President Biden’s Economic Plans Face a Haircut
Author: Greg Valliere
April 6, 2021
PRESIDENT BIDEN’S AMBITIOUS AGENDA has hit some turbulence. He won approval of the $1.9 trillion Covid aid bill last month, but a dominant theme over the long Easter break was that members in both parties are getting uneasy over the price tag of the next bills — and the threat of higher taxes.
IS A MASSIVE NEW INFRASTRUCTURE BILL NEEDED? We continue to believe that something close to full employment is possible by winter. The prospect of a red-hot economy has Republicans worried about their 2022 electoral prospects, so they are determined to obstruct Biden’s bills.
THE GOP HAS MOUNTED A FURIOUS assault on the three remaining components of the Biden agenda, which will cost so much money that even some Democrats are grumbling.
Our handicapping of the next three Biden components:
1. Infrastructure: More spending has decent support in Congress; who doesn’t like new bridges and smoother highways? But Biden’s $2.25 trillion proposal may get a haircut; maybe he’ll get a mere $1.75 trillion over eight years for a wide range of infrastructure projects — for boosting the power grid, getting cleaner water, funding electrical outlets at filling stations, etc.
2. Tax hikes: Republicans appear to be unanimous in their opposition to any new taxes, and Democrats are beginning to waver. Congress may not want to mess with the estate tax, or taxing capital gains as ordinary income.
And Joe Manchin, the moderate Democrat, is opposed to raising the top corporate tax to Biden’s proposed 28%; Manchin might settle for 25%. He claimed yesterday that “six or seven” other Democrats have serious objections to Biden’s pending proposal.
The public wants to hike taxes on the very wealthy and large corporations, but Biden’s proposal is likely to face a major haircut during negotiations this spring. He may get some tax increases, maybe half of what Progressives want; the markets can probably can live with that outcome.
3. A wide range of safety net spending — for community colleges, child tax credits, etc. — has little to do with Covid, but is part of the Democrats’ enormous progressive laundry list. Prospects of enactment are shaky at best; the safety net provisions simply may be too expensive.
ONE BIG COMPLICATION: Biden will be lucky to get 60 or 70 percent of what he wants — but first he will have to cut a deal with representatives from high-tax states like New York and California who are determined to restore tax deductions for state and local taxes. But the left will howl that only wealthy taxpayers would benefit.
STILL ANOTHER COMPLICATION is whether Biden will seek to combine these three provisions into a huge package via the budget reconciliation process (a dramatic change in the filibuster rules seems unlikely).
AN IMPORTANT RULING by the Senate parliamentarian yesterday would allow the Democrats to use reconciliation twice more this year, not just one more time, which could mean that infrastructure might pass separately, then tax hikes, with safety net spending perhaps coming later this year, or in 2022, or never.
BUT EVEN RECONCILIATION WOULD require all Democrats to vote for it — and that suddenly that looks a little less likely than before the Easter break. The Democrats can’t afford to lose even one of their votes, which is why Manchin is so pivotal.
OUR BOTTOM LINE: A haircut seems inevitable. Less spending than Biden wants — plus only a modest tax hike — wouldn’t be a bad scenario for the financial markets, which can live with a “haircut” scenario on taxes and spending.
IT MAY TAKE UNTIL LATE SPRING to get clarity on this legislation, but there’s little doubt about one crucial factor — an increasingly strong economy is baked in the cake, regardless of what Congress passes, as long as the Federal Reserve stays accommodative.
THE FED WILL KEEP ITS FOOT ON THE ACCELERATOR at least into the fall, even though the economy is sizzling already; the labor market, now tightening, will be nearing full employment by year-end.
The views expressed in this blog are provided as a general source of information based on information available as of the date of publication and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Speculation or stated believes about future events, such as market or economic conditions, company or security performance, or other projections represent the beliefs of the author and do not necessarily represent the view of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and AGF accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Any financial projections are based on the opinions of the author and should not be considered as a forecast. The forward looking statements and opinions may be affected by changing economic circumstances and are subject to a number of uncertainties that may cause actual results to differ materially from those contemplated in the forward looking statements. The information contained in this commentary is designed to provide you with general information related to the political and economic environment in the United States. It is not intended to be comprehensive investment advice applicable to the circumstances of the individual.
AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), AGF Investments America Inc. (AGFA), AGF Investments LLC (AGFUS) and AGF International Advisors Company Limited (AGFIA). AGFA and AGFUS are registered advisors in the U.S. AGFI is a registered as a portfolio manager across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.
About AGF Management Limited
Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.
For further information, please visit AGF.com.
©2023 AGF Management Limited. All rights reserved.