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President Biden lays out his plans for recovery

Buoyed by the popularity of his $1.9 trillion Covid-19 stimulus package, President Biden is now planning a large infrastructure package. Will the markets like it?

Buoyed by the popularity of his $1.9 trillion Covid-19 stimulus package, President Biden is now planning a large infrastructure package. Will the markets like it?

by
Charles Stanley

in Features

31.03.2021

US President Joe Biden’s large stimulus package gained some support from Republican voters as well as Democrats, because it offered $1,400 to practically every adult in the country with no tax rises to pay for the largesse. Markets accepted it and it assisted the rise of recovery shares in sectors badly affected by the pandemic measures.

The President has a 60% approval rating so far for his economic approach – and a 72% rating for tackling the pandemic well, in a recent ABC News/Ipsos poll.  Of course, people like being sent free money, and can live with the idea that the state debt goes up a bit. Repayment is for the future, if at all, and is borrowed at the present very low interest rates. The $1.9 trillion stimulus came on top of the Trump packages for 2020, representing a colossal 9% stimulus to US GDP.

It also resulted in some rises in interest rates on longer-term bonds, as some worried about a bit more inflation. If the infrastructure package is, as has been rumoured, as high as $3 trillion, that would test markets more.

Split bills

The latest Biden thinking on how to approach this task seems to be to split the infrastructure package into two parts. The first part would be a conventional capital projects plan designed to renew and improve bridges, rail lines and roads, as well as inserting a massive new green infrastructure into the US.

The President is out to shock the country by constantly stressing a survey which says the US is 13th in the world over quality of infrastructure, when many Americans think it should be number one.  He hopes he can get bipartisan support for this measure, as many Republicans also wish to see infrastructure improvements. There could still be problems securing support in the Senate, as there remains considerable Republican scepticism about elements of the climate change investment. These are driven by worries about the implied attack upon the fossil-fuel economy and concerns about borrowing levels.

The second part would be a more obviously Democrat package of more childcare, more free education and more financial support for those in hardship. The President wishes to widen the meaning of infrastructure to include health, education and anti-poverty measures. It might well be allied to tax measures to help pay for it, including higher corporation tax, higher income tax on all those earning over $400,000 a year, and higher wealth taxes.

If Mr Biden goes for such a  bill, it  is probably destined for the reconciliation procedure next year, a means to allow passage of certain budget bills on a simple majority instead of needing a supermajority of 60 votes out of 100 in the Senate. This bill would be unattractive to most Republicans.

In his first press conference, the President sketched three overarching priorities for his tenure. The first is to invest in US workers and US science, providing a large increase to research and development spending and strengthening US leadership in key technologies. The second is to rebuild alliances. He has formed an Asian containment group against China from the US, India, Australia and Japan. He is convening a conference of the democracies to ensure a stronger voice for them globally. The third is to represent the values of the US, led by human rights and freedom – and he has pledged to to stand up for them in world affairs.

Pandemic and recovery first

The President’s immediate domestic priorities are controlling the virus and powering a strong economic recovery. Despite pressure from public opinion to tackle the border issues with Mexico and to act against gun ownership following more shootings, he wants to concentrate on the economy and leave these other contentious issues until later. The borders issue does require some immediate action which he has delegated to the Vice President.

The big issue for markets is the size and impact of the infrastructure policies. If the President perseveres with the search for bipartisan agreement to a conventional infrastructure package, that will probably be slimmed down a bit with Republican amendments, to some of the green elements. It will be possible with borrowed money. Something under an additional $1trillion on this basis should be acceptable for equity markets.

If he rushes into a more contentious, larger mixed package with higher taxes on the rich and companies, he may be able to get it through under the reconciliation procedure – but that could prove more worrying for equity investors.

Markets will not like the company tax rises hitting net earnings and may also express more concern through the bond market over a further stimulus should it be well above $1 trillion. At a certain point there can be too much stimulus causing inflation and financing fears – leading to bond market led tightening too soon.

We will watch carefully as the President publishes more detail and seeks to win round Republicans to some bipartisan initiative. The President is telling Republican representatives that their voters like some of his package. It is also true that whilst 30% of voters in the ABC News/Ipsos poll think he is helping unite the country, another 30% think he is dividing it more. It is not an easy task uniting America. Markets will have to live with some noisy politics before the infrastructure package is completed.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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