I’d like to think you come to these pages to hear my thoughts.
And perhaps some days you do.
But today is not that day.
We’re a year into the pandemic. People are accustomed to it.
However, the knee-jerk policy reactions we saw from governments a year ago are only just the beginning.
The path from here is not so simple. And it’s pretty much why Jim wrote his latest book, The New Great Depression.
It’s the first book of its kind to look at the pandemic and the economic implications together. Make sure you check out my recent interview with Jim where we explore the long-term economic impacts of COVID.
Now, it’s over to Jim.
Until next time,
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Shae Russell,
Editor, The Daily Reckoning Australia
Aussie Property Expert’s Bold Prediction for 2026. Discover More.
Joe Biden is Using COVID for Cover
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While the Biden administration is off to a fast start, its most important policy initiatives are yet to come. These plans fall into several broad categories:
- COVID pandemic relief
- Economic stimulus
- Tax increases
- Trade deals
- Immigration changes
- The Green New Deal
I will discuss the first three today and the remaining three in a future edition of the DR.
COVID pandemic relief
Biden’s relief plan for the pandemic is similar to Trump’s, with a call for 100 million vaccine injections before 1 May 2021. This goal could be reached with one million injections per day. That’s exactly what Trump had proposed, and Biden has echoed that plan.
Mass injections, combined with virus antibodies in the over 25 million Americans who have recovered, could result in something approaching herd immunity in the US by late 2021. This will not eradicate the virus, but it could make it far less contagious and fatal (assuming no viral mutations escape the vaccines). Meanwhile…
The economic damage continues
Progress on the pandemic spread does not equate to elimination of the economic dislocations. Tens of millions of jobs have been lost, many permanently. Millions of businesses have closed. Even if the pandemic abates, it’s not clear Americans will flock back to restaurants, airlines, casinos, resorts, cruise ships, and large gatherings even if they have the chance. The behavioural adaptations may last for decades, as happened after the first Great Depression (1929–40).
To alleviate this dysfunction, Biden proposes a $2 trillion spending program. This $2 trillion comes on top of the $900 billion spending package passed in December, and the $3 trillion of spending packages passed by Congress in the April–June period in 2020.
Of course, this entire run of $6 trillion in COVID and economic relief is in addition to the $1 trillion baseline budget deficits already built in for fiscal 2020 and fiscal 2021. The total deficit spending tab for both years, pandemic and non-pandemic, comes to $8 trillion.
How they’ll spend the money
Biden is calling for US$1,400 cheques to all households; increased and extended unemployment benefits; 14 weeks of paid leave for illness, new children, or medical conditions; increased child tax credits of up to US$8,000 per family; US$25 billion in rental assistance; US$130 billion to reopen schools; US$20 billion for vaccine centres; and a US$15 per hour federal minimum wage.
The size and scope of this spending program are difficult to comprehend. Nothing like it has ever occurred in US history, with the exception of FDR’s effort to redirect the entire US economy as part of the effort to win the Second World War.
The program will provide aid to some in need and will provide windfalls to favoured political interests, whether they are in need or not. What the program will not do is stimulate the economy or end the no-growth and slow-growth depression we are now in. The reasons for this are explained in the next section.
Economic ‘stimulus’
The line between ‘COVID relief’ and ‘economic stimulus’ is necessarily vague. Obviously the policy response to the pandemic caused the new depression. This means that programs designed to alleviate financial dislocations from the pandemic are simultaneously intended to provide stimulus to the economy. Many, but not all, of the programs described above can also be regarded as part of the economic stimulus program.
In particular, extensions and increases in unemployment benefits, US$1,400 cheques to all American households, increases in the minimum wage, and increases in the childcare tax credit fit squarely in the economic stimulus category. Most of these changes would likely have been pursued by Democrats with or without a pandemic-related slowdown.
More economic stimulus is waiting in the wings. After the new $2 trillion package passes, the White House and Congress will likely pursue another multitrillion-dollar deficit spending program focused on infrastructure, education, and aid to state and local governments.
Tax increases
The Biden administration’s tax policies will proceed on a separate track from economic stimulus and COVID relief plans. The main reason for this is that there are widely divergent views on tax policy within the Democratic caucus in Congress. It will take time to negotiate and compromise on those views before discussions with Republicans even begin.
Beyond that, Republicans will almost certainly oppose any tax increase plan the Democrats agree to and can use a filibuster to enforce their opposition. This will force Democrats to use the arcane reconciliation process to pass tax increases with only 50 votes (plus a tie-breaker from Vice President Harris). That will take time and will invite many other proposals, only tangentially related to the tax code as free riders on the sure thing reconciliation process. As a result, a major tax bill may not be passed until August.
Despite the delays, the Democratic tax legislation will be historic both in its sweep and the size of the tax increases. The individual top tax rate will be raised from 35% to 39.6%, where it was under Obama. Capital gains will be taxed at the same 39.6% instead of the current 20%. Corporate taxes will be raised from the current top rate of 21% to a new top rate of 28%.
Other likely proposals
Other likely proposals include eliminating many business and itemised deductions. The impact of this is to raise effective tax rates even if statutory tax rates stay the same because of lost tax benefits on the deductions. Large corporations like Apple and Google may face a minimum tax on their asset valuation, effectively a wealth tax, if they do not pay more than a certain amount of income tax due to offshore deferral and royalties paid to tax havens.
Other proposals call for the elimination of capital gains treatment of ‘carried interests’ in private equity funds. Carried interests are management fees disguised as profit shares. The new tax law would impose the same tax rate that regular management fees would pay.
The final tax package will take time to craft, but it is likely to resemble this outline.
In my next edition of The Daily Reckoning Australia, I’ll discuss the other three policies listed earlier: Trade deals, immigration changes, and the Green New Deal. Stay tuned…
Regards,
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Jim Rickards,
Strategist, The Daily Reckoning Australia
PS: Australia’s Great COVID Recession — Learn which investments to accumulate and which ones to avoid in order to give you the best chance of preserving your wealth during the recession. Click here to learn more.
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