Active managers struggle to prove their worth in a turbulent year

Consolidation and increased outflows are predicted as traditional money managers fail to lift performance during the pandemic

Robin Wigglesworth in Oslo

© FT montage; Bloomberg | Stockpickers have mostly failed to outpace the growth of exchange traded funds even in the Covid crisis


The history of financial markets has more wild plot twists, temper tantrums and triumphant comebacks than a daytime soap opera — or a US presidential election for that matter. Even by Wall Street’s standards, 2020 has been exceptional, yet for some active asset managers it offered the promise of salvation of sorts.

Over the past two decades there has been an epochal shift of power from the pedigreed stockpickers and bond kings who have straddled markets, to the cheap, passively-managed index funds now in the ascendancy.

In the past 10 years, passive equity funds have enjoyed inflows of more than $2tn, even as traditional, active ones have suffered outflows of over $1.5tn, according to data provider EPFR. There is now over $12tn in index funds globally — either passive mutual funds or the increasingly popular exchange traded funds — according to Morningstar.

This underestimates the heft of passive investing, as many big pension plans and sovereign wealth funds now manage index-tracking strategies internally. “In many ways it’s now the default,” says Christopher Harvey, a senior analyst at Wells Fargo who covers the investment industry.



Traditional money management groups have long argued — particularly loudly in the past decade — that they would prove their worth in the next downturn. The coronavirus-triggered mayhem of 2020 has been a perfect opportunity to demonstrate the merits of human “active” management, while staunching the outflows or even beginning to reverse them.

“It’s markets like this . . . where active managers get to show outperformance,” Jenny Johnson, chief executive of Franklin Templeton, told analysts in April. “And as you have outperformance, the flows will follow.”

In contrast, the weaknesses of index funds would be revealed, some industry executives predicted. 

“The shortcomings of mechanised trading, better known as passive trading, will come into sharper focus,” Peter Harrison, chief executive of Schroders, wrote in the FT in March. “The answers will not be conjured up by arms-length algorithmic investment management.”

‘Active is not dead,’ says Nicolas Moreau, chief executive of HSBC Global Asset Management. ‘The more the market is inefficient, the more active management is important’ © Kai Pfaffenbach/Reuters


Yet, despite such predictions, 2020 looks like it will end up as another muddled year for active management. With a few notable exceptions, the results have mostly been mediocre, with problematic consequences for the industry. 

“It will further accelerate the demise of traditional active management,” says Yves Bonzon, chief investment officer at Julius Baer, a Swiss private bank.

Asset management executives and analysts expect this to speed up consolidation in the industry, as investment companies seek out the shelter that size offers them. There has already been a spate of deals in recent years. 

But with the promises to outperform in downturns once again unfulfilled, and likely to reinforce investor scepticism of active management, the battle for market share is set to become even more ferocious.

“Buoyant financial markets lifted asset levels over the past decade, but masked underlying challenges and deteriorating fundamentals at asset managers,” Michael Cyprys, an analyst at Morgan Stanley, said in a recent report on the industry. 

“We expect the implications of the crisis to have a lasting impact on the industry, accelerate existing trends, and motivate managers to take strategic decisions faster than anticipated.” 



A better environment

The investment industry dealt well with many aspects of the Covid-19 pandemic. 

Shifting thousands of portfolio managers, traders, analysts, risk managers, fund accountants and compliance staff out of the office — at a time when financial markets were in a tailspin — without any major mishaps was an under-appreciated achievement.

“The resilience was a big success,” says Keith Skeoch, chairman of the Aberdeen Standard Investments Research Institute. 

“Not only did business get done, but liquidity kept flowing . . . A huge amount of money has been raised in the bond and equity markets. The industry continued to fulfil its role in transforming savings into investments.”

However, when it comes to the primary job of a money manager, the record is more blemished. Analysts slice and dice the overall performance of active funds in different ways, which can lead to differing results. 

Yet one of the most comprehensive, regular snapshots — the S&P Dow Jones Indices’ “Spiva scorecard” — makes unhappy reading for anyone seeking evidence that active management is having a bright 2020.

