Mr Biden and the Great American Binge

Nearly 100 days into his presidency the character of the Biden administration is now evident. Just how left-wing is Joe Biden? Victor Hill inquires.

100 Days in

Many Americans who describe themselves as moderates thought that a Biden presidency would represent a restoration of normality after the aberration of Trumpism. He would be a unifier, returning to the neoliberal consensus. He would restore climate orthodoxy to its central position, upgrade America’s crumbling infrastructure, revivify NATO and stand up to China. He was thought unlikely to hike taxes even if he might ramp up federal government spending. But nearly 100 days into his administration – the traditional milepost when presidential administrations are first evaluated – what has emerged is not just a Keynesian love of state spending but a frankly left-wing political agenda.

Mr Biden has signalled that his administration will raise both personal and corporate taxes to fund a bigger state. Democratic legislators at state level have done the same. Domestically, there is already a corporate flight from high tax states such as California and New York to lower tax states such as Texas and Florida. (Mr Musk last year re-located Tesla’s tax domicile from California to Texas.) Internationally, some US corporations may seek to operate henceforth in less taxing jurisdictions.

First it was a $1.9 trillion stimulus package – the Covid Relief Bill. Then another $2.3 trillion package was unveiled (or was it $4 trillion?) in the American Jobs Plan, as if we doubted that we were talking serious money. Another $1 trillion childcare, health and education programme is expected soon. Admittedly, these spending commitments will be spread over a decade or more.

Much of the massive fiscal stimulus package is earmarked for infrastructure. But the fear is that all this borrowed – and newly printed – money will mainly boost aggregate demand at the very moment when the US economy recovers from the strictures of the coronavirus pandemic. This could cause a surge in inflation (as I discussed last month) which would in turn put upward pressure on interest rates, thus increasing the cost of debt. Late-Trump, the fiscal deficit was already running at 15 percent of GDP: what it will be late-Biden is anyone’s guess.

Sceptics fear that much of the tsunami of new state expenditure will not go to infrastructure but instead to welfare programmes such as childcare and care for the elderly. The initial stimulus package included a cheque for every American earning $100,000 or less of $1,400. Plus increases in family tax credits, healthcare subsidies and unemployment benefit. The Biden administration wants the minimum wage to rise to $15 by 2025. (The current minimum wage in the UK is $12.38). It wants gig economy freelancers to become employees (something that is unfolding in the UK under judicial pressure rather than government policy).

Officially, $621 billion will go towards road, rail, better broadband and EV charge point infrastructure. $561 billion will be dedicated to renewable energy. $480 billion will fund subsidies for American manufacturers and new R&D. But will capital be allocated to the right projects which offer the best return on investment? Do bureaucrats make better investment decisions than fund managers and bankers? Will the new borrowing pay for itself? In India, when you cross a new road bridge, a digital screen announces both your tariff, traffic flow conditions and the current internal rate of return (IRR) of the project. I doubt that will ever catch on in America.

No doubt growth will soar in the short-term. Goldman Sachs expects the US economy to grow by nearly seven percent this year as America recovers from the pandemic and the money taps are turned full on. Plus, a glut of household savings built up during the pandemic will likely fuel a consumer boom. US GDP will regain pre-pandemic levels by the end of Q2. However, a slew of economists, including Larry Summers, fear that inflation could be unleashed as the economy overheats. Currently, US inflation hovers at around 1.7 percent but the markets expect it will go higher.

Death and taxes

The headline rate of corporation tax (taxes on corporate profits) in the USA will rise from Mr Trump’s 21 percent to 28 percent if Mr Biden gets his way. That will put the USA roughly on a par with France. There will be no new tax offset initiatives. More radically, a plan for a minimum global tax rate will assess US corporations’ tax liabilities in accordance with their global revenues. That will make the US corporate tax regime one of the severest in the world. Treasury Secretary Janet Yellen last month called on countries around the world to join Washington in this endeavour.

The problem with a tax on global revenues is that, even if the Europeans go along with it (possible), it puts multinational US companies at a disadvantage to their Chinese and Indian competitors. According to Bank of America, in 2019, 60 percent of all US multinationals’ global revenue was booked in just seven jurisdictions – including Ireland, Switzerland and the Netherlands. Such countries would be under political pressure to stay out of the arrangements. It is unlikely that Ireland will abandon its 12.5 percent corporate tax rate which has attracted the likes of Facebook, Google and Apple to establish subsidiaries which book revenue on its shores. In the UK, where various forms of digital sales taxes have been proposed, the government is yet to give its backing to Ms Yellen’s proposal.

