President Trump has withdrawn from talks with Democrats in Congress about another economic stimulus package, saying they are asking for too much money for profligate liberal cities and that after he wins reelection, he will turn to passing a great package that will support small businesses. But let’s be real: Trump is very probably about to lose this election, at which point he is unlikely to have any enthusiasm for shoring up the economy as Joe Biden prepares to take office on January 20, 2021. This means the passage of another meaningful stimulus package will likely have to wait for late January, at the earliest, leaving the economy without additional aid for nearly four months, even as the expiration of CARES Act relief and the persistence of elevated unemployment cause household finances to deteriorate. It’s bad news for the country.
But Biden and Democrats can mitigate this problem by taking a page from the Federal Reserve. The Fed uses a practice called “forward guidance”: It makes statements about what it will do in the future in order to influence the economy today. If and when Democrats win the election — if they take the presidency and both houses of Congress, which appears to be the most likely outcome — they won’t have an immediate ability to enact legislation, but they can immediately start making commitments about what legislation they will pass, and those commitments can start helping the economy right away by giving economic actors clarity about what resources will be available to them come winter.
The biggest missing piece from the CARES Act was truly extensive aid to state and local governments to address the budget shortfalls they face from plummeting tax revenues and added COVID-related expenses. To a large extent, those governments have postponed hard decisions about how to close budget gaps, instead borrowing money and drawing from their rainy-day funds, waiting with the expectation that federal aid will eventually make them whole. If Democrats commit in November to a size and structure for an aid package they will plan to pass in January and February, that will give many of these governments the confidence they need in order to continue postponing layoffs and deep budget cuts.
Federal Reserve chairman Jerome Powell has been warning lawmakers, including in a speech today at the National Association for Business Economics conference, about the need for added fiscal support of the sort that would come in another relief package of the sort that the president killed today. If Democrats commit to passing such a package after the transition, the Federal Reserve can help manage the need to wait until then by increasing its commitment to lend money to state and local governments as they wait for aid — a move that would probably be too politically divisive before the election but should be feasible afterward if Democrats have won.
Commitments from Biden, Nancy Pelosi, and Chuck Schumer about aid to households and businesses can also help the economy by helping people to plan. It would give them the confidence that they can spend and not worry about running out of money next year, and show businesses in particular that they have good reason to hang on and stay open because help is on the way. A forward commitment is not as good as actual aid: While household savings rates improved through the early part of the crisis due to extensive federal payments and reduced household expenses, they vary from family to family. Not everyone has the option to borrow or draw down on savings as they wait for assistance to come months from now, nor does every business have the financial reserves it needs to wait a few more months. But a lot of families and a lot of businesses do have these resources, and inducing them to keep spending and keep operating can do a lot to keep the whole economy afloat.
If and when Biden wins, he’s likely to be entering into a transition with a Trump who has even less interest in maintaining the good functioning of the economy and the country that he shows today. It is going to be a difficult transition. But by making plans and commitments about what he will do when he takes office, Biden can start the healing right after he wins, even if Trump is uncooperative.