Only about a third of US equity funds beat the broader market in the year to the end of June. The longer-run Spiva — the S&P Indices Versus Active — results are even grimmer, with under 13 per cent outperforming over the past 15 years. 

The story is broadly similar for bond funds, despite fixed income markets generally being considered less efficient and therefore offering more opportunities for skilled money managers.

According to Jenny Johnson, chief executive of Franklin Templeton, it’s in turbulent markets like the current one created by the pandemic: “ . . . where active managers get to show outperformance”


Nor has the third quarter helped much. Bank of America estimates that 40 per cent of US equity funds have surpassed their indices in the first nine months of the year. This is narrowly ahead of the 36 per cent long-term average since 1991, when its data began, and the turbulence around the recent US presidential election may have helped. 

But it means a majority of funds still underperformed their index even in a supposedly better environment and is unlikely to alter the entrenched trend of outflows affecting the industry.

“This has been anything but a normal bear market,” says Michelle Seitz, chairman and chief executive of Russell Investments, pointing to extraordinary central bank stimulus and the dominance of big technology stocks in the subsequent recovery. “I don’t know how valid it is to look at a cycle like this and try to draw too many conclusions from it.”

There are important nuances, for example, that active managers generally perform better in certain markets, such as international equities; or in smaller stocks that are less well covered by Wall Street’s army of analysts. “Active is not dead,” says Nicolas Moreau, chief executive of HSBC Global Asset Management. “The more the market is inefficient, the more active management is important.”



Higher returns also mean the sensitivity to performance can be diminished. Investors are unlikely to dump funds that focus on racier “growth” stocks just because they have narrowly trailed behind their benchmark.

Nonetheless, the overall shift into index funds has continued apace — with another $375bn going into passive vehicles in 2020, according to EPFR.

The main driver is the fact that fixed-income ETFs — which some analysts had warned would prove to be fragile in a downturn — performed better in the coronavirus market tumult than many investors had feared, says Sheila Patel, chairman of Goldman Sachs Asset Management.

“A number of institutional investors say they were pleasantly surprised by the liquidity and functionality of using ETFs in March-April,” she says. “So I definitely think it’s cemented a place on the fixed income front.”

     The S&P Dow Jones Indices’ ‘Spiva scorecard’ provides evidence that active management is not having a bright year © Justin Lane/EPA-EFE/Shutterstock


Stock market underperformance

Equities remain the hardest area for asset managers to retain investors, and the hurdle is getting higher. In the 1990s the top six deciles of best-performing funds saw inflows, while in the 2000s only the top three deciles did so. In the past decade only the top-decile funds enjoyed positive flows, according to Morgan Stanley.

Even Fidelity’s Contrafund — the world’s biggest actively-managed equity fund — has suffered steady outflows in recent years, despite its manager William Danoff beating his benchmark by an average of over 3 percentage points a year over the three decades he has managed the fund.

Underscoring how far the pendulum has swung in favour of passive investing, this summer Coloradan industrialist Clarence Herbst sued the state university’s foundation — which he had previously chaired and donated to — for eschewing index funds in favour of pricier, poorly-performing active funds. 

The case was thrown out by a Denver judge in October on the grounds that Mr Herbst had no standing to sue, but the fact that it was filed was emblematic of the shifting views of investors.


Tellingly, the shares of most big investment groups have underperformed the broader stock market this year, falling by an average of 2.4 per cent compared with the S&P 500’s 10 per cent gain. Over the past decade BlackRock — the world’s biggest provider of ETFs — is the only US asset manager whose shares have beaten the S&P 500.

Industry executives are aware of the unfavourable data on their overall performance, and know that for a durable active asset management comeback this will need to change. But there is cautious optimism that the coming decade will prove more fertile for their stockpicking stars and bond kings.

Given the prospect of more market volatility, lower overall returns that necessitate a more aggressive approach and widespread economic disruption, the future of active management is brightening, Mr Skeoch argues.

“It’s up to active management to show that it can deliver . . . But I would argue the environment is going to be materially different,” he says. “The opportunity is there, we’ll see if people step forward and take advantage of it.”


