Analysis by Randeep Somel, manager of the M&G Climate Solutions Fund
by Sue Whitbread
20 January 2021: Biden’s term in office starts in the midst of a deep economic contraction and a global health pandemic, of which the US is one of the worst affected countries. Biden understands that managing the virus will be very important for how successful his term will be and has therefore announced he aims to provide 100m vaccinations in his first 100 days.
The second part of the response will be the continued economic measures the federal government takes to support the economy until the pandemic has passed. The incoming administration has proposed a further $1.9 trillion economic package to aid vaccine deployment, local government support, and $1,400 cheque for individuals. Only when these immediate measure have been taken can the new government look to enact parts of their wider agenda, which include reducing inequality and tackling climate change.
The prospects for the Democratic agenda were helped on January 5th when Democrats won both run-off elections in the state of Georgia to take control of the US senate on a 50-50 split basis. This means Democrats will control not only the presidency but both houses of the United States Congress. However, their margin in both houses is very slim and can be de-railed by a single conservative Democrat in the senate. Therefore we should not expect radical changes in any direction. Any new legislation will be carefully thought out and balanced.
What’s on the agenda?
Biden campaigned to increase corporate tax rates to 28% from 21% and also to raise income taxes for those earning over $400,000. While it is a large increase in corporate tax rates, they will still remain below the 35% rate they were under President Obama. Conservatives members of congress are already getting concerned of the ballooning US deficit which has now surpassed $27 trillion. An increase in these rates of tax will show the incoming team are concerned for the huge debt piles the US is amassing and they are targeting those areas such as US corporates and the wealthy who have been least impacted in 2020.
The continued stimulus and ever increasing debt burden however does have wider implications for inflation and treasury yields – an increase in both could lead to curtailment of the longer term economic recovery.
The new pick for treasury secretary will be very important. Biden has nominated Janet Yellen, the former federal reserve chair. A very competent and skilled administrator, Yellen will play a crucial role in both stimulating the economy in the short term but ensuring its long term prospects are not hindered.
Yellen has been known to support the case made by Biden that cheap borrowing costs are an opportunity for public spending to boost the economy. This will aid an infrastructure package that President Trump talked about for his four years in office but was unable to achieve. It will also play into Biden’s ‘Build Back Better’ promise of targeting spending towards green areas, such as escalating the use of renewable energy for electricity generation, which will target emissions free power by 2035 and upgrading four million buildings to meet the highest standards for energy efficiency. The third part of the plan will encourage adoption of electric vehicles with the US government, offering tax incentives to replace older cars and also funding over 500,000 new EV charging stations.There does seem to be broad consensus amongst Democrats, and a small number of Republicans on tackling climate change, so this could be a key area and lasting legacy of the Biden Presidency.
International relations have also soured over the last four years. I do not expect US-China trade disputes to end, but the US is likely to take a much less confrontational tone especially with its allies and international bodies such as the UN, WTO and NATO.
International matters are not likely to be at the top of the US agenda in the first 100 days, but the next G7 summit hosted by the UK in Cornwall in June 2021 will likely be Biden’s first major international visit and first time international leaders have met since the pandemic began. It will be important to show the US engaging again with its allies on international affairs.
The first 100 days in office are important as the incoming President will have an element of goodwill and a honeymoon period but it also sets the tone for the next four years in office.
This is why it is important that Joe Biden acts decisively. When a majority of Americans agree that the country is heading in the wrong direction it offers an opportunity for a new President to set the national in a new direction. Partisan politics in the US will not help, but in Biden the US now has an experienced leader with a 47 year history of striking deals across the political aisle to get things done.
Unlike previous inaugurations, expectations are low across the political spectrum. It is times like these ordinary citizens can become extraordinary leaders.
Good luck Mr President!