Republicans Find Religion — Deficits are Bad
Author: Greg Valliere
November 24, 2020
THE REMARKABLE JANET YELLEN will easily win Senate confirmation as the next Treasury Secretary, but she will quickly encounter an old mantra from Republicans — deficit spending must be curbed.
YELLEN IS A MONETARY DOVE, and she won’t be reluctant to spend more money if the economy hits a soft patch in the first quarter. But the Democrats’ limp performance in House and Senate races has greatly diminished chances for a massive new pandemic spending bill.
GET WHAT YOU CAN: Democrats are increasingly resigned to getting only a modest stimulus bill — no more than $1 trillion — in the lame duck session. As we wrote yesterday, there’s a decent chance of enacting a bill before Christmas that would deal with the basics: the need to extend unemployment aid, support small businesses, etc.
A CONSENSUS SEEMS TO BE FORMING among Congressional Democrats — take what you can get now, then perhaps shoot for more after Joe Biden’s inauguration if the economy needs help before vaccines arrive.
BUT EVEN IF DEMOCRATS TAKE THE SENATE in a 50-50 tie after the Jan. 5 Georgia runoffs, the party may have to grapple with two moderates: Joe Manchin of West Virginia and Jon Tester of Montana. They will have enormous clout and they surely won’t support a massive stimulus bill.
WE’RE HEARING THAT BIDEN’S ADVISERS are telling him to take a modest package, which can pass in December with support from some Republican Senators such as Susan Collins. At some time after Thanksgiving, Biden will meet with Mitch McConnell; both are prepared to deal and we think they will get enough to keep the economy afloat this winter.
IF THE ECONOMY BEGINS TO HEAT UP by spring, the Republicans will then intensify their opposition to new spending — even though they were silent as Trump embraced huge tax cuts and new deficit spending. If Republicans retain the Senate — which is the most likely scenario — new spending will fall out of favor.
YELLEN AND JEROME POWELL will be on the same page, attempting to reverse Treasury Secretary Steve Mnuchin’s curbs on Fed lending facilities. Monetary policy will remain extraordinarily simulative, and Yellen would work closely with Powell if there’s a need for more stimulus. McConnell will be the key; he’ll embrace some stimulus, but not much.
YELLEN IS ENORMOUSLY POPULAR within the Fed, and her Keynesian view of government has widespread support among Democrats. But she will have detractors — especially the Wall Street Journal editorial page — who will want her to take away the monetary and fiscal punch bowl.
IT’S NOT TIME TO REJECT MORE MEDICINE: More fiscal stimulus is coming, but by spring an anti-spending stance will dominate the GOP rhetoric. Yellen is a brilliant and unflappable economist, but can she navigate the shark-infested political waters as spending falls out of favor?
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