Consolidation picks up pace

Staunching the industry-wide outflows matter because scale is becoming increasingly important for asset managers. Many big institutional investors are trimming how many employees they hire, while wealth brokerages are also culling how many mutual funds they make available to retail investors. Size both means that an asset manager has more sway with potential clients, and that they are better able to pay for their rising costs.

Analysts argue that the turbulence triggered by the pandemic is more likely to shift money between active managers — with those that prove their mettle winning business from underperformers — than arrest the ongoing shift into passive investment vehicles. Morgan Stanley’s Mr Cyprys, estimates that the churn between active managers is actually nearly three times greater than that between active and passive.


Traditional money management groups have long argued that they would prove their worth in the next downturn. Yet, despite such predictions, 2020 looks like it will end up a muddled year for active management © Michael Nagle/Bloomberg


As a result, there has been a spate of mergers and acquisitions. The latest deals involved Franklin Templeton buying Legg Mason for $6.5bn in February; and Morgan Stanley paying $7bn for Eaton Vance to combine it with its own money management arm. The deals catapulted both buyers into the club of groups with $1tn of assets under management.

The former deal in particular represented a doubling-down on a bet that active management is on the cusp of a comeback, according to Ms Johnson. “If you’re driving a car down a well-paved road you don’t need a lot of the safety features. But if you’re going to head to the mountains and you get a snowstorm you’re going to wish you had those safety features,” Franklin Templeton’s chief executive told CNBC in a recent interview. “And that’s what active management is.”

Adding to the sense of an industry shake-up, activist investor Nelson Peltz has taken big stakes in both Invesco — which is still digesting its 2019 purchase of OppenheimerFunds — and Janus Henderson, itself a product of a 2017 merger of Janus Capital and Henderson Global Investors, and is clamouring for further consolidation. At the same time, Société Générale, Bank of Montreal and Wells Fargo are all reportedly looking to sell their asset management arms.

There is plenty of scope for consolidation. Morgan Stanley analysts point out that the 10 biggest investment groups control just 35 per cent of the $90tn industry, making it the most fragmented sector outside of the capital goods sector. They predict that the Covid-19 crisis will further accelerate its consolidation.



“M&A is not a panacea. But strategically combining firms to meet the needs of the capital markets, to meet the needs of the clients and to adapt to the changing landscape is absolutely vital. Every CEO should stay open-minded,” says Ms Seitz, whose company is one of those said to be up for sale by its private equity owner TA Associates.

In addition to bulking up, investment groups are exploring other ways to future-proof their businesses. These efforts include investing heavily in technology to both improve the performance of their fund managers and to cut costs, expanding internationally — with Asia particularly high on the agenda — and accentuating their credentials on environmental, governance and social issues, as ESG considerations become more important to clients.

Yet increasingly, size is seen as the most important imperative.

“The ones with the most amount of assets are going to survive and thrive,” Mr Harvey says. 

“But if you’re not a behemoth already, it will be tough to become one.” 

The Calm Before the Exchange-Rate Storm?

Core dollar exchange rates have so far been surprisingly stable during the pandemic, most likely because major central banks’ policy interest rates are effectively frozen at or near zero. But although the current stasis could last awhile, it will not last forever.

Kenneth Rogoff



CAMBRIDGE – With alternative assets such as gold and Bitcoin thriving in the pandemic, some top economists are predicting a sharp fall in the US dollar. This could yet happen. But so far, despite inconsistent US management of the pandemic, massive deficit spending for economic catastrophe relief, and monetary easing that Federal Reserve Chair Jerome Powell says has “crossed a lot of red lines,” core dollar exchange rates have been eerily calm. 

Even the ongoing election drama has not had much impact. Traders and journalists may be getting worked up about the greenback’s daily travails, but for those of us who study longer-term exchange-rate trends, their reactions to date amount to much ado about nothing.

To be sure, the euro has appreciated by roughly 6% against the dollar so far in 2020, but that is peanuts compared to the wild gyrations that took place after the 2008 financial crisis, when the dollar fluctuated between $1.58 and $1.07 to the euro. 

