Are Joe Biden's plans realistic?
Union Investment Analysis | 100 days of Joe Biden: important course has been set
The new US administration is moving at a remarkable pace in implementing its agenda. With the signature of President Joe Biden on March 11, 2021, the so-called American Rescue Plan (ARP) came into force. It is now the third economic stimulus package since the beginning of the corona pandemic and has a total volume of around 1,900 billion US dollars, which corresponds to almost nine percent of American economic output.
At the same time, the US vaccination campaign has gained considerable momentum. More than 200 million people have already been vaccinated, and over a quarter of the population has full protection. With this, Biden has exceeded the self-imposed goal, according to which 200 million vaccine doses should be administered in the first 100 days of his term in office. The experts at Union Investment are therefore assuming a dynamic recovery in the US economy and forecast growth of 6.4 percent for 2021.
True to the motto "After the fiscal stimulus is before the fiscal stimulus", the Biden government is already planning the next coup. Because immediately after the economic stimulus package was passed, the next important milestone in Biden's “Build Back Better” agenda moved into the center of public interest: the American Jobs Plan (AJP), which includes large parts of the new US President's infrastructure and investment plans . Biden's message is clear: Government spending is no longer just a debt, but an investment as well. So far, the president has met with approval on the capital market. The US stock market - measured by the S&P 500 index - reached a record high in mid-April. And as a result of rising inflation expectations, US government bond yields have also risen.
America's fiscal and infrastructure programs are targeted
Source: Union Investment; CARES = Coronavirus Aid, Relief and Economic Security Act; Status: April 16, 2021. Target function, mode of operation, budgetary effects, fiscal multiplier.
What are the new investment packages about? While the Rescue Plan is supposed to get the US economy on the growth path quickly and is fully debt-financed, the AJP is supposed to increase the growth potential of the US economy. The Jobs Plan aims at structural changes. In contrast to the Rescue Plan, the AJP is not "front-loaded". The infrastructure and capital expenditures will extend over the entire planning period of eight years. And: A significant part of this plan is to be financed.
In addition, the AJP should not only create millions of new jobs, but also get the US in shape for the great power competition with China. Four areas are particularly considered (see graphic):
Investments in transport infrastructure, i.e. classic infrastructure investments in roads, bridges and tunnels, but also the expansion of electromobility
Investments in buildings as well as broadband infrastructure, power grids and water supply
Investments in research and development, manufacturing and the training of skilled workers. The development of domestic (production) capacities and delivery networks in the field of future technologies and strategically important goods should be promoted
Investments in the expansion of the care infrastructure
In addition to direct spending of US $ 2,250 billion, the plan also provides tax breaks for investments in "clean energy" of US $ 400 billion, such as the expansion of solar and wind power.
American Jobs Plan (AJP)
Draft by the Biden government
Source: Committee for a Responsible Budget, White House, Union Investment; As of April 20, 2021.
Counter-financing through tax increases
This package is to be financed through changes in corporate taxation (The Made in America Tax Plan). In addition, multinational corporations are to be taxed more heavily and tax loopholes (especially for multinational corporations) closed.
The investment package is linked to the hope that it will have a positive impact on the long-term growth potential of the US economy. This has fallen significantly since the financial crisis and was most recently just under 1.7 percent on a ten-year average. Before the financial crisis, it was much closer to the three percent mark. Against the background of the planned investments in infrastructure and future technologies, a return to this area seems to be quite realistic.
How strong the net growth impulse of the AJP will be depends on a number of factors. It shows, however, that the fiscal multiplier, which indicates how much additional value is created by an additional euro or US dollar of government spending, is generally higher for infrastructure investments than that for transfers to households (such as stimulus checks). This is due to the second-round effects of investment spending: If the state builds a bridge, new jobs are created, which in turn has a positive effect on consumption and thus also on corporate investment.
Overspending on health and families
The Biden government wants to launch yet another spending package, which is also part of the infrastructure offensive, the so-called American Families Plan. Specifically, it should primarily concern the area of health and childcare, such as lowering the eligibility age for Medicare health insurance. Similar to the AJP, the plans are likely to provide for financing through tax increases, with the focus on reforming income tax or increasing income through reforming drug prices.
In total, the two plans together should lead to expenditures of approximately 4,000 billion US dollars, which should be offset by planned additional revenues of 3,000 billion US dollars. Due to the lack of support from Republican senators, the only way to implement parliamentary measures is to use the so-called budget reconciliation, but this is possible. Through this maneuver, income and expenditure packages can also be passed in the Senate with a simple majority.
On the way there, very tough and sometimes seemingly hopeless negotiations can be expected. Experience so far has shown, however, that the Democrats bring diverse opinions to the negotiating table and discuss them in an extremely controversial manner. In contrast to the Republicans, however, what unites them in the end is the will to pass laws.
The experts at Union Investment assume that at the end of the process, the spending plans in particular will be implemented as far as possible, both in terms of amount and in general terms. The additional tax revenue, on the other hand, is likely to be significantly lower than planned in the previous plans.
Opportunity-rich environment for renewable energy stocks
On the capital market, stocks from some sectors have already priced in some of the expectations for additional orders. For example, stocks from the industrial and basic materials sectors have made significant gains. This is why a selective approach makes sense for investors, as there could be potential for correction in one case or another if the plans cannot be implemented as intended.
Shares from the sustainable infrastructure and electromobility sector as well as from the health sector, which could not only benefit from increasing demand from the ranks of the baby boomers, but should also enjoy political support from the Biden government in selected areas, remain promising.
The risks for the stock markets include that the infrastructure plans will be cut significantly or that the extension of the tax breaks (tax credits) in the area of renewable energies will be less. However, the tax increases are likely to be a manageable burden and, according to Union Investment estimates, will account for around three to four percent of profits on the US stock market index S&P 500 in 2022.
Status of all information, explanations and representations:
April 22, 2021, unless otherwise stated.
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