US President Joe Biden, disparagingly called “sleepy” by his blond-haired predecessor, has clearly exceeded expectations in his first 100 days in office. In foreign policy, he has spoken plainly and told the despots in Moscow, Beijing, Istanbul and elsewhere what he thinks of them and what they can expect. In terms of economic and social policy, he has even stepped up a gear – and perhaps exaggerated, as critical voices say. Over the next ten years, he wants to invest around USD 6,000 billion in three stages, firstly to lead the country out of the Corona pandemic, secondly to bring its infrastructure up to scratch and thirdly to reduce social inequalities. Is there a second Roosevelt in the White House, launching a New Deal 2.0?

 

1st Act: the “American Rescue Plan

The first part of the three-pack to deal with the Corona pandemic is already law. The “American Rescue Plan Act 2021“, worth USD 1900 billion, was passed by a narrow majority in Congress and signed by the president. Biden wants to strengthen “the backbone of this country“, especially the middle class and the working population, whose livelihoods are threatened by the pandemic and should now be given a “fair chance”. Among other things, over five million children are to be lifted out of poverty this year, as the White House officially announced.

Around USD 450 bn of the bailout plan is earmarked for one-off grants of USD 1400 to low-income earners. This is intended to boost consumption. The rescue plan also includes financial aid to states and municipalities (about USD 350 bn), for schools and kindergartens. The pandemic unemployment assistance of USD 300 per week, which is limited until May, will be extended until September (USD 300 bn).

There are also plans for USD 180 bn for Corona vaccination and testing, investments in education and transport (USD 155 bn), tax relief for families with children and low-income earners, and safe reopening of schools (USD 130 bn each). Health insurance benefits are to be increased (USD 92 bn) and family and daily sickness benefits are also to be extended and expanded (USD 50 bn). Another USD 50 bn is earmarked for struggling small and medium-sized enterprises.

The stimulus effect of the bailout should give the US economy an additional growth boost of 2.9% in the current year and 3% in 2022, estimates the german Macroeconomic Policy Institute (IMK) of the Hans Böckler Foundation. A stimulating effect will also unfold in Europe. “For Germany, the positive effects of the US package of 0.3% of GDP for 2021 and 0.1% for 2022 are almost as large as for the euro area as a whole,” the IMK researchers expect.

According to the IMK, relevant inflation risks would not arise from the clear economic impulse in the USA. However, the US economy is overheating. Consumer demand has increased significantly – this is also felt by suppliers in Asia. There is a lot of pent-up demand. US consumers have money in their pockets again and are willing to pay higher prices. On the other hand, skilled workers are already in short supply in certain sectors, and wages are rising accordingly. The unemployment rate is falling significantly. The US Federal Reserve nevertheless promises to remain expansionary and to prevent an unwanted rise in interest rates and inflation in the near future. In the first quarter, US economic output rose at an annual rate of 6.4% – faster than economists surveyed had expected (6.1%). High growth is also expected for the coming quarters.

 

2nd Act: a modern infrastructure

His second investment project, the renewal of the ailing US infrastructure over the next ten years, is not only even more voluminous than his first, at around USD 2250 bn, it is also likely to be more difficult to push through in Congress. This is because the renewal of the road, rail, electricity and data networks, the promotion of renewable energies, spending on debt, education, research and development and other social institutions is first to be financed by higher taxes on corporations and the rich.

What Europeans would simply perceive as more tax justice is tantamount to sacrilege, at least for the arch-conservative Republican part of the population in the USA. Joe Biden counters: The “biggest labour market programme since World War II” will create millions of jobs and improve the USA’s international competitive position – especially compared to China. The USA is to become the innovation world champion again.

 

Danger to national security

National security is in danger, the president warns, underlining the need for action – and action immediately. About a quarter of the USD 2250 billion is to be spent on improving conventional infrastructure – roads, highways, public transport, water supply, sewage systems. Here, much is in a bad state. In many places, power lines from house to house are laid above ground, and blackouts during storms are not uncommon. And many Americans still get their drinking water delivered to their homes in lead pipes.