Similarly, the yen-dollar exchange rate has hardly moved during the pandemic, but varied between ¥90 and ¥123 to the dollar in the Great Recession. 

And a broad dollar exchange-rate index against all US trading partners is currently sitting at roughly its mid-February level.

Such stability is surprising, given that exchange-rate volatility normally rises significantly during US recessions. As Ethan Ilzetzki of the London School of Economics, the World Bank’s Carmen Reinhart, and I discuss in recent research, the muted response of core exchange rates has been one of the pandemic’s major macroeconomic puzzles.

Economists have known for decades that explaining currency movements is extremely difficult. Nevertheless, the overwhelming presumption is that in an environment of greater global macroeconomic uncertainty than most of us have seen in our lifetimes, exchange rates should be shifting wildly. 

But even as a second wave of COVID-19 has stunned Europe, the euro has fallen only by a few percent – a drop in the bucket in terms of asset-price volatility. Fiscal stimulus talks in the United States are on one day, off the next. 

And although America’s election uncertainty is moving toward resolution, more huge policy battles lie ahead. So far, though, any exchange-rate response has been relatively small.

Nobody knows for sure what might be keeping currency movements in check. Possible explanations include common shocks, generous Fed provision of dollar swap lines, and massive government fiscal responses around the world. 

But the most plausible reason is the paralysis of conventional monetary policy. 

All major central banks’ policy interest rates are at or near the effective lower bound (around zero), and leading forecasters believe they will remain there for many years, even in an optimistic growth scenario.

If not for the near-zero lower bound, most central banks would now be setting interest rates far below zero, say, at minus 3-4%. 

This suggests that even as the economy improves, it could be a long time before policymakers are willing to “lift off” from zero and raise rates into positive territory.

Interest rates are hardly the only likely driver of exchange rates; other factors, such as trade imbalances and risk, also are important. And, of course, central banks are engaged in various quasi-fiscal activities such as quantitative easing. But with interest rates basically in a cryogenic freeze, perhaps the single biggest source of uncertainty is gone. 

In fact, as Ilzetzki, Reinhart, and I show, core exchange-rate volatility was declining long before the pandemic, especially as one central bank after another skirted the zero bound. COVID-19 has since entrenched these ultra-low interest rates.

But the current stasis will not last forever. Controlling for relative inflation rates, the real value of a broad dollar index has been trending up for almost a decade, and at some point will probably partly revert to the mean (as happened in the early 2000s). 

The second wave of the virus is currently hitting Europe harder than the US, but this pattern may soon reverse as winter sets in, particularly if America’s post-election interregnum paralyzes both health and macroeconomic policy. 

And although the US still has enormous capacity to provide much-needed disaster relief to hard-hit workers and small businesses, the growing share of US public and corporate debt in global markets suggests longer-term fragilities.

Simply put, there is a fundamental inconsistency over the long run between an ever-rising share of US debt in world markets and an ever-falling share of US output in the global economy. (The International Monetary Fund expects the Chinese economy to be 10% larger at the end of 2021 than it was at the end of 2019.) 

A parallel problem eventually led to the breakup of the post-war Bretton Woods system of fixed exchange rates, a decade after the Yale economist Robert Triffin first identified it in the early 1960s.

In the short to medium term, the dollar certainly could rise more – especially if further waves of COVID-19 stress financial markets and trigger a flight to safety. And exchange-rate uncertainty aside, the overwhelming likelihood is that the greenback will still be king in 2030. 

But it’s worth remembering that economic traumas such as we are now experiencing often prove to be painful turning points.


Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University and recipient of the 2011 Deutsche Bank Prize in Financial Economics, was the chief economist of the International Monetary Fund from 2001 to 2003. He is co-author of This Time is Different: Eight Centuries of Financial Folly and author of The Curse of Cash.

THE MADNESS OF CROWDS, THE SANITY OF GOLD

by Matthew Piepenburg


Crowds, like sheep, are only as safe as the shepherds who guide them.

If the shepherd is mad, so too is the crowd.

Today, central bank shepherds are leading the vast majority of investors over a currency cliff. This is easy to predict, despite the fact that most forecasting models are woefully flawed.

