Joe Biden’s first 100 days in office surprised both critics and supporters, with ambitious spending plans to rebuild the U.S. economy. The combination of the economic shock from the pandemic, cheap debt and the failure of past austerity policies has catalyzed the largest investment in infrastructure and social protection in generations.
The great financial crisis of 2008/2009 was followed by limited stimulus and economic austerity which resulted in a weak recovery and exacerbated inequalities. President Biden, and much of his current team who were already in the White House under Barack Obama, clearly wish to avoid repeating this mistake. Today, the president seems to prefer to run the risk of a stimulus that is too strong rather than too weak to stimulate the US economy.
To ensure economic recovery, we must first overcome the pandemic. The new administration has kept its first election promise, which was to deliver 200 million vaccines by April 29, that is, during the first 100 days in office. As part of a vast deployment program, the United States has made the vaccines available to everyone over the age of 16, and at the time of this writing, 30.9% of the population has been fully vaccinated. It is more than the UK, the European Union and all the other developed economies.
The conditions are therefore ripe for a strong recovery. Congress approved the first part of the Biden administration’s budget package, the US $ 1.9 trillion “American Rescue Act,” intended to ensure rapid recovery through supportive policies. revenues.
The administration’s ambition goes beyond the fight against the pandemic. President Biden added two more stimulus packages that seek to reshape the US economy in what he describes as an “investment in America that only happens once in a generation.” The second part of his program, the “American Jobs Act”, which covers 2.3 trillion dollars published at the end of March, aims to modernize the infrastructures of the United States and to put an end to decades of underinvestment.
Don’t do things by halves
Third, last week the administration unveiled an $ 1.8 trillion program dubbed the “American Families Plan”, which included $ 800 billion in tax credits. This will finance jobs and incomes, education and health care, promoting economic demand and productivity. Plans are also being made for four-fifths of U.S. private-sector workers who do not currently enjoy paid time off.
To finance these measures, and in accordance with electoral promises, the top tax rate on the income of people earning more than $ 1 million a year would drop from 37% to 39.6%.
In addition, the capital gains tax would also drop from 20% to 39.6%, to which is added the 3.8% Medicare surtax that already exists. If the capital gains tax is passed later this year, it will be the first time in American history that capital will be taxed at the same rate as income.
However, we believe that the capital gains tax proposal will be reduced by Congress to a rate of about 30%, with effect from January 2022. This would be in line with estimates that maximize tax revenue for the government, as a higher rate may discourage investment activity and ultimately reduce the tax base.
The magnitude of the challenge of restarting the US economy can hardly be overstated. By multiple criteria, including life expectancy, obesity, homicide rate, infant mortality, and education, the United States lags all other developed countries (see attached chart ).
This has a disproportionate impact on the efficient use of the country’s human capital. It is also an economic mess, because the stability of a country depends on the well-being of the poorest 20% of the population. LJoe Biden’s stimulus package aims to increase the after-tax income of the poorest fifth of the population by 20%, while most of the financial burden falls on those with the highest incomes.
Political opposition to Joe Biden’s proposals has been rather limited to date. The popularity rating of the US president has remained constant, between 54% and 57%, because his policies have not shifted polarized opinions.
Upon taking office, Mr. Biden pledged to govern in a bipartisan fashion. Yet with a majority in the House of Representatives and the casting vote of its vice president in the Senate, laws were passed in Congress without the support of Republicans.
President Biden’s first 100 days began with the re-accession of the United States to the Paris Agreement. On April 22, the United States reinforced its commitments in the fight against climate change. However, at the strategic level, the struggle to retain global leadership continues.
The administration is working to rebuild its multilateral approach to geopolitics. The president met with Japanese Prime Minister Yoshihide Suga in mid-April to discuss how to jointly meet the strategic and security challenges posed by China.
Sino-US relations have changed tone, but not yet in nature. China’s economic ambitions have led to a clash with the United States, as its share of global gross domestic product has risen from 13% to 17% since 2009.
After meeting with President Xi Jinping, Biden told Congress last week that “China and other countries are moving closer together”, posing a strategic challenge for the United States. “Autocrats think democracy cannot compete with autocracies in the 21st century?” He said. Antony Blinken, US Secretary of State, said on May 2 that China’s growing military assertiveness and domestic repression threatens the “rules-based international order.”
On April 16, the United States imposed new financial sanctions on Russian entities and officials in retaliation for cyber attacks and other forms of interference, following measures taken in March on the country’s treatment to the leader of the political opposition Alexeï Navalny. The United States, Japan and South Korea will discuss cooperation on North Korea this week at a meeting of G7 foreign ministers. Last month, the United States and Iran agreed to discuss the resumption of negotiations on nuclear enrichment and sanctions. The Biden administration is also beginning to withdraw its troops from Afghanistan.
The success of the US immunization program and unprecedented levels of planned budget spending have changed expectations for the US economy, leading to an upward revision of GDP growth forecasts. At the start of 2021, the consensus of economists predicted growth of around 4% for the full year and a similar expansion for the European Union (EU). Today, analysts’ consensus predicts a 6.25% expansion in the US and the EU’s outlook unchanged. We expect the US economy to grow 6% this year, compared to 4.3% in the EU and 9% in China.
The economic improvement is reflected in the rise in US rates, which almost doubled in the first quarter. In the near term, inflationary pressures will weigh on government bonds, and we have raised our year-end target for 10-year US Treasuries to 2%.
For the dollar, interest rates in the rest of the world will be more important than the evolution of national rates. In particular, improving global growth and international trade will contribute to higher rates elsewhere, which should weaken the dollar to some extent.
In stock markets, attention is shifting from fiscal stimulus to stronger regulations and taxes. A corporate tax hike could reduce earnings per share for 2022, which are also expected to rise 14% from 2021. We believe that information technology, health care and consumer stocks will be the hardest hit. Overall, we maintain a slight overweight in US equities and expect an S&P 500 at 4,500 points by the end of 2021, with small caps and stocks linked to the transition to a carbon neutral economy benefiting the most from policies conducive to government growth.