What to expect from a Biden presidency - Capital Economics
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What to expect from a Biden presidency

US Economics Update
Written by Paul Ashworth
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Much of President-elect Joe Biden’s agenda will be dead on arrival with the Republicans maintaining control of the Senate, but there is still a chance of more fiscal stimulus being passed, albeit probably not until after Biden takes office on 20th January.

  • Much of President-elect Joe Biden’s agenda will be dead on arrival with the Republicans maintaining control of the Senate, but there is still a chance of more fiscal stimulus being passed, albeit probably not until after Biden takes office on 20th January.
  • Biden appears to have won the presidency, narrowly capturing enough of the swing states he needed, particularly in the Midwest. Several states might end up undertaking mandatory recounts, but Biden’s leads in those states are nevertheless big enough to make it unlikely the results will be overturned. The Senate picture is not complete yet either and won’t be until early next year, but we would be surprised if the Republicans lose either of the two run-off elections required in Georgia.
  • The conventional wisdom is that, with the Republicans clinging to their slim majority in the Senate, hopes of more massive-scale fiscal stimulus, which was expected under a Democratic clean sweep, have been dashed. To some extent, that is true, but there is also a straw man element to that argument. We were never convinced Biden would be able to deliver on the size of stimulus that some commentators had been talking about. Not when the best the Democrats could have realistically hoped for was a two or three seat majority, which would have left them well short of a filibuster-proof 60-seat majority and at the mercy of the most moderate Democratic Senators, three of whom voted against the Green New Deal last year.
  • Given the uncertainty over the election, we had deliberately avoided incorporating any additional fiscal stimulus into our baseline forecasts. The upshot is that, even if Congress only agrees on a smaller $1.0trn to $1.5trn fiscal package, we would still be revising our economic forecasts up rather than down. Senate Leader Mitch McConnell struck an encouraging tone this week, calling another coronavirus relief package “job one” and acknowledging the “possibility” of providing more funds for state & local governments, a key demand of Democrats. Even assuming a relatively modest budget multiplier of 0.6, which would match the CBO’s estimate for the CARES ACT, that “small” stimulus would still add between 3.0% to 4.5% to GDP. With GDP now only 3.5% below its pre-pandemic level, we’re talking about a stimulus that would still be enough to eliminate all of the remaining output lost to the pandemic.
  • The bottom line is that, with GDP recovering and the unemployment rate dropping below 7%, the economy simply doesn’t need the size of stimulus that was being talked about under a Democratic clean sweep. That may change in the coming months if the latest surge in coronavirus cases triggers another round of widespread lockdowns but, for now, we still expect GDP growth to be 4.5% in 2021 and any fiscal stimulus would cause us to revise that forecast higher.
  • We don’t see this stimulus being passed during the lame duck session that will run until the new Congress convenes early next year, however, because even if McConnell and enough Republican Senators are on board, we suspect that President Donald Trump would simply veto it. Stimulus will have to wait until late-January or February next year.
  • With his pride damaged by the election loss and amid his baseless claims of election fraud, we suspect that Trump will pursue something of a scorched earth strategy between now and inauguration day on the 20th January. Every President issues ill-advised criminal pardons on their way out the Oval Office but, with Trump, we worry more about a flurry of increasingly dramatic Executive Orders, designed to shore up his MAGA base, already looking ahead to a run for the Republican presidential nomination in 2024. There has been little disorder in the streets despite such a closely contested election, which perhaps explains why market volatility has remained so low, but, egged on by Trump and his family, that could also still change over the next month or two.
  • As the Republicans will still control the Senate, most of Biden’s policy plans are dead on arrival. There will be no tax increases on corporations or higher income earners, no green new deal-style infrastructure spending, no near-doubling of the Federal minimum wage and no major health care reform. But a Biden administration could still pursue tighter regulation of the financial and energy sectors simply by restoring the teeth of the regulatory agencies for those industries. Biden could also lean on his Attorney-General to launch more anti-trust lawsuits against major tech firms without needing the approval of Congress.