THE FAILURE OF PREDICTIVE MODELS

Whatever one’s views of the recent Presidential election in the U.S., for example, we can all agree that the professional pollsters and their advanced algorithms got the “blue wave” of an easy Democratic landslide completely, well…

Wrong.

Whether predicting viral death rates, political elections, GDP growth, budgets, tax revenues or market direction, the experts and their analytics have been consistently poor in mapping out the near future.

The World Bank, for example, is projecting global GDP to increase in 2021 by 4%, despite the obvious damage COVID lockdowns have already done to global economies.

That same World Bank has also confessed to a global debt tally of $260 trillion. This means global debt to GDP is now greater than 3:1, which makes such growth projections openly comical.

THE FANTASY OF CENTRAL BANK MESSAGING

As for central banks who print money out of thin air to buy unwanted sovereign debts, they too are projecting miraculous solutions to otherwise staggering debt problems based on, you guessed it: Creating more debt.

And how will this debt be paid? Easy—with money created by a mouse click at a central bank near you.

Seem a little bit too good to be true for the economic future?

Well, the U.S. Fed’s track record for forecasting recessions is 0 in 10, but that has never stopped them from making inaccurate and contradictory projections which resemble a kind of open madness:


“You will never see another financial crisis in your lifetime.”

-Janet Yellen, spring 2018


“I do worry that we could have another financial crisis. ″

-Janet Yellen, fall 2018


“There’s no reason to think this (bullish) cycle can’t continue for quite some time, effectively indefinitely.”

-Jerome Powell –2018


“The US is on an unsustainable fiscal path; there’s no hiding from it.”

-Jerome Powell–2019


In the post-08 “new abnormal” of deficits without tears and embarrassing new theories which argue that unlimited money creation can never lead to inflation , the fantasy forecasters have been quite busy replacing reason with madness.


PREDICTING THE END?

But can economies, as well as near-term price actions in markets, truly be forecasted with results better than a coin toss?

My answer is a clear “yes” and a clear “no.”

Why?

Because some things, like the complex movement of a Swiss watch can in fact be trusted, and hence predicted; while other phenomena, like the madness of crowds and their preference for fantasy, cannot.

TRUST CAN NOT BE FORECASTED

The vast majority of investors, for example, have an almost blind faith in central banks housed in impressive buildings with fancy folks running them.

Measuring that faith, as well as the inevitable loss of that faith, is harder than a Rolex repair. In fact, it’s impossible to time, even when objective evidence suggests that the experts are indulging in madness.

Since 2009, central banks and policy makers have done nothing but put lipstick on an economic pig by using artificial money to buy unwanted IOU’s and then telegraphing the result as “free market capitalism,” or even worse, a “recovery.”

To ignore such madness in favor of blind faith is itself a kind of madness, and madness, like COVID-19, spreads best in crowds.

Today, the vast majority of the world has gone financially mad, and most don’t even know it.

SOME MARKET FORCES CAN BE FORECASTED

Informed investors, as well as students of history, math and common sense, however, have long since stood outside of the crowd.

They accept that market laws, like laws of physics, are in fact quite predictive.

For example, not once in the history of nations, markets or exchanges, has any empire, system or market ever successfully prevented an economic, currency or market collapse by printing gobs and gobs of fake money.

Not once. Not ever.

The Austrian school of economics, unlike Keynesian debt madness taken too far, long ago understood that an economic party sustained by debt ends with a brutal hangover caused by that same debt.

Just as physicists long ago understood that for every action there is an equal and opposite reaction (F=MA), Austrian economists like von Mises similarly understood that market forces are no different.

For every debt rise there is an equal and opposite debt fall.

Given that today’s global economy is supported exclusively by the greatest debt levels ever recorded in the history of capital markets, should we not therefore be confident in “forecasting” one helluva a day of reckoning for our global markets, economies and currencies?

Or as von Mises so bluntly warned:

“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

The short answer, then is yes, some things are foreseeable. 1+1 still equals 2, and debt-based “recoveries” always fail, along with their inflated currencies.

