Monday, September 28, 2020

A Biden presidency may be just what markets need

Jun 28. 2020
Joe Biden
Joe Biden
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By Syndication Washington Post, Bloomberg Opinion · Conor Sen · OPINION, BUSINESS 

Joe Biden's growing lead in the presidential polls combined with recent stock-market turbulence has some Wall Street observers wondering if markets are getting nervous about the odds of Democratic victories in November.

This anxiety among investors may very well be misplaced, reflecting old and off-base stereotypes of what the two political parties are trying to accomplish. 

Just as investors were overly optimistic about the economic benefits of tax cuts and deregulations in President Donald Trump's agenda, they're too quick to dismiss a Biden platform as simply focused on tax increases and new regulations. Here's what they're missing: Biden and the Democratic Party probably will concentrate on returning the labor market to full employment with increased spending and worker-focused tax policies. That should be decidedly good news for the economy and markets.

Thinking about what candidate would be best for growth starts with identifying the biggest problem facing the U.S. economy. Ever since the financial crisis - and especially with the onset of the coronavirus pandemic - the economy has been held back by a lack of aggregate demand. That's led to a host of negative effects. Among these are:

- Rising inequality amid labor-market slack that kept wage growth in check.

- Low inflation, which caused the Federal Reserve to consistently undershoot its inflation target, holding back growth.

- Weak business investment, as companies decided that there's not enough growth to warrant investment in new plants or facilities to boost production.

- Low interest rates, which hamper bank profitability and lead them to focus more on cost cuts and returning capital to shareholders than increasing lending.

- And subpar productivity growth and labor force participation.

Even before the onset of the pandemic, Trump's approach to addressing economic growth fell short. Markets rallied in the weeks and months after his election as they anticipated pro-business policies and faster economic growth. Although the tax cuts of 2017 did lead to increased profits for some industries, the country's growth trend did not improve in his time in office. 

The anticipated surge in business investment failed to materialize. The ratcheting up of the trade war served mostly to depress economic growth and led businesses to limit new investments amid the uncertainty. Conditions did improve for workers somewhat, as unemployment fell to generational lows. Minimum-wage increases in many cities and states helped with earnings growth for some service workers, and it did seem that inequality was beginning to narrow slightly. But by the second half of 2019, the 10-year Treasury rate had fallen below 2%, reflecting investors' realization that long-term faster growth wasn't materializing in the way some had expected after Trump's election.

What the U.S. needs to increase economic growth and reduce inequality is higher levels of government spending and a tax code more favorable to workers, which is what Biden seems to be promising. Given the evidence throughout the developed world over the past several years, there shouldn't be a partisan debate over whether the federal government should spend more money - just over how to spend it. Fed Chair Jerome Powell has continued to make public statements about the importance of fiscal stimulus to support the economy, and suggested that workers in communities that often miss out on broad-based prosperity benefit from policies that lead to full employment and faster overall wage growth.

Both Biden and Trump have talked about wanting to pass an infrastructure bill of at least $1 trillion. Yet Republicans in Congress are unenthusiastic about the idea, while Democrats are in favor. Meanwhile, the economy needs more fiscal support because of the pandemic. The Democratic-controlled House of Representatives passed a $3 trillion package in May to do more, although Senate Majority Leader Mitch McConnell, R-Ky., put it on hold, pledging to work on a package in July. Some sort of scaled-down Green New Deal and its accompanied spending could also be part of a Biden administration.

A Biden tax plan, in contrast to the 2017 tax cut, probably would shift income toward people who might actually spend it rather than save it. The prospect of a higher capital-gains tax rate might induce some wealthy investors to sell at year end, but younger investors with Robinhood app accounts in lower tax brackets might scoop them up at a discount. This could spark some temporary market turmoil, although that wouldn't last if a new administration passes programs that raise the longer-term economic growth trajectory.

A more measured response to the trade war also could aid growth by giving multinational corporations more policy certainty.

So what the economy needs right now is more spending to replace the demand that's been destroyed during the past several months. And what workers need are fiscal policies that foster full employment. The combination of more employment, faster wage growth and higher consumer spending will encourage companies to invest in new equipment and innovation. All of that's more likely in a Biden administration than what we've gotten during the past few years.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Sen is a Bloomberg Opinion columnist. He has been a contributor to the Atlantic and Business Insider.



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