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We need the market to allocate resources and that’s being overlooked: Economist

William Lee, Milken Institute Chief Economist joins the Yahoo Finance Live panel to discuss the latest latest news on the 2020 presidential election race and what the outcome means for the economy.

Video Transcript

AKIKO FUJITA: We are awaiting some new vote tallies coming out of Pennsylvania. We are expected to get that update any minute now. Of course, Joe Biden has taken the lead in that state, and we're watching that one very closely. Because if the former vice president does take that, that will be it in terms of the election. And that will get him to those 270 electoral votes that he needs to claim the presidency.

I want to bring in William Lee. He is the chief economist over at Milken Institute. William, it's good to talk to you. Let me just first get your thoughts on what's playing out right now. Of course, you're looking at this in the context of the economy. We got some numbers out today that seems to suggest that while the recovery is continuing, things are starting to slow down. How different would a Joe Biden administration tackle this?

WILLIAM LEE: I think they're going to have to realize that the recovery itself is a very lopsided, uneven recovery. The virus and the shutdowns have really blown huge holes in the economy so that policy doesn't work the way it used to work. The transmission channels for monetary policy are not going to the right sectors. It's overheating. The housing market's overheating, auto sales.

But meanwhile, the restaurants and hotels and workers there are laid off, and businesses are going bankrupt. So a President Biden or a President Trump would have to face up to the fact that they have to target the next fiscal package in a very laser focused way to get the money where it's needed, and not where it's not needed.

ZACK GUZMAN: Yeah, I'm glad you mentioned that because it does seem to be getting overlooked. I know we're distracted by the election, but this pandemic is getting way worse. We're getting record numbers there. The need seems very extreme. You think back to March where we were. I know you were talking. You were very right on in talking about the supply shock, what that would do to demand destruction on the other side.

When we approach the holiday season, I feel like that's getting overlooked here in how much money is not going to be spent if this is getting out of control and people are going to be staying home. Talk to me about that and how you really can't go back and roll back time to address a hard-hit holiday season.

WILLIAM LEE: No, in fact, when you roll forward time, you're going to see that the spending may not be as suppressed as you think. But it's going to be shifted away from services, away from travel, away from going to gyms, and toward buying stuff off of Amazon and buying lots more Pelotons.

So I think the composition of spending will be wholeheartedly changed. And the economy is going to have to shift accordingly. Employment's already shifting in the sense that the warehouse workers and transportation workers of retail-- even retail picked up in terms of the big box electronics stores. Those have been the sources of employment, even though restaurant workers and other work is being laid off.

So I think that the fear is that we're overlooking the micro aspect, the central decomposition of the economy, in a way that allows policy to be made in a reasonable way. That people just focus on the big number, like, oh, we need $2 trillion, we need $3 trillion. We need government. But we don't need that. We need the market to allocate the resources, and that's what's being overlooked.

AKIKO FUJITA: William, one of the big unknowns, as it relates to a potential Biden administration, is his handling of China. You know, we've seen a lot of ups and downs through the Trump administration, whether it was on the trade issue or the tech issue. Joe Biden has made it very clear he's still going to be strong on China.

But how are you looking at his policies? How would he be different from President Trump, at least in rhetoric? And ultimately, even if he is as tough on China, does the lack of sort of that strong rhetoric allow for some stability?

WILLIAM LEE: Oh, that's such a great question. I'm so glad you brought it up because the myth is that we're going to go easy on China with a Biden administration. The Chinese are already planning that when you look at the rhetoric that goes on within China and the blogs that are there. And I think that is so wrong.

The Democrats have been very much a hard line-- hardliners against China in terms of labor standards, what they call slave labor, the human rights issues, even climate issues. Energy-- don't forget China's-- 15% of China's energy comes from coal. And getting any kind of agreement about climate is going to involve China and shifting China off of its coal dependence.

So Joe Biden's rhetoric is going to be focused much more on the quality of the production that goes on in China, the human rights issues. And I think that's going to shift the discussion. But it's going to be not less hard on China. In fact, it could even be harder on China because these are the issues that are really hot topics in China. And they don't want to talk about it.

ZACK GUZMAN: Yeah, and William, back here at home, we've been discussing a lot, how much we don't know yet about this election. The Senate still seems like it's going to be drawn out to January with a couple Georgia runoffs potentially here, as we get those final results.

When we talk about Joe Biden's plans here, both on the tax front, climate change front, all of these things, seemingly, could hinge on who controls the Senate. So when you look at that big question mark there, how big of an impact might that have on not just stimulus, but other plans here around the economy?

WILLIAM LEE: Zack, that's spot on. The last I looked, it was 48-48 Republican versus Democratic split in the Senate right now. And if we get a 50-50 split, the Vice President Harris would be the tiebreaker. And you're not going to get the kind of action that is in the Biden administration kind of agenda.

Also, this myth about Biden be a great negotiator and getting things done in the Senate because he's one of their own, don't forget, he was vice president under the Obama administration. And that was really the most difficult period, where they had problems working with McConnell and the Republicans in the Senate.

So I don't anticipate a lot of very fast action. And whatever action is going to come is going to be marginal and incremental. And it's going to be hard won in terms of making the deals work. So I don't anticipate a lot of difficult a lot of real, fast progress there. And I think the markets are kind of trying to price that in. The last few days of the huge jump up in the markets was over a split government and a lot of gridlock. I don't anticipate that scenario to change going forward.

AKIKO FUJITA: William Lee, chief economist at the Milken Institute, it's good to talk to you. Thanks so much for your time.

WILLIAM LEE: Thanks for having me.