Despite such cold facts, the current fantasy being pushed by the MMT crowd as well as politicians and central bankers from Japan to the U.S., is that such economic reckonings (including inflation) can be outlawed by a money printer.

Folks: That’s madness in a nutshell.

Such short-term fantasy explains how economies right outside your front door are tanking while stock markets (enjoying artificial, low-rate debt rollovers) in the U.S. and elsewhere are approaching new highs.

Those highs are quantifiably correlated to global money printing like this:


Printed, fiat currencies are used to push bond prices so high that bond yields (which move inversely to price) have been so thoroughly distorted that for the first time in market history, we are seeing negative yielding bonds across the globe like this:


That too is, well…Madness.

Such objective charts are staggering, and ought to be a universal wake-up call to any sane observer of global markets.

Again, to believe otherwise, frankly, smacks of a kind of madness.

But as Mark Twain warned, crowds often prefer a comforting fantasy over a hard fact, and are thus easy to fool.

Hence, economic policy makers continue to lead a crowd of sheep over a cliff of unsustainable debt paid for with diluted currencies that destroys their hard-earned wealth.

The inherent purchasing power of all major currencies are now tanking by the second when compared against timeless measurements of value like gold.

The following graph is perhaps the most important one you will ever see:

In short, global currencies are among the first dominos to fall in an artificial global economy sustained by grotesque levels of debt paid for by equally grotesque levels of fiat money creation.

Inevitably, economies and markets fall in succession with their currencies. The historical cure for such currency madness is a gold, which far from being a “barbarous relic” of the past, is a timeless solution for the future.

Again: This is predictable. This is forecastable.

To consider such evidence yet burry one’s head is a form of madness. To ignore the evidence, or worse yet, hide or downplay the evidence, is even more maddening.

Most “financial journalists,” for example, studied marketing rather than markets and are hardly reliable “warning bells.”

They understand click-bait techniques and key words, and get their research from a Google search rather than a basic understanding of economic forces.

Not 1 in 10 of average investors (or 1 in 100 of average “financial journalists”) have ever paused to consider simple charts like those above.

That, alas, explains the spread of fantasy as well as the madness of crowds who feel their currencies, stocks, and bonds are in the safe hands of the experts.

Folks, those experts are paper tigers, not financial lions. For now, however, mad faith in their mad policies continues.

TIMING THE IMPOSSIBLE, PREPARING FOR THE INEVITABLE

But for how long?

Timing human emotion, blind faith or even collective madness is a fool’s errand.

The emotional element of the global economy is too complex for easy modeling, and right now, the vast majority of market participants still trust the “experts” in general and the central banks in particular, to save them.

Comforting speeches from the FOMC and empty headlines from the sell-side on the latest tech stock have replaced basic economics, math and history.

Stated more simply: Fantasy has replaced facts.

Neither I nor you can time the expiration date of this misguided yet ephemeral trust in using counterfeit money to pay for record-breaking debt levels and historically unmatched asset bubbles.

But as both history and natural market forces confirm, that trust ends once currencies lose their value and the madness of crowd faith in fantasy is replaced by a mad crowd of broke investors

Those who confront facts rather than fantasy, however, can prepare for the unfolding of history and math without having to worry about the precise “timing” of what is otherwise inevitable.

Toward that end, the historical remedy for the current wave of policy madness has always been the same: Precious Metals.

The Economy Can’t Wait Until January

Families and states need relief now. The lame-duck Congress should act fast to alleviate the suffering.

By Jason Furman

PHOTO: DAVID GOTHARD


The U.S. economy has recovered from the coronavirus shock faster than most economists expected. Unfortunately, things aren’t where they should be and additional progress is becoming harder—even without the complications of the resurgent virus. 

The Federal Reserve is limited in how much more it can do to help the macroeconomy, and it can’t do anything directly to alleviate the suffering of those who are out of work and no longer getting any additional assistance from Washington.

Congress shouldn’t wait for President Biden to be sworn in. It should act quickly to pass a relief package for families and states that includes funding for schools and money to combat the virus itself. This will require compromises on all sides, but they are worth making because time is of the essence.

