The $1.9 trillion American economic recovery plan announced by the 46th U.S. president, Joe Biden, at first glance seems to suggest a break with the stimulus that former President Donald Trump tried to use. In fact, Biden intends to roll back Trump’s tax reform, raising taxes on the richest U.S. citizens and corporations, and use these funds to find money to support the economy. However, this will not happen immediately: the effects of the coronavirus pandemic are far from over, and in the future, when the announced fiscal measures are implemented, there will still be a lot of work to be done to raise money. Therefore, many analysts are confident that the Biden administration will continue to increase the U.S. national debt and budget deficit, and will continue the policy of “quantitative easing,” that is, to do exactly the same thing that the Trump administration did. The only question seems to be what the dynamics of this process will be and how long they will be able to resort to the bailout printing press without toxic consequences.
First, we borrow, then we collect
The economic stimulus plan announced just days before Joe Biden’s inauguration consists of three packages. The new U.S. administration intends to direct the most considerable sum-about $1 trillion to help the country’s population. There are plans to resort to both the “helicopter money” handouts already tried out under Donald Trump (promising direct payments of $2,000 per taxpayer), and more long-term incentives, such as Biden proposed to double the minimum wage, to about $15 per hour, as well as to increase unemployment benefits. A second bailout package of roughly $500 billion is for businesses that suffered the most severe losses from the pandemic, and a third package of roughly $400 billion represents funds for fighting the coronavirus, including mass vaccinations.
Still, the main point of the announced economic program looks to be the Democrats’ promise to raise taxes on high-wage workers and companies, i.e., to restore the policies that existed before the Trump administration, which began its presidential term with tax cuts. As QBF investment firm portfolio manager Tural Gadirli notes, Biden’s tax plan includes eight key measures:
Raising taxes for Americans earning more than $400,000 a year, while keeping tax rates at current levels for anyone earning less than that amount;
raising the top tax rate for individuals from 37 percent to 39.6 percent; the top rate applies to individuals earning more than $518,400 a year and married couples earning more than $622,000 a year;
limiting the tax credits associated with itemized deductions to 28% of the amount; thus, for those with tax rates above 28%, the tax rate would be reduced to 28% for every dollar spent on charity;
an increase in the long-term capital gains tax rate, which is levied on gains from the sale of assets, from 23.8% to 39.6% for people with incomes over $1 million;
raising the corporate tax rate from 21% to 28%;
imposing a 15% minimum tax on accounting profits;
imposing penalties on “tax havens.”
raising tax rates on foreign profits of U.S. companies located overseas to 21%; and imposing a tax penalty on corporations that open jobs overseas to produce and sell products back to the U.S.
With the implementation of all these points, Joe Biden is planning to release about $3.3-3.7 trillion, which will be spent to support the U.S. economy, notes Tural Gadirli.
In addition, as Igor Kuchma, a financial analyst at TradingView, Inc. reminds, at a recent press conference, Janet Yellen, the Biden administration’s Treasury Secretary, voiced support for a global digital tax under the auspices of the Organization for Economic Cooperation and Development (OECD). But at the same time, she said that before raising corporate taxes, the U.S. economy must first be allowed to recover. Thus, Kuchma suggests, in the short term the U.S. will continue the policy of quantitative easing, i.e., buying securities from the market by the Fed’s efforts, and therefore it will not look surprising that the dollar continues to lose ground (over the last year the dollar weakened against the euro from 0.92 to 0.83 points).
But while Trump (like many other Republican presidents) was able to cut taxes immediately after the inauguration, for Biden to make a reversal in his first days in office will be very difficult, even despite the dominance of Democrats in both houses of Congress. Proceeding from what Janet Yellen said, one can conclude that under current conditions the process of raising taxes may be delayed, said Mikhail Bespalov, analyst of the investment company KSP Capital UA. Hence, the most probable scenario of raising funds will be further increase of the US government debt.
For 2020, reminds Bespalov, its size increased by 19.6%, exceeding $27.7 trillion – in this century a comparable increase could be observed only in 2009, during the global financial crisis. Another argument for increasing the debt burden is the need to finance the record budget deficit in the U.S., which more than tripled last year on the back of the pandemic, exceeding $3.3 trillion.
