Can Biden revive America?
Henk Potts, London UK, Markets Strategy EMEA
Amid a pandemic and domestic tensions, how might the US be reshaped by the new Democratic administration and what might it mean for growth prospects?
Joe Biden formally became the 46th President of the United States on 20 January, ushering in a new era of politics that will have ramifications for both domestic policy and international relations.
While the Democrats suffered unexpected losses in the House at November’s presidential election, had an extended wait for results and required a pair of run-off elections in the Senate, a win is a win.
With full control of Congress, Democrats seem more likely to confirm the Biden administration’s nominees, control the Congressional policy agenda with the power to call hearings and overturn some of the Trump administration’s deregulatory efforts, as well as pass some of Biden’s major policy initiatives.
Given the 50-50 split in the Senate, with Vice President Kamala Harris serving as the tie-breaking vote, and a slimmer House majority, moderate Democrats may block legislation that leans too far left. Issues such as eliminating the legislative filibuster or expanding the Supreme Court are very unlikely to gain traction, in our view, given opposition from some centrist Democrats, but discussion of limiting the legislative filibuster may return.
The president has laid out an ambitious $1.9tn relief plan, that is close in size to the CARES Act enacted in March and is on top of December’s $900bn relief package1. Its aim is to control the virus, boost consumption and provide support for low paid workers, small businesses and state services.
The Biden administration will likely aim to secure enough GOP votes to bypass the legislative filibuster. If they are unable to gain Republican support, Congressional Democrats may use the budget reconciliation process to pass legislation. This is an expedited process that allows Congress to advance certain tax, spending and debt limit legislation with a simple majority.
Lowering the rate of infections and fatalities, delivering the vaccine, providing virus-related assistance and transitioning to a post-pandemic return to society is the number one priority for the Biden administration and will likely occupy the majority of the first half of 2021.
In terms of economic support, the stimulus package proposes another round of direct cheques to individuals which could be as much as $2,000. It also suggests increasing a weekly federal unemployment benefit to $400 and extending it through September. The package provides help for state and local government to meet the shortfall from the low tax take and higher spending. Additionally, $170bn is assigned to support the reopening of schools. There are also funds to increase loans and grants for small businesses and a proposal to increase the minimum wage to $15 an hour1.
The size of the package will clearly come at a cost. As a consequence, the fiscal deficit is projected to increase to more than $3tn, or 14% of gross domestic product, this year1.
US infrastructure policy is a patchwork of federal and state policies with programmes funded by a number of different sources which is widely viewed as underfunded and ripe for bipartisan reform.
Over the course of the campaign and since his victory, Biden has argued for significant infrastructure spending with elements of climate change policy to “build back better”.
Biden said he would focus a large segment of his spending plans on upgrading US infrastructure to make it more environmentally friendly and sustainable. He has called for significant investment in surface transportation, water systems, electricity grids, broadband and transit networks.
While we do not expect a $2tn infrastructure package, as proposed during the campaign, we do think a multi-year spending package with bipartisan support could be possible. If the administration is unable to secure GOP votes, it may use budget reconciliation to pass infrastructure measures.
More active regulatory posture
The Biden administration is likely to implement a more active regulatory approach as a way to enact its policy agenda. While the president has not been as vocal as some other Democrats, he has voiced concerns about the former administration’s approach to deregulation. Not only are potential increases in financial penalties possible, but there may be significant regulatory policy changes.
From a sector perspective, climate-related sectors such as energy may experience some of the most significant changes, as the Biden administration will likely aim to enforce existing regulations, reverse deregulation efforts and prosecute alleged wrongdoing.
For “big technology” we are likely to see increased focus on issues related to anticompetitive conduct; antitrust laws and enforcement levels. Legislation faces an uphill challenge, but expect enforcement agencies to more heavily scrutinise and regulate the industry.
Labour relations and healthcare
Throughout last year’s election campaign, Biden advocated stronger labour protection laws and collective bargaining, some of which may be enacted without Congressional legislation.
He wants to make it easier for workers to organise and collectively bargain with their employers, change the designation of some workers as independent contractors, hold executives personally liable when they interfere with organising efforts and ban “right-to-work” laws. He has also proposed establishing a Task Force on Coal and Power Plant Communities to help secure benefits for coal miners and their families.
We expect the Biden administration likely will use regulatory power to implement a host of healthcare policy objectives to combat COVID-19, as well as strengthen the Affordable Care Act and remove barriers, such as reopening enrolment, increasing funding for marketing, and hiring “navigators” to help people sign up for coverage.
Trade, foreign policy and international cooperation
Policy proposals and comments suggest that a Biden administration will pivot towards a multilateral posture, with an emphasis on strengthening the post-second world war international order.
Biden likely will also focus on protecting technologies that are critical for US innovation and national security; embracing a policy of competition and deterrence toward China; and, in a post-pandemic world, mitigating national security-related supply chain risks. His national security and diplomatic nominations signal a shift from President Trump’s “America First” agenda.
We now anticipate the US economy will grow at 6.2% this year and the unemployment rate will fall to 4% at year end
The president’s aggressive stimulus package will support America’s immediate growth prospects. It should temporarily supplement income and government spending while the economy is being weighed down by the pandemic.
The speeding up of a vaccine rollout should reduce new coronavirus cases, help to revive service industries that are particularly sensitive to social distancing and assist in restoring employment back to pre-pandemic levels. We now anticipate that the US economy will grow at 6.2% this year and the unemployment rate will fall to 4% at year end.
Despite the faster than previously projected recovery, inflation is anticipated to remain subdued this year before gaining momentum in 2022. The US Federal Reserve’s new inflation framework allows for periods when inflation can moderately overshoot the 2% target. As such the central bank is expected to keep rates close to zero through 2023. However, a tapering of its asset purchases could start in early 2022.