President-elect Joseph R. Biden unveiled his $1.9 trillion stimulus package that aims to lift America out of its current economic crisis. Any bill based on Biden’s plan will have to be passed in the House first, where the Democrats have a slim majority and in the Senate, which will be evenly split. How the legislation moves through the chamber will depend on how the committees are structured. If they come to an agreement on sharing power in the Senate, this could affect how fast legislation gets to the floor for a vote.
Positives of the stimulus plan:
Significant increases in government spending will likely cause great optimism in many sectors of the U.S. stock market. Market sectors such as consumer discretionary, financials, health care, energy, REITs (Real Estate Investment Trust), and industrials are potential beneficiaries from the Biden stimulus plan.
The Biden administration did not hesitate to spend lots of money to combat the Covid-19 pandemic with $400 billion being spent in response to the crisis. $20 billion of that money is being allocated to a vaccination program. Should Biden’s plan to vaccinate 100 million Americans in 100 days succeed, then we could see the reopening of the economy and a subsequent economic rebound in America.
Government infrastructure spending played a key role in the U.S. economic recovery during 2009. Increased infrastructure spending would also reduce unemployment, as the U.S. Council of Economic Advisers has calculated that $1 billion of transportation-infrastructure investment supports 13,000 jobs for a year.
Drawbacks of the stimulus plan:
Every penny of Biden’s stimulus package will be financed with borrowing. Riedl forecasts that the Trump measures, plus additional aid promised by Biden’s stimulus package, will push the 2021 budget deficit to at least $3 trillion. As a result, the U.S. debt will increase from $16.8 trillion to a minimum of $23.3 trillion, a jump of $6.5 trillion in just 24 months. The federal government will have its hands tied when trying to pay off these debts in the future. The only way the federal government can pay off this debt is by letting inflation rise (thus devaluing the dollar and making it cheaper to pay off the debts). However, rising inflation rates will hurt the greater U.S. economy, as there will be reduced wage growth. The elderly will suffer as the value of savings will diminish.
The Biden administration plans to raise an additional $4 trillion in tax revenue by increasing the top tax rate to 39.6%, taxing capital gains at ordinary rates, and raising the corporate tax rate to 28%. While the U.S. government desperately needs to reduce its budget deficit, increased tax rates could discourage savings, investment, and business formation, potentially causing lasting economic damage.
Biden’s stimulus package pledges to spend $15 billion on grants for small businesses. However, Biden’s efforts in helping small business is counter-intuitive, due to Biden’s plans to raise the U.S. minimum wage from $7.25 per hour to $15 per hour. Small businesses are the ones that usually feel the brunt of minimum wage increases, as high wage rates affect narrow budgets. This is especially true for small businesses such as restaurants, which typically have thin profit margins and have felt the brunt of Covid-19 regulations. This may subsequently discourage small businesses from employing. This could be detrimental to America’s already dismal unemployment rate, as small businesses make up 47.3% of the nation’s private workforce, according to the Small Business Administration.
The stimulus package aims to heal the ailing U.S. economy with ambitious proposals. Whether they are bold enough or too aggressive will decide its fate. However, whether or not this package will be implemented will depend on the outcome of how much power Democrats and Republicans have in the U.S. senate. A Democrat majority will lead to the package being passed, whereas a republican majority will force a scaled-down package to be proposed and will likely cause delays in the implementation of the package.