A trillion here, a trillion there, and it begins to add up to real money. If President Biden has his way, and I believe he will, there is $6 trillion of government spending coming our way. To pay for $4 trillion plans, the President is proposing raising taxes on corporations and the wealthy. What will the impact be?
Begin with the four major issues facing the United States:
- Climate Change: Estimates of the cost of doing nothing to combat climate change run around $150 trillion or higher in damages due to climate change. The Biden commitment is to reach zero carbon emissions by 2050. It is a very aggressive goal, but several studies do say it can be achieved. The studies suggest reaching that goal will be both expensive and require a significant effort. But it will also provide a significant number of new jobs and will be a cost benefit in reducing long-term damage.
- Healthcare: COVID-19 showed us that the United States healthcare system has a lot of problems, over and above fixing Obamacare. President Biden has committed to expanding the Affordable Care Act.
- Income Inequality: Since 1973, there has been a widening gap between the incomes of the top 1% to 2% and the rest of Americans. For more information, read my September 29, 2020 newsletter on the topic.
- Lifestyle: There has been a growing awareness of systemic racism, police brutality, and gun violence in this country. Biden owes the victory to the African American community, and I believe he will not forget what he owes that community.
Given the address President Biden made before the joint session of Congress, it appears he is preparing to address each and every one of these four areas. It may be the most aggressive and ambitious set of proposals since the days of Lyndon Johnson.
I believe that Congress will pass both the American Jobs Plan and American Families Plan. During the Obama yeas there was an effort to build bi-partisan support. Republicans negotiated and made substantial reductions to the original proposals and then voted against the legislation. That experience is not lost on the new administration. They may do some negotiating, but they are not going to bend much or slow down the process.
If that is true, it is not a question of whether we like or dislike what happens. It is a matter of interpreting how government policy will impact the stock market and in particular the stocks in our portfolios. Key to that is the additional taxes being proposed to pay for the programs. It is unlikely the American Jobs Act or the American Family Act will be deficit financed. There will very likely be tax increases. The proposed increases will fall on corporations and on the wealthy.
As an aside, note the prognosticators who projected a Biden victory would cause the stock market to crash have been dead wrong. For the first 100 days of Biden’s presidency, the S&P 500 is up 9.9%, versus 9.1% for Trump. I believe these stock market increases have less to do with who is president than the inertia of American business.
Biden’s tax plan is to increase corporate tax rates, target those companies paying no taxes and increase taxes on multinationals who avoid paying their share of taxes. In addition his plan is to tax the wealthy.
I believe in total it will be a positive for the economy. The spending by the government for the Jobs and Families Plan acts will put money in the pockets of the lower half of income earners. They are the ones who will spend a good portion of what they receive. That was evident with first quarter GDP up 6.4% due in no small part to the $1,400 stimulus checks. There is, of course, inefficiency that 100% does not get spent and the government bureaucracy is not highly efficient. On the other hand, there is a multiplier impact. As the old saying goes, “the butcher pays the baker pays the candlestick maker”.
The money generated from taxes on the wealthy is essentially a transfer of money from the wealthy to the lower incomes. The wealthy would be using the funds to save and invest rather than spend. That might be an issue if there was a shortage of capital, but just the opposite seems to be true.
As far as corporate taxes, it seems that many corporations are making more money than they can put to work, and so they are buying back their stock. Projections are that $651 billion will be used by companies for stock buybacks in 2021, second only to 2018. Those buybacks tend to support stock prices but do little for growing the economy.
For American companies, there is a tradeoff between stock buybacks and the impact of increased consumption. Lower income earners spending their money will, I believe, increase actual revenues and earnings which in turn generate the capital for further expansion. Stock buybacks remove stocks and boost earnings per share, but do not add to earnings or revenues.
There will be a lot of pushback against this plan from politicians, from businesses, from business groups, and from the wealthy. But I believe the Democrats will push through their agenda. There will be those prognosticators who will scream that the stock market will collapse. Many will be the same “experts” who forecast the implosion of the market if Biden was elected. They have been wrong before and I believe they will be wrong when these new proposals are passed.
In summary, it seems to me that the proposals advanced by the Biden administration not only address the four major issues facing the United States but do so in a way that will be positive for the economy and for the stocks of some companies.
There will be losers as well as winners. The hope is to be invested in the winners and avoid the losers.
 Caroline Valetkevitch and Stephen Culp, “U.S. corporate buybacks are on the rise, lifting investor hopes,” Reuters, published January 25, 2021, https://www.reuters.com/article/us-usa-stocks-buybacks/u-s-corporate-buybacks-are-on-the-rise-lifting-investor-hopes-idUSKBN29U18R.