Given low-interest rates, Biden is faced today with a once in a lifetime opportunity to fix a chronically inadequate infrastructure in the US. How he responds to the challenge will define his presidency. I spoke to Dr. Karim Abdel-Motaal, founder of KAM Portfolio Managements with a doctorate in economics from Harvard University to find out his take on the future that lies ahead.
Following a tumultuous 6 months of campaigning, Joe Biden was elected the 46th president of the United States, promising to restore political normalcy and to sternly face the economic crisis. Biden, having led the country now for 2 months and dominating the House and Senate, has every opportunity to enact out his plans for recovery and unity. Biden’s now published $1.9 trillion stimulus package plan includes:
- Stimulus checks to be increased to $1,400
- The federal minimum wage to be raised to $15/hours
- Infrastructure investment
- Raising child tax credit to $3,600
- Expanded income tax credits
- Increasing unemployment benefits
I would like to argue that this crisis presents itself as an opportunity at the hands of Biden. The US economy has been for a long time in dire need of long-term investments, but this has in the past been severely limited by concerns surrounding fiscal prudence and maintaining a small budget deficit. However, the way Trump's administration and the pandemic have played out now means, interest rates are practically negligible in real adjusted inflation terms. The US infrastructure is woefully inadequate compared to other developed nations, with such low-interest rates, Biden now has the opportunity to make real improvements to railroads, housing, and highways. In the past, it’s been difficult to motivate public investment because of republican objections to deficit spending, this resulted in the US having no real public healthcare system, an underdeveloped and snubbed education sector, etc. For Biden, the stars have very much aligned for a fiscally liberal term, the pandemic has blown up fiscal considerations, debt sensitivity has also diminished with Trump spending so much. These interest rates now mean that if there is ever was a moment to borrow long term, it is now.
With all this in mind, I strongly believe that Biden will follow in the footsteps of his democratic predecessors with demand-side policy. It seems foolish to continue with supply-side microeconomic policies like tax reduction when, fiscally, there is very little that can go wrong with an ambitious government spending program such as the one he has now announced. While this is true, the real question of his presidency’s success is how he will use this opportunity. Several of the pertaining social issues in education, for example, such as voucher programs, school unions, and teaching quality cannot be solved by simply throwing money at a problem.
Another key question surrounding the economic recovery path is how Biden will manage relations with China and their tariffs. The main problem is that following IT theft scandals and unfair Chinese competitive markets, Trump has boxed in the US with self-destructive tariffs that don’t even address the issue of a lack of intellectual and corporate property. I believe that Biden will focus on de-escalation whilst not fully removing tariffs, as this policy is in full keeping with democratic views. Personally, I think that the current tariffs don’t do anything to correct what China is doing and instead punishes the US trade. This matter is also highly related to how Biden will manage polar demands from the extreme left (AOC, Bernie Sanders) and the extreme right (Ted Cruz, Kevin McCarthy). Though his instincts would be to push a bipartisan agenda, this would most likely be halted by constant obstructions as we saw by the right during the Obama 2008 recovery. We have already seen this obstructionism take place in the question of organizing the senate, where Republicans have carried out filibuster obstruction. Biden will most likely plow ahead with his recovery plan ignoring Republican agendas.
Finally, from a financial perspective, the opportunities obviously come from high levels of spending, especially through cyclical investments that benefit from broad-based recovery(stocks, bonds, and currencies), the type of recovery we will most likely see under the democrats. The global climate crisis can also present an opportunity with more investments in renewables, carbon mitigation, and public sector support, factors that will drive long-term growth and sustainability which the US so desperately needs. On the other hand, the financial risks go hand in hand with the opportunities. With such low real interest rates and countries printing and spending huge amounts, the danger lies in how this will affect asset prices. Everything seems to be going up, with more and more borrowing independently from credit. If this continues the time will come to pay the piper, these assets that have speculatively grown will suffer, this is reflected by the continued growth of the stock market despite global business failure.
To summarise, Biden is faced with great opportunity to grow deprived sectors in the US economy but also with the imminent risks of volatility and misallocation of this loan money. The social return of these loans will always be higher with almost negative real interest rates; therefore, the levels of public debt shouldn’t be a constraint in his plan.
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