Biden’s Stimulus Plan and What it Means for the Economy

After winning both Senate seats in January’s special election in Georgia, Democrats have gained unified control of both houses of Congress. This significantly increases President Biden’s ability to sign new legislation, including the long-promised stimulus package in response to COVID-19. President Biden called for a 1.9 trillion USD relief package on Thursday (January 14th) that includes a 1,400 US per-person payment to most households, a 400 USD weekly unemployment insurance, and increases in child tax credit. Aid for households makes up about half of the plan’s cost with much of the rest going to vaccine distribution and local governments.

 

Public debt is the primary concern. As a result of the pandemic, the US government’s budget deficit in 2020 amounted to 3.1 trillion USD—15% of GDP and the largest since World War 2. President Biden has visons to fight inequality, combat climate change, and expand the healthcare system but high levels of debt could cripple his future agenda. Unlike the period following WWII, where population and economic growth quickly decreased national debt, large tax cuts and an aging population have increased the burden. Spending on healthcare and retirement programs is growing faster than the revenue needed to finance them. Excluding proposals to tackle the pandemic, President Biden has proposed a spending of 11 trillion USD over the next decade. Debt financing many of these projects, such as investments in critical infrastructure and combating climate change, would be difficult in a divided government. Republicans are already criticizing Biden’s plans as ‘unsustainable borrowing’

 

However, President Biden’s announcement has seen compelling positive effects. The Democrats’ victory in Georgia and the new stimulus package has led to higher-than-expected government spending and inflation which pressures the Federal Reserve to cut down its bond-buying operations and potentially even increase interest rates earlier than planned. This, along with improved investor confidence caused the big jump in Treasury yields on Wednesday that brought 10-year returns above 1% for the first time since March. The stock market shared this sentiment: cyclical stocks sensitive to the economy such as financials, industrials and consumer discretionary sectors beat safer long-term stocks in general. Exposures to the long-overperforming technology sector have seen a rotation to small-caps and less favoured value stocks because the expectation of low interest rates has made businesses whose valuations are based on future profits more appealing. According to the Financial Times, roughly 27 billion USD has been directed to small-cap stocks since Biden won the election in November. Small businesses are expected to flourish as lives return to normal and the extra government spending should lift the sectors hit hardest by the pandemic.

 

As businesses recover, unemployment will drop rapidly. After Democrats won control of the Senate earlier this month, Goldman Sachs forecast unemployment would fall to 4.8% by the end of this year from 6.7% in December and 14.8% in April. It took nearly seven years to reach that level after the 2009 recession. During the last expansion, job opportunities expanded significantly, especially for low-skilled workers and wages rose quickly as well. The pandemic largely undid this progress, disproportionately hurting the same group of workers, most of which work in services that require physical presence. As the recession drags on, it becomes increasingly difficult for them to find work at previous wages. A rapid return to 5% unemployment can solve this.

 

Therefore, the implementation and effectiveness of President Biden’s plan is yet to be seen and the fix comes at a signficant price. However, with the economy struggling and interest rates at historically low levels, it seems worthwhile to set aside deficit concerns in order to bring American business out of this crisis.

 

By Matthew Xiao

Sector Head: Jackon Philips

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