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The US economy will continue to grow during the first part of the year, driven mostly by sectors that have benefited from the reallocation of resources due to the pandemic. If the incoming Biden administration does not impose greater restrictions on the U.S. economy, there will also be some recovery in areas that saw the greatest losses during 2020. The Federal Reserve’s easy monetary policy will continue, and for the time being this will fuel increased economic activity.

I usually base my yearly forecasts on indicators relevant to the business environment. Such factors (which are also used to calculate the various indices of economic freedom) include tax and regulatory policies, trade, rule of law, and monetary policy. But analyzing what will happen with the economy in 2021 will depend on factors that go beyond economic policy. The two key factors are the continued impact of the Covid-19 pandemic and the change in the U.S. administration and the composition of Congress.

The Democratic sweep of the Georgia Senate races opens the door for the adoption of several of the Biden administration’s most anti-free-economy proposals. Biden will be pressured to fulfill his promise to reverse Trump tax cuts, especially the corporate tax rate. The narrow victory will give a huge boost to the current “Washington consensus” that government spending accompanied by an easy monetary policy and increased borrowing is an elixir that can’t fail. Increased regulations will also be part of the Biden economic policy mix. Increase in taxation, however, might be delayed since, despite higher growth rates, the economy will be still very weak compared to pre-pandemic days.

Nothing in the Biden agenda is different from what many European countries have been implementing in recent years. The higher level of government spending relative to GDP, more stringent environmental regulations, higher taxes, and “quantitative easing” have not led to higher growth rates in Europe. On average, the large economies of Europe saw a bigger decline in their GDP than the US did. They will also likely recover at a slower pace than the US. The new U.K. lockdowns and the spike in Covid-19 cases in Germany should revise European growth forecasts downward. Nevertheless, in the U.S. the 2021 economy, given the 2020 decline, will likely grow at over 4%, partly in new directions and partly catching up. The potential for a rebound is there, especially if the vaccines prove effective and state and local governments begin to lift restrictions.  

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The U.S. stock market shows a good deal of optimism, as if the easy-money party can go on forever. But stocks also reflect changes in the real economy. For instance, the stock price of Tractor Supply Company TSCO (almost doubling since March 2020) reflects the general move away from large cities and the increased construction in rural areas. New investments by people working from home and by the companies that serve them, from entertainment to communication, are also reflected in rising stock prices. Such companies include Microsoft MSFT , Zoom, and DocuSign DOCU . Part of this dynamic and reallocation of resources will continue at least for the first half of 2021. Some of the new consumer and investment patterns caused by reactions to the pandemic will be here to stay, but it too early to evaluate whether it will lead to higher or lower productivity in the future.

Regarding monetary policy, rare is the analyst that does not expect a more expansionary trend. More voices are cautioning about the return of inflation, but I think we will have to wait until 2022 to see inflation pressures that are strong enough (over 3% per year in consumer price index) to lead to a change of the current mindset that monetary authorities can save us from any trouble.

Despite the increase in the trade deficit, we will see a gradual return to the pre-Trump consensus. Not that the prospects for freer trade were rosy before Trump – any proposal that leads to greater liberalization with Europe is likely to face opposition there. It seems that it will be easier to get the United States back into the Trans-Pacific Partnership Agreement than to achieve a big breakthrough with Europe.

Among Western countries, none comes close to the importance the United States in evaluating what will happen with the world economy. Globally, however, China is almost as relevant. Unfortunately, more capitalism has not lead to a freer political system in China. We saw another corroboration of this on January 6, when fifty three pro-democracy activists were detained in Hong Kong. In my piece last year about the 2020 economy, I wrote that leading publications around the world were publishing articles with titles such as “2019 was a horrible year for Xi Jinping’s China” (Le Monde). The scene has changed now and the Chinese economy is forecast to grow over 8% next year, remaining a magnet for those who want to do business and pursue profits at all costs.

In March of 2020, when it was clear that the pandemic was spreading around the world, I stated that, in the long term, the biggest danger for the free society and economy would be to see the Chinese model of a mix of communism and markets emerge victorious. If we trust the numbers, China has won. Even if they undercounted their Covid-19 deaths by a factor of 10, they would have, together with Japan, the lowest Covid-19 deaths per million. The Chinese economy is the only one in the top ten which grew last year. The power of the Chinese Communist Party can’t be measured by government spending. It can rule its mega-State without the need of becoming a Deep State.  

What are the implications of a victory of the China model for the US and the world economy? It is logical to conclude that the world of business, at least big business, will continue to work with the conviction that working with governments both here and abroad is not only consistent, but necessary for profit maximization. This alliance of large corporations and big government is what many of us call the “crony capitalist” model. Some Western countries might be able to resist the pressure, but most of the countries that have China as their main trading partner have a very weak rule of law and prevalent corruption. In those countries Chinese corporations working side by side with the Chinese government will likely dictate the terms of the most relevant business transactions.  

During economic crises it is normal to hear those responsible for economic policy say, “We are all Keynesians now.” Looking at the record highs of the stock markets during a time of dramatic political division, it almost seems that “we are all super-Keynesians now.” Although like other analysts I believe we are in an “almost-everything” bubble, when it comes to the real economy I will have to leave my pessimistic thoughts for 2022.