Why This Contentious Transition Is So Perilous for the Economy

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The worst economic crises of the last century both played out during “transition” — the period between the presidential election and the inauguration. That’s not a coincidence.

The most important transitions — ones that involving major changes of direction for the government — leave months of uncertainty over policy in the interim. Things that were already going wrong often spiral. Chaos loves a vacuum.

Unfortunately, the Covid crisis and the transition of 2020 have the clear potential to spin out of control in the same way.

The country’s major transition crises had certain elements in common: a pre-existing problem, an incumbent administration that had been criticized for its policy in dealing with it, and a presidential election ushering in a challenger calling for a sharp break from the predecessor’s approach.

The transition then left the public (and businesses and investors, too) trying to grapple with a paralyzing dilemma: “What happens while we wait for something completely different?” The answer was that the problem metastasized.

It happened in 1932. The Great Depression had worsened, and the economy and the financial system teetered on the edge of ruin. Franklin D. Roosevelt’s election promised a strong break from the policies of Herbert C. Hoover. Yet for months, while the country waited for the inauguration, Hoover remained in charge.

Hoover maintained that the Depression had only gotten worse because of people’s fear of what the incoming President was proposing to do. He attempted to convince Roosevelt to commit to continuing policies like fiscal austerity and the gold standard. But Roosevelt wanted nothing to do with him. During the standoff, the economy cratered and the financial system fell apart.

Another major crisis occurred in 2008, when President Obama won the election promising a starkly different approach from the Bush administration’s. I was part of that transition, and in December our economic team briefed Mr. Obama about the quickly fading economy. He said, jokingly: “Is it too late to ask for a recount?”

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Unlike in 1932, 2008 was an amicable and cooperative transition. Officials in the outgoing Bush administration did not undermine the incoming administration. To the contrary, they took the transfer of power seriously and did what they could to help.

Even in that circumstance, though, there were still significant disagreements in how to respond to the crisis: how the Troubled Asset Relief Program (TARP) rescue money should be spent, what conditions should be put on banks that received the money, how auto companies should be treated, and much more. People knew a change was coming but not what would happen in the interim, and they worried that no one was really in charge. The crisis escalated.

I’ve focused on economic crises, but the issue is even bigger than that. Some of the biggest political crises in the country also happened in transition. In 1860, Abraham Lincoln won the election, promising a sharp break from Democrats and the incumbent, President James Buchanan. Lincoln’s election brought tensions to a boil. States talked openly of seceding.

President Buchanan, a lame duck, announced that he did not believe the federal government had the authority to stop states from leaving. Within weeks, South Carolina voted to secede, followed by six other states, all before the inauguration. Soon after Lincoln took office, the Civil War began.

Which brings us to 2020. Even before the election, the coronavirus had surged and was raging through much of the country. The United States has had more than 140,000 cases in a day,rising numbers of hospitalizations and has even witnessed multiple super-spreader events in the White House that infected the president, his chief of staff, cabinet members and senior advisers.

Economists have emphasized from the beginning that controlling the spread of the virus is crucial to fixing the economy. The CARES Act, the rescue package passed in March, provided temporary relief in the hope that the virus would rapidly diminish. But as that money has run out, a wide gulf has opened between the approach of the outgoing Trump administration (which has variously argued for doing less and minimized the seriousness of the problem) and the incoming Biden administration, whose first action after the election was to appoint a board of medical advisers and push an aggressive agenda to get the coronavirus under control.

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And so the nation is, once more, counting down the months before a new administration changes the country’s direction, wondering what policy the federal government will pursue in the interim, and watching a pre-existing problem that may easily spiral out of control while we wait.

The good news is that there is a strong possibility that we could have an effective vaccine widely available sometime next year.

The bad news is that the outgoing administration has actively fought against the changeover — withholding transition funds, forbidding the sharing of information with the Biden folks and contesting the election results. As the weeks pass, tens of thousands of people may lose their lives and millions of businesses may disappear unnecessarily.

Certainly we will hope for the best — that this third wave of infections in the United States subsides quickly, that the economy continues to recover, people temporarily laid off can come back to their jobs, and a massive number of small businesses do not go broke.

But history teaches that problems brewing during major transitions of power can explode. So, as if enough hadn’t happened already in 2020, the Biden administration and the broader American public, had best prepare for the worst, just in case.

Austan Goolsbee, a professor of economics at the University of Chicago’s Booth School of Business, has advised President Barack Obama and President-elect Joseph R. Biden Jr. Follow him on Twitter: @austan_goolsbee

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