking and lead to the misallocation of resources throughout the economy. This will heighten the threat of financial instability. In the process, the already large disconnect between Main Street and Wall Street will widen, adding political and social challenges.
These three real and present challenges for the US economy translate into a more difficult outlook for both the short and longer term. It means less dynamic supply and less buoyant demand. The growth in the economic pie will not just be less than what’s needed. It will also fall short of what the two sides of the political divide believe is possible under their different approaches, fuelling a messy blame game that will further undermine the social fabric.
The US plight is also problematic for a global economic recovery that is now more likely to become more uneven and more uncertain. America’s internal divisions will preclude the early resumption of its traditional role in informing, influencing and sometimes imposing outcomes in multilateral economic co-ordination forums. They will also increase the risk of deglobalisation and the further weaponisation of economic and investment tools.
Regardless of who ultimately wins this nail-biting election, a politically divided US means a more challenged domestic economy at a time when a second Covid-19 wave is already disrupting activity in much of the west. Eventually, the science will force politicians to act but the risk of economic and financial disruptions is rising considerably.
Ultimately, the combination of another health emergency, a weakening economy and increased financial instability will force the US government into decisive action — but not before considerable damage to the lives, livelihoods and mental wellbeing of this generation, and perhaps future ones as well.