  • As a guiding principle, we expect Biden’s foreign policy to be a lot more favourable toward traditional allies and a lot less favourable toward the various authoritarian dictators that Trump had such a soft spot for. The expectation is that Susan Rice, who served as ambassador to the UN and national security advisor in the Obama administration, will be nominated to be Biden’s Secretary of State. Biden nearly named her to be his vice-presidential running mate. The only question is whether the Republicans in the Senate would be willing to confirm her appointment, given her entanglement in the fallout from the Benghazi terrorist attack in 2012?
  • When she was the US ambassador to the UN, Rice was a staunch defender of Israel and helped to negotiate tougher international sanctions on Iran. Biden has indicated that as President he would return the US to the 2015 Iran nuclear deal, but only if Iran itself was complying with the terms of the original deal, which it currently is not. Biden will not want to appear “soft” on Iran. Biden is also more likely to use his authority under the International Emergency Economic Powers Act to impose sanctions on Russia and Turkey. Relations with North Korea will become more antagonistic again.
  • We expect Biden to pursue a closer relationship with the European Union, in part to build alliances that could be more effective in countering the growing global influence of China. There is little risk of a Biden administration imposing tariffs on motor vehicles imports from the European Union, as the Trump administration repeatedly hinted it might. The exception may be relations with the UK, which is less likely to secure a post-Brexit free trade deal under a Biden administration. Whereas Trump was an enthusiastic supporter of Brexit, Biden has said that any attempt by the UK to undermine the Good Friday peace agreement in Northern Ireland, by imposing a hard border, would rule out any UK-US trade deal.
  • More generally, while Biden will be less protectionist than Trump, we don’t expect him to enthusiastically embrace renewed globalisation. Biden’s economic plans included prominent “Buy American” provisions and the House Democrats have displayed little enthusiasm for relaxing trade rules, even temporarily denying Obama a renewal of the President’s fast-track authority to negotiate free-trade deals. The Biden administration is not going to re-join the TPP – although Biden has floated the idea of “re-negotiating” it – or pursue bilateral trade deals with smaller nations, not when there is a good chance that the Republican-held Senate and Democratic-held House would both reject them.
  • One of the biggest uncertainties with Biden is how and when he would unwind Trump’s tariffs on China. Biden has been sharply critical of Trump’s Phase One trade deal, arguing that tariffs have imposed costs on American consumers in return for few concessions from Beijing. In recent interviews, Biden sidestepped questions on whether he would scrap the tariffs, instead simply saying that he would refocus US demands on commitments on structural changes to China’s policies on technology transfer and market access. It seems likely he would push for renewed negotiations, perhaps involving a broader set of allies, to pressure China into making structural changes. We are sceptical that would be any more effective than Trump’s approach at encouraging China to change its behaviour. Under President Xi, China has increasingly emphasised a state-led model focused on fostering domestic innovation and China is acting more assertively internationally. The upshot is that, regardless of who is President, US-China relations are likely to remain tense.
  • Biden will be 78 years old when he is inaugurated, and we would be surprised if he seeks a second term. (We also doubt that Trump, who is 74 years old, will contest the 2024 presidential election.) Whether Biden makes way for Kamala Harris sooner, possibly after a disappointing mid-term result in 2022, remains to be seen. Harris’ has an extremely progressive voting record in the Senate, even more so than Elizabeth Warren, but her campaign for the presidential nomination was based on a significantly more moderate platform. Even though the Republicans will be defending 22 of the 34 Senate seats up for grabs in the 2022 elections, traditionally the party not controlling the White House tends to make gains. As a result, whether Biden or Harris are President in two years’ time, either could face an even more adversarial Congress, particularly if the Republicans pick up enough support to flip control of the House.

Paul Ashworth, Chief US Economist, paul.ashworth@capitaleconomics.com