The growing costs of President Biden

Joe Biden is fashioning his election phrase of ‘Build Back Better’ into an activist administration, a heavily-unionised workforce – and a large expansion in state spending.

| 6 min read

President Biden campaigned to be the great reconciler who would seek to bring Republicans and Democrats together. His first 100 days in office has, instead, revealed an old man in a hurry to dramatically transform the US into a more left-wing Democrat state.

He has become the advocate of much bigger government. He is fashioning his election phrase of Build Back Better into a vision of an activist administration, a heavily-unionised workforce and a large expansion of state spending.

So far, it is proving popular, as a programme might which begins with sending a free $1,400 to practically every adult – and will proceed with the offer of more services delivered free to people used to paying for them. Many Americans feel protected from the costs thanks to the promise that only the rich and large companies will pay through higher taxes.

The policy entails a triple stimulus. He has passed his $1.9 trillion Recovery Plan through Congress to provide an immediate boost to incomes and spending as the US begins to unlock from the pandemic. Mr Biden then wishes to follow this up with two other packages. There is a $2.25 trillion infrastructure spending programme and a $1.8tn American Families Plan.

The six-trillion-dollar man

The infrastructure plan includes traditional spending on roads, railways and bridges, but also includes items like care costs that would not normally be called infrastructure. The American Families Plan proposes two extra years of free schooling for the under 5s and two years free college education. It offers better employee-leave terms, cheaper childcare and various tax credits for lower-income families. Taken together, were they all to pass, it makes Joe Biden the six-trillion-dollar President – and it amounts to a potentially massive stimulus of around 30% of GDP over the next few years.

The markets must decide how likely it is that all this will pass. One third is through. The American Families Plan will likely prove contentious with Republicans, who will fashion opposition on both cost and philosophical grounds. They will argue it will lead to excessive borrowing by the state, or in due course to tax rises for more than just the rich. They may also seek to suggest its very essence is against the free spirit of the USA, seeking to substitute state services paid out of tax for private services where people exercise more choice over school, college, health and care plans and the rest.

In some of the Republican writing an attack on the gig economy is seen as an attack on job creation and enterprise. There is some fear that the state may use its greater control over education to make pro-Democrat attitudes central to the project.

It is unlikely there will be bipartisan agreement to a large American Families Plan. Current discussions between the two main parties over the Infrastructure Plan show a large gap on that, with the Republicans talking about a half-trillion-dollar or so programme of traditional infrastructure and the Democrats pursuing the wider $1.8tn budget.

Talks will continue this May, with Democrats keen to avoid undue delay. They will wish to get a Budget Bill before the Congress based on the reconciliation procedure which does not then need Republican votes to pass if the talks break down. It will, however, require all Democrat Senators to vote for it, which is not guaranteed.

Current attention is on Senator Joe Manchin of West Virginia who does not intend to vote for a 28% corporation tax rate and may also decline to vote for the very large sums of spending in the original drafts.

Compromise will result

It seems likely that, because of the usual bruising political encounters in Congress, the scale of spending and some of the ambition of both the Infrastructure and the Families Plans will be reduced. It is also likely there will be a substantial Budget Bill under the reconciliation procedure which after tough arguments within the ruling party does carry.

Maybe the President has built a lot into his proposals to allow compromise. It certainly makes his dealings with his own party easier, as he can now say in private he was offering Senator Bernie Sanders, Chairman of the Budget Committee, and Senator Elizabeth Warren much of what they stood for in the Presidential primaries, and leave it partly to them to see how far they can persuade other Democrats to vote for it.

The economics is more important than the politics for the markets. It means there will be a further substantial stimulus next year on top of the Recovery Plan stimulus the economy is now enjoying. That is good news, insofar as it means a bright outlook for turnover and profits for more US companies in the next couple of years.

It is less good news for investors because it will mean a sharp increase in company tax, cutting the drop-through of profits to the earnings level for shareholder rewards at the same time as facing richer investors with increases in personal tax bills.

The triple stimulus comes on top of a massive surge in money growth over the last year which will place upwards pressure on inflation – and bring forward the need to cut back bond buying and raise interest rates.

The Fed reckons the increase in inflation will come from higher commodity and energy prices and some temporary supply shortages. With the plans for more unionisation and the American family emphasis on regulated jobs there could also be some pay inflation to follow. Treasury Secretary Yellen let slip there could be rate rises to come, before correcting her message.

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The growing costs of President Biden

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