Mr Biden, despite his liberal credentials, is in terms of trade policy, more Trumpian than Trump. He has not reversed any of Mr Trump’s tariffs on South America. Meanwhile, the proposed US-UK free trade agreement is in the freezer, even as the USA pursues trade deals elsewhere. In any case, there could be no deal with the UK that did not meet the approval of the Delaware chicken farmers. It seems that, as President Obama forewarned, the UK is at the back of the queue. As I have stated in these pages numerous times, a US-UK trade deal is highly unlikely in my view. That said, both the UK and the US have eased tariffs on favoured goods such as Scotch whisky. When there are trade tensions between the US and the EU, the UK is now a neutral power. The Boeing-Airbus spat is not our problem.

Adding all this up, the USA might soon have the most outrageous fiscal deficit in the developed world, the least competitive corporate tax system and a welfare state burgeoning to Scandinavian levels of generosity. Not to mention an Italian level debt-to-GDP ratio. As the state borrows more, so private investment will be crowded out, thus lowering the long-term growth rate. And regulation is set to tighten, not least in the digital domain and in the labour markets. And yet Wall Street gets further into record territory – though yesterday it fell back on news that Mr Biden wants to more than double capital gains tax for millionaires to as high as 43.4 percent.

The dollar has already started to weaken – and could be under further threat from the emergence of a Chinese state-backed digital currency. That’s something I’d like to discuss soon. And bond market yields are rocketing. The 10-year US Treasury is now yielding 1.571 percent – nearly 90 basis points up since January.

Woke in the White House

Another strain of policy under President Biden is a desire to assuage the peculiar alliance of race theorists, feminists, gender studies afficionados (not forgetting transgender studies), historical revisionists and no-platformers who drive America’s woke agenda – and to a high degree, ours too. This woke agenda arose in America’s universities, where it has already had the effect of limiting free speech and therefore critical thought in general. It then spread to municipal government with woke mayors, like the Mayor of Portland, Oregon. And now it also pervades America’s boardrooms – and, perhaps to a lesser extent, boardrooms on this side of the Atlantic. Woke capitalism will come at a cost – as I shall explore shortly.

In giving the administration’s tacit support for the woke agenda, Mr Biden and his team are dallying with people who want to de-fund the police, who support radical constitutional change and some who espouse a radical Marxist agenda. The president has established a committee which will determine whether to expand the US Supreme Court – and thereby, presumably, to overturn its conservative majority.

He has also fanned enthusiasm for awarding the District of Columbia statehood which would confer on it two seats – undoubtedly Democratic ones – in the Senate. Puerto Rico might also be encouraged to pursue statehood. The most recent referendum on the issue in the territory in 2012 suggested that most Puerto Ricans favour full statehood within the United States, although the referendum was criticised for the large number of spoilt ballots.

In America, Catholics (Mr Biden is a mass-attending Catholic) are often regarded as social conservatives. But Mr Biden is an evolved catholic. Senator Biden voted to outlaw same-sex marriage back in 1996; yet by 2012, as Vice President, he told a TV audience that he supported it – as indeed many ordinary Catholics now do. He is also pro-immigrant. This week he instructed immigration agencies not to use the term illegal alien.

America’s got vaccine talent

The US is on course to overtake the UK in the vaccination stakes if it has not done so already. By early this week 213 million vaccinations had been administered, according to Bloomberg. To some extent this is due to the efforts of Mr Trump who under Operation Warp Speed pre-ordered vast supplies of vaccine even before they had been licensed by the FDA. In all, the federal government signed contracts for 800 million doses – enough to jab America’s 328 million citizens nearly three times.

Mr Biden, since his inauguration on 20 January, has poured money into the vaccination programme. He appointed a White House Coronavirus Response Coordinator, Jeff Zients, who worked on Obamacare in the Obama administration. On 25 January, he purchased an additional 200 million doses from Pfizer and Moderna, invoking the Defence Production Act. This is a piece of legislation going back to the Korean War which gives the president extensive powers to oblige private companies to cooperate with government for reasons of national security. As a result, Merck (NYSE:MRK) was forced to assist in the manufacture of the J&J-Janssen vaccine.