“The challenges posed by the pandemic are forcing U.S. authorities to ramp up debt to provide the stimulus the economy needs, without which the crisis could have been far more severe and the recovery would have taken longer. Biden’s economic agenda includes an increased focus on health care, climate change and renewable energy development, increased access to education and deleveraging of education loans, as well as measures to combat the pandemic. All of these initiatives are expected to increase spending and require significant funding, which is expected to come from higher tax revenues. Upon taking office, Mr. Biden has already begun to rescind his predecessor’s executive orders, but initial priority is likely to be given to continuing the stimulus and economic recovery. When this process yields results and the negative effects of the pandemic are mitigated, one should expect the Biden administration to raise taxes both for affluent Americans and corporations that he promised before the elections,” Mikhail Bespalov believes.
Therefore, the U.S. will continue to increase the national debt under Biden, although the rate of its increase is unlikely to be as high, summarizes the analyst. So far, in his opinion, the possibility of continuing the previous debt policy still exists. This is helped by low rates on U.S. government bonds, which are still one of the most liquid debt market instruments and are in demand around the world. These low rates are ensured by the soft monetary policy of the Federal Reserve System, which reduced its key rate to the minimum level of 0-0.25% and continued to buy securities from the market, i.e., quantitative easing. As long as investors have reason to believe that the Fed’s rate will remain close to zero for quite a long time and inflation will be moderate, the U.S. will probably be able to continue to increase the national debt, Bespalov believes.
Same Trump, only with a Democratic profile
It is the funding of various initiatives at the expense of unbridled emission that shows that the Democrats and Trump’s measures to stimulate the economy are identical, adds well-known publicist Andrei Parshev, member of the General Council of the Cause Party, author of the bestsellers “Why Russia is Not America” and “Why America is Coming. Besides, according to some economists, this money supply issue will not result in a catastrophe: the excess money supply will be “absorbed” all over the world: the global currency has “modest advantages”. Although dollar prices will rise in the other half of the globe.
Parshev continues that Biden’s tax initiatives may at least partially mitigate the emission blow to finance, but there is an obvious downside to this approach: “The problem is that Trump’s tax cuts and some other measures have seriously improved the economic situation, created jobs, moved some industries back to the US – Biden’s measures will definitely work in the opposite direction. And his declared increase in the minimum wage, no matter how attractive it looks, in addition to stimulating immigration, will also increase the cost of U.S. industries and reduce their competitiveness. In general, no one is expecting the American economy to grow under Biden – neither his supporters nor opponents.
However, some observers have serious doubts that Trump’s tax reform has been good for the U.S. economy. The tax maneuver carried out at the beginning of 2017 did not have the effect where it was expected, Valdis Wuldorfs, head of trading at the financial company Aravana Capital Management, is sure: all the money saved by companies were used not for investment, but for the repurchase of their shares – its volume was recorded, and the hole in the budget of the United States in 2020 reached 40%.
“If we follow the trivial logic, when taxes return to “normal,” tax optimization will flourish again, with big companies paying most of their taxes somewhere in Ireland, and hence tax collection in the United States itself will not increase. It is hard to say which option is better: things have been too messy since the mass flight of U.S. manufacturing to China. At that time it was justified, because China supported the dollar by buying a phenomenal amount of U.S. debt, and all trade was conducted in dollars. Therefore, now there is only one source to implement the “Biden program” – printing money,” – says the analyst.
And it’s not just the budget deficit, adds Valdis Wuldorfs, recalling the damage that the U.S. economy suffered from the pandemic. Over the past year, segments such as airlines and airport fees, hotels, mass events, restaurants, sports, and new car sales (except Tesla) have all or partially shut down. The whole mass of people employed in them will not go to work for Amazon or Google, Wuldorfs points out, – consequently, tax collections will fall, and then the circle goes around: less income for the population – less spending, all businesses will feel it again on their turnovers and tax collections will fall again.
The picture described is very similar to the mechanism of economic crises described by John Maynard Keynes back in the 1930s: in the absence of good expectations, the crisis will reproduce itself and the economy will find another “bottom”. Since then it has also been well known that, at the very least, this downward movement can be interrupted by an increase in public investment. However, adjusted for the scale of the U.S. economy and the level of accumulated problems, the amount declared by Biden may prove to be only a drop in the ocean. $ 1.9 trillion is enough for the first 3-6 months, and by the end of the year, another $ 5-7 trillion will have to be injected into the U.S. economy just to keep things as they are, and then in 2022 (if the Biden administration will survive to this happy hour), the injections will have to increase to $ 15-20 trillion, Valdis Wuldorfs believes.
