Commentary on Political Economy

Friday 7 May 2021


Biden’s risky spending poses a danger for the world

By Liam Halligan
May 7, 2021 — 8.20am

Nomadland was the big winner at last week’s Oscars ceremony. The movie tells of camaraderie and resilience, but also anxiety and despair, among a growing band of mainly older Americans.

Facing financial difficulties, this hardy bunch, many once reasonably well-off, avoid the expense of a permanent home by living in mobile homes or vans, travelling in search of casual work.

Joe Biden is spending up big.
Joe Biden is spending up big. CREDIT: BLOOMBERG

Nomadland is reminiscent of novels by John Steinbeck – who superbly captured the mood of mid-1930s, depression-era America. In some senses, there are parallels between the US then and now.

Inequality is acute and rising – as the fabled “1 per cent” command an ever-higher share of the country’s wealth. And president Biden, evoking his Democrat predecessor Franklin Delano Roosevelt, last week unveiled a post-Covid recovery programme akin to America’s interwar “New Deal”.

But do Biden’s spending plans make sense given the US is already booming? While life is tough for the Nomadland crowd, the bigger picture is of an inflation-prone economy that could soon overheat. At least one in 10 Americans live in poverty and, at the sharp end, millions across the US need assistance. But Biden’s rescue programme, however well-intentioned, is so vast, and muddle-headed, it poses serious dangers to America and the rest of the world.

Stephen Bartholomeusz

Senior business columnist

The US is on the cusp of a pronounced boom, having recovered in the first three months of this year as businesses reopened. The world’s biggest economy grew at an annualised 6.4 per cent during the first quarter, rebounding much faster than expected after last year’s sharp fall.

This growth is built in part on the US vaccine programme. Around 143 million Americans – 43 per cent of the population – have had at least one jab, with 10 million doses administered over the last week alone. This has lifted confidence, helping consumer spending in April hit a 14-month high.

We’ve also already had a $US1.9 trillion ($2.4 trillion) Covid recovery stimulus – much of it spent on cheques sent directly to individuals (the latest, in March, for $US1400) and lavish aid to state and local governments.

Yet, on top of that, Biden has just unveiled another $US4 trillion of stimulus, split between social safety net spending and investment in infrastructure and green jobs. Such spending is astounding and, with the economy accelerating fast, could also be seen as reckless.

FDR’s “new deal” involved $US42 billion of state spending back in the 1930s. That was outstripped by the 2008 recovery package after the Lehman collapse – which cost $US840 billion, about a third more than FDR’s scheme, when adjusted for historic prices.

The benchmark S&P 500 is near record highs.
The benchmark S&P 500 is near record highs. CREDIT: AP

Yet while that 2008 stimulus was equivalent to 6 per cent of annual GDP, Biden’s post-Covid spending plans, including the £2 trillion ($3.6 trillion) already unleashed, amount to almost 30 per cent of GDP. Yes, GDP is an annual number and Biden’s bazooka will be fired across several years. But this is unlike anything peacetime America has seen.

Many Republicans – and some Democrats – fiercely oppose stimulus on this level, worried not only about rising debt levels but also a spike in inflation. The Federal Reserve downplays such dangers – and last week kept benchmark rates unchanged at 0-0.25 per cent, citing the need to support growth.

Yet, even before the US emerges from lockdown, inflationary pressures are clearly building. Producer prices in March were 4.2 per cent above the same month in 2020, a ten-year high.

While this partially reflected firmer energy costs, “core” inflation – excluding food and energy prices – hit 3.1 per cent last month, also the highest in a decade. And with customer inventories low and order books increasingly full, producers are passing price pressures on.

Stephen Bartholomeusz

Senior business columnist

That’s why the consumer price index surged 2.6 per cent in March, up from 1.7 per cent the month before. Such headline inflation could hit 4-5 per cent in the coming months, as prices in a booming, fully open economy outpace those last summer, when the US was largely locked-down.

While the Fed says inflation will moderate, pandemic-related scarring and supply constraints could well keep inflation higher for longer. Restrained supply and pent-up demand means US rates may rise well ahead of 2024 – the Fed’s current inferred position.

For now, a dovish Fed and cyclical recovery is boosting US share prices.

The bellwether S&P500 index of leading stocks keeps climbing – and is now 25 per cent above its pre-Covid high. The most likely check on this runaway market is a “taper scare” – tighter monetary policy, either higher rates or a halt of the Fed’s quantitative easing money-printing programme.

In reality, Biden’s tax measures are largely for show. Talking tough about forcing “big corporations” and “the plutocrats” to pay more goes down well with most voters. But it won’t happen to anywhere near the extent needed to fund these profligate plans.

As inflation expectations rise, and monetary tightening looms, share prices will surely adjust. And that could happen sooner than expected.

Biden’s spending extravaganza will supposedly be funded by tax rises. The newly-announced “Made in America Tax Plan” outlines a bewildering array of measures, including a corporation tax hike from 21 per cent to 28 per cent, minimum levies on US firms’ global earnings and reforms to discourage businesses moving operations abroad.

Yet multinationals are highly adept at relocating activity to lower tax bills. And nations often compete on tax – making “global” levies, requiring cross-border coordination, less likely to succeed.

Biden also wants higher income taxes, but only on “the truly wealthy” – those earning over $US400,000 per year. That’s the top 2 per cent of the income distribution, who already provide almost half of all US income tax revenue. Again, there’s no way such a narrow group can put even a dent in the bill for a multi-trillion-dollar spending scheme.

In reality, Biden’s tax measures are largely for show. Talking tough about forcing “big corporations” and “the plutocrats” to pay more goes down well with most voters. But it won’t happen to anywhere near the extent needed to fund these profligate plans.

This huge spending package will be driven, of course, by yet more QE. Having doubled its balance sheet to almost $US8 trillion since Covid first hit, the Fed will keep expanding, just like the European Central Bank, the Bank of Japan and our own Bank of England.

Given the dollar’s reserve status, the US may get away with it – avoiding sharp and sudden rate hikes, even as inflation comes through, given global demand for America’s sovereign debt and currency, not least in times of crisis.

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