The economy collapsed in March and April, with 25 million workers losing their jobs. 

The majority of the job losers, 17 million of them, were temporarily laid off, not unlike what might happen after a massive natural disaster. Although the pandemic continues, we have learned to coexist with it, for better or worse, and the majority of temporarily laid off workers have returned to their jobs. 

The result has been faster job growth than most forecasters expected. In October, the headline unemployment rate fell to 6.9%, well below the 9.3% that the Federal Open Market Committee had predicted in June.

The economy is still down 10 million jobs since February, and the unemployment rate understates the challenge because millions more than usual have given up looking for work entirely. Correcting for this, and for a misclassification error identified by the Bureau of Labor Statistics, brings the realistic unemployment rate to 8.4%. 

The lines at food banks tell the story: People are suffering.

Further progress will be harder as many of the unemployed who had a job to return to have already done so. As of October, there are only 2.4 million more workers on temporary layoff than there were before the pandemic started. 

At the same time, the number of unemployed workers not on temporary layoff has risen by 2.8 million. These are the people stuck in a more normal recession, many of whom will need to find new jobs with new employers or even in new industries; this is what economists call a “reallocation shock,” which can be particularly persistent and difficult to solve.

Progress will also be complicated by rapidly rising virus caseloads, hospitalizations, deaths and colder weather, which, in parts of the country, is starting to limit outdoor activity. At the same time the protective cushion provided by the Cares Act has been deflating since many of its key provisions expired. 

The Cares Act was so large that households generally had healthier balance sheets at the end of July than they did before the virus hit. Since then, the unemployed have been running through their savings and accumulating debt. I estimate that the expiration of the enhanced unemployment benefit will reduce demand enough to subtract about 3 percentage points from the annual growth rate in the fourth quarter. 

That is likely not enough to drive growth negative, but it is a substantial and unnecessary headwind nonetheless.

Economic relief and fiscal stimulus in the neighborhood of what Treasury Secretary Steven Mnuchin and House Speaker Nancy Pelosi were negotiating this fall would be critical and well targeted to alleviate suffering and spur economic growth. 

The $600 weekly unemployment insurance bonus may have made sense in the April shutdown, but a lower number like the $400 a week endorsed by President Trump is more appropriate for the current labor market. Jobs are still hard, but not essentially impossible, to find.

In addition, expanding the Supplemental Nutrition Assistance Program and possibly an additional round of checks would help reach many people who aren’t eligible for unemployment insurance. People need money now—not next year or never.

State and local governments generally went into the crisis with very low debt levels and large rainy-day funds. They now face, through no fault of their own and regardless of their initial fiscal position, a revenue shortfall of $225 billion plus hundreds of billions more in emergency spending needs, especially for schools. 

States and localities have mostly gotten by to date with the combination of Cares Act funding, rainy-day funds and timing gimmicks, but there’s obviously a limit. For many, the fiscal hole will reopen next year, if it hasn’t already.

There can be no full solution to America’s economic problems without controlling the virus. This will require substantial additional resources, especially for testing, but also for vaccine distribution and manufacturing of antibodies and other remedies. 

Money spent limiting the virus has the greatest economic bang-for-the-buck of anything we can do. Given how quickly the virus spreads, every day that passes without this funding is especially costly, in jobs and lives.


Mr. Furman, a professor of practice at Harvard, was chairman of the White House Council of Economic Advisers, 2013-17

Democracy in a time of division

The challenge for Joe Biden is to convince most US citizens he serves their interests

Martin Wolf

    © James Ferguson


The election of Joe Biden as US president is the first good news for embattled believers in liberal democracy and the postwar multilateral order since 2016. He is a decent man with an instinctive grasp of the values America has, at its best, stood for. 

On the assumption that Donald Trump’s attack on the electoral process fails, Mr Biden will be president. That will be a huge relief. But it is folly to imagine that Trumpist division is defeated.

More broadly, liberal democracy will remain embattled, in the US and elsewhere. The evidence on this reality is, alas, clear. Research at the Centre for the Future of Democracy at Cambridge university shows a rise in global dissatisfaction with democracy since shortly before the 2008 financial crisis. The rise in dissatisfaction in the English-speaking democracies, led by the US, is striking. 