Overall, the USA has delivered about one quarter of total jabs administered worldwide at a rate of over three million a day over the last two months. The two vaccines administered have been the Pfizer-BioNTech vaccine and the Johnson & Johnson (J&J-Janssen) vaccine. There have been no supply issues as both are manufactured in the USA. After a shaky start, Mr Biden hit the target of administering 100 million doses in his first 100 days nearly six weeks early.

Most doses of vaccine are sent by the federal government to state governments for distribution; but Washington also sends millions directly to a network of 14,000 pharmacies through its Federal Pharmacy Program. There are also about 5,000 mobile clinics. Thousands of military personnel have been acting as vaccinators. Mr Biden’s $1.9 trillion coronavirus relief package included another $20 billion for vaccination centres and community health workers. Within three more months 75 percent of the US adult population should have been vaccinated.

One negative is that there are pockets of vaccine hesitancy. Nearly 40 percent of US marines offered the coronavirus vaccine have refused it according to Pentagon figures released last week. But overall, the USA is excelling in the vaccine race. The presidential election of November 2020 took place at the low point of America’s response to the pandemic. If the election could have been delayed (constitutionally impossible – but some Trumpistas devoutly wished for it) the result may have been different. Of such counterfactuals is alternative history made.

Incidentally, not a single Oxford-AZ vaccine has been administered in the USA. CNN reported two weeks ago that government advisors did not foresee the Oxford-AZ vaccine being used at all.

Geopolitics

Joe Biden’s arrival in office coincides with a shortage of semiconductors (computer chips) and rare earth minerals – both of which are essential in the manufacture of high-tech products such as cell phones or fighter jets. Honda (TYO:7267) shut down five plants in the USA and one in the UK (Swindon) in February due to component shortages. General Motors (NYSE:GM) has warned that such outages threaten its bottom line. As I write, JLR has announced that it is suspending production in the UK for the same reason. Both issues have focused a light on the USA’s unhealthy reliance on China to keep its factories running.

The value of semiconductors manufactured in China has risen fourfold since 2010, according to IC Insights. Since 1990, the US’s share of global semiconductor production has slumped from 37 percent to just 12 percent today. In recent years the key supplier of semiconductors to the US apart from China has been Taiwan – notably TSMC (NYSE:TSM). This means that any increased hostility on China’s part towards Taiwan will gain additional traction in Washington.

In terms of rare earth minerals, we are now seeing a pivot away from China towards Australia, which has yet untapped reserves of rare earth minerals. Australia is already an important intelligence partner given its involvement in the Five Eyes and an increasingly important military partner given its inclusion in the Quartet (USA, Japan, India and Australia).

In so far as Russia is concerned, Mr Putin in his 21^st year as Russian president looks more unpredictable than his earlier incarnations. He is getting less risk-averse and more intolerant of opposition. The Russians are amongst the best educated and most sophisticated people in the world; but, unfortunately, they are increasingly divorced from their leadership.

As well as the threats posed by a more aggressive China, and a Russia engaged in asymmetrical warfare, Mr Biden must deal with the Islamic Republic of Iran. His approach is to revive President Obama’s ill-fated nuclear deal, even if the threat posed by Iran towards Israel has if anything exacerbated since the Obama years. Iran has already notified the International Atomic Energy Agency (IAEA) that it wants to start processing nuclear fuels.

All told, geopolitical risks are rising rapidly.

An unknown quantity

Biden afficionados claim that Mr Biden is a new Franklin Delano Roosevelt. His detractors think there is no comparison. Even those who back him admit he is frail and often croaky. His delivery is halting. Sometimes he looks bewildered. His minders don’t allow him out much. He didn’t give a formal press conference until 25 March – after 64 days in office. He hasn’t been abroad yet.

For all that, his administration is buzzing. The initiatives keep on coming. On Thursday, Mr Biden announced a radical new target that America will halve its carbon emissions by 2030 (relative to 2005). I’ll examine soon how feasible that is – will Americans ever forego the tumble dryer and dry their washing on a line as Brits do? Fat chance.

A good leader is a catalyst – if he or she gets things done, we laud them, even if they are personally lacklustre. One of the most transformative leaders of the UK was Clement Attlee (PM 1945-51) whom Winston Churchill described as a sheep in sheep’s clothing. Mr Biden may yet prove a catalyst for beneficial change. And he might fall flat on his face. But for now at least, the equity markets are sanguine.