Since the November elections, investors have been focused on President-elect Biden’s efforts to bolster the U.S. economy including the latest $1.9 trillion plan. However, investors should not lose sight of potential regulatory changes that could unwind much of the deregulation that occurred in the Trump era. Three areas – the environment, healthcare, and tech giants – are among those likely to be most affected.
It is easy to overlook the impact of regulations on the economy because they are inherently difficult to quantify. Federal agencies are only required to conduct cost-benefit analyses on rules deemed “economically significant,” which are defined as having an annual effect on the economy of at least $100 million.
What is evident is the Trump administration was serious about reducing regulatory burdens businesses faced. President Trump began his tenure with an executive order that called for agencies to cut two regulations for every new regulation. The Trump administration also reinterpreted existing statutes to be more favorable to business.
By comparison, one of Joe Biden’s top priorities is to combat climate change. To do so, he plans to reverse 100 of the Trump administration’s rollbacks of Obama-era policies relating to the environment and public health. Biden’s stated actions include rejoining the Paris Climate Accord, raising fuel economy and emissions standards with a goal of net zero emissions by 2050, and withdrawing Trump’s five year plan on offshore drilling.
Biden, like Trump, however, is not considering market based solutions to climate change such as cap and trade that have been used successfully to deal with the problem of acid rain. Nor is he considering a tax on carbon emissions. His preferred solution is to mandate restrictions on the use of fossil fuels and to develop alternatives to them.
Biden’s plan calls for outlays totaling $1.6 trillion over 10 years to build out green infrastructure and increase R&D in alternatives. This tally does not include the cost of added regulations, which are estimated to have been more than $100 billion annually during the Obama years. Meanwhile, investors will be assessing the implications for energy companies whose ability to generate satisfactory returns will likely hinge on how well they transition away from fossil fuels over time.
Another area that could be impacted by regulatory changes is the pharmaceutical industry. Both Democrats and Republicans alike have been seeking to lower drug prices but with limited success thus far.
One of the challenges in regulating drug prices is the big difference between list prices set by drug companies and actual costs that patients pay out of their insurance plan. Because pharmaceutical companies are likely to balk at changes in list prices, the most likely solution is to provide larger Medicare drug benefits so patients pay less when they fill a prescription.
A bipartisan bill introduced by Sens. Chuck Grassley (R-IA) and Ron Wyden (D-OR) could serve as a template for drug pricing legislation. The bill would penalize drug companies for any price increases that exceed inflation and require them to pay rebates to the Medicare program. President-elect Biden ultimately will have to decide how much to prioritize drug pricing alongside other goals that include improving Obamacare and reversing some of the Trump administration’s actions on Medicaid.
Meanwhile, two developments have lessened the likelihood of major legislative changes:
- Drug price increases have slowed recently
- The rapid development of COVID-19 vaccines has cast pharmaceutical companies in a more favorable light
Finally, one issue that could have the greatest impact on the stock market is anti-trust legislation directed at the largest tech companies. The technology sector represents 6% of GDP and 2% of employment. Yet, a handful of tech firms account for more than 22% of the market capitalization of S&P 500 index, and they far outperformed other companies during the COVID-19 pandemic.
This has resulted in Big Tech attracting increased public scrutiny. In early October, the Democrat-led House issued a report based on 16 months of investigations looking at allegations of anti-competitive behavior among four leading tech companies – Amazon, Apple, Facebook, and Google. This was followed by the Justice Department advancing antitrust lawsuits against Google in October and against Facebook in December.
Dipayan Ghosh of the Harvard Kennedy School views the bipartisan support for greater regulation as arising from a shift in public sentiment against the largest tech companies. At this juncture, it is too early to tell what policies the Biden administration will pursue. However, Ghosh foresees Congress and the White House focusing on reforming certain business practices aimed at:
- Protecting consumer privacy
- Requiring algorithmic transparency
- Limiting potential for anticompetitive conduct
- Holding tech firms liable when they facilitate (or fail to moderate) harmful content
An article in Foreign Policy.com by Vivek and Tarun Wadwha argues that even though Silicon Valley helped bankroll Joe Biden’s campaign, “the mood and context have changed utterly, and the traditional cozy relationship between the Democratic Party and Big Tech is on the brink of turning much more contentious.” They cite seven reasons why Big Tech is in for a rough time.
Still, others maintain Biden has been friendly to Big Tech in the past, and that he was relatively quiet about the technology industry throughout the presidential campaign.
My own view is Biden is likely to take a centrist stance on the issue. The challenge for his administration will be to update the current regulatory system relating to technology while avoiding policies that could worsen the problem. Doing so will require balancing the need to support the digital revolution in a way that upholds democratic principles.
A version of this article was posted to TheHill.com on January 18, 2021.