Frighteningly, in 2020, the respected US-based think-tank, Freedom House, ranked the quality of US democracy 33rd in the world among countries larger than 1m people, between Slovakia and Argentina. Given Mr Trump’s record, that is hardly surprising. 

Moreover, this was before his attempt to throw the electoral system, the core of democracy, into disrepute, with unsupported allegations of fraud.

Mr Biden’s ability to reverse all this is likely to be limited, even though he will surely wish to do so. He will surely confront obdurate resistance from Republicans in Congress, who will try to ensure that he and the federal government are seen to fail, as was their aim during Barack Obama’s presidency.

Moreover, while Mr Trump may (or may not) be gone, his marriage of plutocratic goals to nativist populism and social reaction ensures that some version of Trumpism will remain the ideology of the Republican party. This is the only viable strategy for a party devoted to low taxes and laissez faire in a diverse democracy with high inequality. 

Crucial to the success of this party is a Supreme Court dedicated to such goals, under the misleading flag of “originalism”.



It is likely then that nothing fundamental will change in US politics during a Biden presidency. Moreover, claims of a stolen election will resonate with Mr Trump’s base. 

Particularly if the GOP leadership stops Mr Biden from succeeding with the economy, the chances of a comeback for Trumpism, even Mr Trump himself, are good.

This does not mean that Mr Biden will be unable to do anything. On the contrary, the powers of the presidency are huge, abroad and (albeit less so) at home, though the Supreme Court might strip the president of some of the regulatory powers he was thought to possess. 

An immediate challenge will be Covid-19. Here, Mr Biden might be lucky. If the promise of a vaccine comes good, he might enjoy an early win.


Yet the Democrats seem unlikely to break the success of the pluto-populist strategy, partly because they are in a not-dissimilar situation themselves. They, too, depend on donations from the wealthy, who are generally unenthusiastic about higher taxes or aggressive regulation. 

The rest of the active Democratic constituency — the censorious “woke” and ethnic minorities — is likely to keep the bulk of Mr Trump’s coalition of evangelicals and non-college-educated white people united in rage.

The role of money in US politics is fundamental. A recent updating of earlier research, released by the Institute for New Economic Thinking, confirms that the views of the top decile of the population largely determine policy. The inevitable frustrations of the rest give the parties their passionate voting blocs.


A successful democracy is far more than a set of institutions. The state must be seen to serve the interests of most citizens. The latter must also share patriotism — a love of country that transcends differences of social position, political belief and economic interest. Mr Biden stands for this. Can the extremes feel the same about their opponents?

If it is unreasonable to expect any transformation in the domestic political pattern, what about the US role in the world? Here changes might be bigger. I expect a Biden presidency to attempt to revive an alliance of interests and values with the other advanced high-income democracies, notably Europe. 

I expect it will make brutally clear to the British prime minister the wisdom of friendly relations with the EU. I expect it will put the Russian president and his ideological acolytes in central and eastern Europe back in a box marked “hostile”.



I expect, too, that Mr Biden will make an effort to create an engaged, yet demanding, relationship with China in the context of realistic multilateralism. I am less sure it will be possible to manage the crucial superpower relations without serious risk of conflict. 

Somehow, the US and China must learn how to confront, compete and co-operate, at the same time. 

Particularly important will be a deal on climate. Under Mr Trump, others, notably China, have enjoyed a free ride on this issue, promising carbon chastity many decades in the future while building coal-fired power plants frantically today. But this will require the US to accelerate its own green transformation. 

The opportunity is there. But that is also likely to require some co-operation from Congress. As things are today, that looks very unlikely.


The right response to Mr Biden’s election is hope without naivety. Mr Trump has tested to destruction the idea that a solipsistic superpower determined to disrupt the global order will do much more than destroy its reputation. 

Mr Biden can do better than that, but deep conflicts will endure, at home and abroad. 

His presidency might end up as a disappointing interlude. I very much hope not. 

But his country is deeply divided and the challenges are huge.