MNI INTERVIEW:US Election Limbo Dents Stimulus Odds: Obstfeld

Muddled U.S. election results reduce the chances of a new fiscal package to support the economy through a worsening pandemic, and the prospect of more coordinated global aid, Maurice Obstfeld, former IMF chief economist and presidential adviser, told MNI Wednesday.

Donald Trump may focus his energies on contesting the election in the next few months instead of an economic package, and Senate Republicans will likely resist giving any hand to Joe Biden, Obstfeld said in an interview.

"My forecast would be that they don't see much benefit for them in cooperating with a sizeable fiscal package," he said of Republican Senators, adding that "obstructionism" could linger into any Biden administration. Obstfeld in 2014-2015 was a Member of President Barack Obama's Council of Economic Advisers and now teaches at the University of California, Berkeley.

"I don't see the Senate as being more willing to move a substantial fiscal package if they think that Joe Biden is coming in," he said. "They would be more inclined to do that if Trump was remaining in power."

WAVE OF AUSTERITY

The economy needs another package of something more than USD2 trillion that was the focus of talks between House Leader Nancy Pelosi and Treasury Secretary Steven Mnuchin, Obstfeld said. Otherwise state and local governments will be forced into a big round of layoffs and service cuts to meet their balanced budget requirements, further sapping demand for many firms "hanging by a thread" after battling through the major Covid-19 lockdowns earlier this year, he said.

"That's going to constitute a wave of fiscal austerity that's going to have a negative impact on growth," Obstfeld said.

"I see the world going into a much more deflationary scenario with this U.S. electoral outcome than we would have seen otherwise," he said. "The resurgence of infections in Europe has created much more pessimism about the growth outlook there, and that's going to be a drag on the global economy that will also affect the U.S."

"If the U.S. is paralyzed, then it can't very well call for foreign action in the same direction," Obstfeld said.

Senator Mitch McConnell said Wednesday that Congress should move before year-end to put through fiscal stimulus, reiterating a "targeted" approach amounting to roughly USD500 billion over Pelosi's USD2.4 trillion package.