Moreover, he adds, the practice of handing out “helicopter money” leads to further aggravation of the crisis. The very idea of unconditional basic income (BBD), the analyst believes, is counterproductive and leads to the complete degradation of the workforce that still can and wants to work – even in spite of the paltry size of the handouts from the state by American standards, which do not cover even the cost of rent barely decent housing. That’s why, Wooldorfs concludes, the chances of the U.S. debt stagnating are nil – it will grow exponentially, and Biden decided not just to reanimate his predecessor Barack Obama’s Obamacare program, but to expand it as well.
Biden’s economic course can already be traced to appointments made to key positions at the Justice Department, the Treasury Department and the State Department, says Pavel Segal, First Vice President of Opora Russia. The new Treasury Secretary Janet Yellen, he recalls, is committed to a strong dollar policy and has extensive experience in regulating monetary policy, as she previously led the Fed. In any case, Segal adds, if the announced program of Biden is realized, the national debt will increase – at the expense of which the social obligations to the electorate will be fulfilled: minimum wages will be raised, allowances will be paid and the quality of healthcare will be improved.
Better a bad plan than no plan at all.
It seems too early to make final conclusions about how the financing of Biden’s plans will pan out. According to Tural Gadirli, the expansion of the U.S. debt under Trump was a forced measure, which was connected to the pandemic that “turned off” certain sectors of the U.S. economy and required radical solutions. Under Biden, the analyst is confident, this is not expected to happen, including because vaccination is in full swing – about 25-30% of the population is expected to be vaccinated by the summer.
The Biden administration really aims to support the economy until it recovers, says economist Khazbi Budunov, editor of the Politeconomics telegraph channel. In the spirit of modern monetary theory (MMT), he insists that the problem of finding money is speculative: the source of new money is government spending itself, that is, money is created at the moment of spending and is simply a record in electronic accounts. In this logic, the crucial point turns out to be how much political will Biden has for all his schemes:
“Debt and deficit levels will be higher than under Trump, but that won’t be an issue. What matters is whether there are enough real resources to cover the amount of spending. If there is a shortage of real resources, the economy will face inflation. But right now, there are 20 million people in the U.S. economy in the free labor force alone. A new course of economic policy in the U.S. must address health insurance, education, full employment, etc. But this requires political will, which will inevitably generate class confrontation,” said Khazbi Budunov.
The latter point is very relevant in the context of Biden’s proposals to raise the minimum wage. Most likely, believes Tural Gadirli, this task will fall not on the budget, but on employers, and therefore its implementation is unlikely in the near future: increasing wages will directly affect the growth of unemployment, as employers will have to “optimize” staff and reduce jobs.
In addition, the “green” part of the Biden program will probably face difficulties, according to Artem Tuzov, executive director of the capital market department of investment company “Univers Capital”. In this case, it is also possible to talk about the continuation of Donald Trump’s initiatives to modernize the American infrastructure (Biden intends to spend about $2 trillion on new roads, bridges, and other things), only with an emphasis on green technology, and also the new White House administration has set a plan to achieve zero emissions by 2050. According to Artem Tuzov, problems in the implementation of these initiatives may arise not because of lack of funds, but because green technologies require a huge amount of natural resources, which are close to exhaustion. And given that Europe has the same plans, in the next few years there could be a serious fight for the necessary raw materials for the production of solar panels, lithium batteries for electric cars, etc. The cost of metals such as silver, lithium, nickel, and others will skyrocket because there is not enough of them on the planet to make such a large-scale transition, the analyst believes.
There are more radical opinions on this point. Green energy will be able to function in case of the development of a new type of battery, which will be able to store and give out energy billions of times without considerable loss of power and with low cost, says Valdis Wuldorfs. That is why, in his opinion, Biden’s “green course” will turn out to be just another “budget sawing”. Andrei Parshev believes that during Biden’s presidency we will not see any real ecological revolutions. At best, there will be a reduction in industrial production, which is very likely to be described as being made to combat climate warming.