Jonathan Marriott, Chief Investment Officer
President Biden may turn out to be the most transformational president since Franklin D. Roosevelt (FDR), who introduced the New Deal in 1933 to counter the Great Depression. It was Winston Churchill who said ,"Never let a good crisis go to waste," and Biden is using the COVID-19 pandemic to introduce radical changes that go way beyond what is needed to recover from the pandemic. He has already passed the $1.9 trillion "American Rescue Plan" and has proposed a $2.25 trillion "American Jobs Plan". In his speech to congress this week, he introduced a $1.8 trillion "American Families Plan". This equates to new spending totalling nearly $6 trillion (or about $18,000 for every man, woman and child in the US). This will be funded by higher corporate, capital gains and income taxes for the wealthy. He appeals for a bipartisan approach, but this tax and spend agenda will find little support amongst Republicans. Even more moderate Democrats will not vote for some of the tax rises.
Tax rises and the end of trickle-down economics
Donald Trump, in the election campaign, warned that Biden would raise taxes and the stock market would collapse. On tax he may have been correct, however the S&P 500 index is up over 20% since the election and 8% since the inauguration so at present he looks to be wrong on that. The financial markets were relieved that the latest plans were more fiscally neutral and the stock market has been supported by what many people will see as his greatest achievement in the first 100 days: the vaccine roll-out. Initially, he targeted 100 million doses in 100 days, but they have mobilised production and distribution to deliver 220 million doses in his first 100 days. This will enable the US economy to reopen faster than many other countries around the world.
In 1986, Ronald Reagan said, "The nine most terrifying words in the English language are: I'm from the Government and I'm here to help." Since that time, US politics has been about low taxes and small government. The theory was that wealth would trickle down to the less well off. The experience from the Reagan years was that lower tax rates through economic growth actually raised more revenue.
However, the pandemic has clearly demonstrated the need for government help. Biden said on Thursday night that "trickle-down economics has never worked. It's time to grow the economy from the bottom and middle up." He plans to raise corporate tax from 21% to 28%, the top rate of income tax from 37% to 39.6%, and double capital gains tax for the wealthiest Americans.
He does not want to raise the tax burden on the middle classes but does want the wealthy to pay more. In general, the rich have got richer during the pandemic as the stock market increases, supported by the government, and now he is looking for them to give some of this back. Democratic Senator Joe Manchin of West Virginia has already said that he will not vote for a corporate tax rise beyond 25%. Biden needs all 50 democratic senators and the Vice-Presidential vote to get this passed so it is likely that this will be reduced.
Plans for American interests
The Jobs plan is aimed at a radical improvement in US infrastructure, ranging from roads and ultra-fast broadband to clean water. The building programme will employ many less qualified workers for years to come. The Families Plan raises investment in many other areas including health, childcare, education and research. The common aim of both these plans is to make America more competitive. He also wants to raise the minimum wage to $15 per hour.
This links to foreign policy where he has told President Xi that he welcomes competition, but he will stand up for American interests. Biden remains tough on China and has not removed the tariffs imposed by former President Trump. He stresses he will defend US interests and will maintain strong military presence in the Indo-Pacific region and in Europe with NATO, aiming "not to start conflict but to prevent conflict."
Reversing Trump’s policies
The support for NATO and other international organisations such as the World Health Organisation shows a radical reversal of Trump's policies. Biden clearly takes a multilateral approach to foreign policy. He has returned to the Paris Agreement on climate change. Unlike Trump, he sees climate change as a real threat to the world and has already held a summit with world leaders on this and has made commitments to cutting CO2 emissions. In this respect, he will cooperate with China rather than compete.
The return of big government
Trump’s slogan was MAGA, ‘Make America Great Again,’ while Biden may appear to be seeking a MAGBA agenda, ‘Make American Government Big Again’. The pandemic crisis may have led to a realisation that government does have a bigger role to play in people's lives and Biden is not letting this opportunity go to waste. Blocking tax loopholes and getting the rich to pay a bit more is likely to be popular on main streets, if not in the boardrooms of America.
President Biden’s speech drew attention to the weakness of divisions in a democratic state and appealed for cross-party support. His plans are vast, but big government will be seen as anti-American by some and unlikely to get cross-party support. In the months to come, his plans will no doubt be debated and diluted, but in essence a bigger role for government appears to be inevitable. The space race in the sixties led to huge innovation and boosted the economy. Investment in research, education and infrastructure may help maintain American leadership in the world.
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