The White House wants to spend USD 500 billion on vocational training and further education. Research, development, and innovations in production are to be promoted with USD 480 bn. Almost USD 380 bn is to be spent on environmentally friendly retrofitting of homes and commercial buildings, and USD 370 bn on the expansion of broadband communication, the modernisation of electricity grids, the expansion of clean energies and, as a logical consequence, the promotion of electromobility.

 

Who benefits?

The infrastructure programme is likely to benefit companies (also from Europe) that build wind and solar plants, as well as those that are leaders in the fields of clean energy, resource efficiency, emission reduction, air conditioning/building technology or drinking water treatment. In general, the USA will increasingly demand products from companies in the mechanical engineering and electrical engineering industries from abroad, because the alternatives from domestic suppliers are limited.

 

3rd Act: The family should be at the centre

Biden’s third major package, the family plan, is worth around USD 1,800 bn. USD 1,000 bn is designed as spending and USD 800 bn as tax relief for families. It aims to improve the education and upbringing of children of low-income parents and to facilitate the return to work of women, who were hit harder than men by the COVID pandemic. These goals are based on welfare state models that are commonplace in Europe but seem futuristic in the USA.

Among other things, Biden wants to finance two years of pre-school education for three- and four-year-olds with around USD 200 bn. Scholarships are to be expanded with another USD 85 bn. In addition, Biden wants to expand the child tax credit and help with childcare and care for the elderly. Paid sick days and up to three months of maternity leave are to become the norm in the USA. These three programme items add up to about USD 225 billion over ten years.

 

The crux of financing

According to Biden, his infrastructure and family programmes could be financed without taking on new debt. It is enough that US companies and the “richest one percent” of the population pay a “fair share” of taxes. Therefore, he would do everything possible to close loopholes in tax havens (namely Switzerland, Bermuda and the Cayman Islands). The president promised that there would be no tax increases on annual incomes below USD 400,000. On the other hand, he wants to raise the top tax rate from 37% to 39.6% – in effect reversing the tax cut enacted by his predecessor Trump in 2017. The same tax rate as on wages and salaries is also to apply to capital gains and dividends, on which only 20% is levied so far. In addition, industry-specific tax breaks are to be dismantled.

The president still has a lot of convincing to do to get his investment plans – at least in part – passed politically. In the House of Representatives, the Democrats have the majority; in the Senate, Biden is dependent on dissenters among the Republicans. What is more, Biden’s proposals could even attract the attention of individual Democrats in the Senate. What and how much can ultimately be implemented and when is unclear.

But there are also first signs that the Republicans’ hard anti-stance against higher spending is softening somewhat. For public opinion has turned. According to the Gallup polling institute, in 2020 for the first time a majority (54%) of Americans supported a stronger state. “While the Corona pandemic certainly plays a role in this, a clear polling trend in favour of a strong state has already been discernible since 2012,” Institutional Money quotes Thomas Gitzel, chief economist at VP Bank. The Republicans have also taken note of this. That is why they no longer torpedo the Democrats’ plans in principle but come up with counter-proposals.

In addition, Biden wants to provide the IRS with more resources to audit companies and millionaires more closely. He wants to oblige banks to automatically inform the IRS about assets and capital income. This could generate USD 700 bn in additional tax revenues over ten years, according to official sources. The infrastructure package and the family plan with the proposed counter-financing will remain cost-neutral over 15 years, according to the White House. In addition, productivity and growth would be stimulated so that budget deficits would decrease in the long term.

The increase in corporate taxes could reduce profits on the US equity market by 6% to 9%, argues LGT Capital Partners. Nevertheless, US corporate earnings should still grow in the mid-single digits in 2022 due to the strong economy.

Biden and the Democrats have little time left. The next important mid-term elections to Congress are in November 2022. Of the 100 senators, 34 must be newly elected. Normally, the pendulum swings to the side of the party that lost the presidential election in the first mid-term elections. The Democrats want to prevent this by trying to keep their own base happy on the one hand and win back those voters who defected to Trump in 2020 on the other. The easiest way to do this is with targeted spending programmes and promises.


Manred Kröller
Financial journalist

 

 

This post has been translated automatically

 

 

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