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Market Impact of Biden’s Fiscal Program

By Nick Sargen
Markets Policy
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 A key issue for investors as the presidential election approaches is what fiscal policy will look like if Joe Biden wins.

Until recently, it has been difficult to piece Biden’s program together from occasional news stories. However, a comprehensive report on Biden’s proposed budget was released by the Penn Wharton Budget Model (PWBM) that gives people a better idea of what to expect.

Specifically, Biden’s proposal is estimated by PWBM to increase federal spending by $5.4 trillion over the next ten years. If enacted, it would increase federal spending to 24% of GDP by 2030 from 21% in 2019.

A Wall Street Journal article quotes Kent Smetters who oversees the project as saying: “This is the largest proposed spending increase by a presidential candidate since George McGovern.”  

Yet markets do not seem overly concerned by this prospect. One reason is federal outlays this year alone have increased by nearly $4 trillion to counter the coronavirus pandemic. Moreover, Congress is deliberating whether to expand the CARES Act. In this context, investors appear numb to the amount of government spending in the works. 

For its part, the Trump campaign has portrayed Biden as beholden to the far left. However, the outlays in Biden’s plan are a small fraction of the $30 trillion to $50 trillion proposals that Bernie Sanders and Elizabeth Warren laid out in their campaigns. In doing so, Biden is signaling to the electorate that he is not unduly swayed by far-left Democrats.

One concession to progressives is Biden’s plan to include two years of debt free college for all students and free public college for those from low-income families. Other spending priorities include green infrastructure projects and increased R&D for clean energy and technology. Spending on these areas is projected to total $3.5 trillion over ten years.

Biden’s plan for healthcare is directed at improving access to it while decreasing costs. Key provisions include lowering the Medicare eligibility age from 65 to 60 years and expanding the Affordable Care Act (ACA) insurance market places. They are estimated by PWBM to increase healthcare spending by $1.6 trillion.

The proposals for lowering costs include having Medicare negotiate drug prices with pharmaceutical companies and allowing consumers to import drugs from abroad. These initiatives are estimated to reduce healthcare costs by $1.25 trillion, which would likely result in net healthcare spending increasing by about $350 billion over ten years.    

To help finance the increased federal spending, Biden would roll back the Tax Cut and Jobs Act (TCJA) enacted in December 2017. The corporate tax rate would be increased to 28% from 21% while the rate on foreign profits would be increased and a minimum tax on corporate book income would be imposed. 

On the personal side, households with adjusted gross income (AGI) of $400,000 or less would not see their taxes increase directly. Those above this threshold (the top 1.5 percent of households) would face an average decrease in after-tax income of 17.7%.  

Thus far, investors appear inclined to await the actual election results before responding to prospective policies. In this regard, they have little to go on in assessing what President Trump will do if he is re-elected: Trump’s campaign does not include a formal platform, although Trump is on record as favoring further tax cuts.

So, where does this leave the electorate? My take is the choice being offered in the 2020 elections is between a tax hike and spend plan put forth by Biden versus a tax cut and spend plan by Trump.  

In either event, prospective budget deficits are likely to be higher than the path they were on prior to the coronavirus pandemic. Yet, the bond market is unfazed by this outcome. One reason is inflation has been unusually low.  In fact, the Federal Reserve has been compelled to alter its strategy to achieve a targeted average annual rate of inflation of 2%. At this week’s FOMC meeting the Fed signaled rates could stay near zero for several years.

Another reason is business capital spending has been soft since 2018. In the wake of the escalating trade war between the U.S. and China, businesses were reluctant to add to plant and equipment. Instead, they used the windfall from the Trump tax cuts to increase dividends and make share repurchases.  As a result, government spending has not “crowded out” private investment.

In these circumstances, increased government spending is unlikely to generate substantially higher Treasury bond yields.

By comparison, there is a greater risk of a stock market sell-off if Biden wins. One reason is the increase in corporate tax rates is estimated to cut after-tax earnings per share of S&P 500 companies by about 12% according to Goldman Sachs.

Another consideration is individuals may opt to sell stocks and pay capital gains taxes at the existing rate for capital gains, which is below the rate that the Biden plan proposes. That said, any sell-off could be short-lived as investors refocus on prospects for the economy.

In the end, therefore, voters may be forced to decide which policies are best for the country and for their own personal interests.  

A version of this article was originally posted to The Hill on September 18, 2020.
 

nick sargen

Nick Sargen

Senior Economic Advisor
Nick is an international economist, global money manager, author, and contributor on television business news programs. He earned a PhD and MA from Stanford University and BA from UC, Berkeley.

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