Many of our clients have asked us what the impact of a Joe Biden victory would be on the stock markets and the American economy. In the short run, say the first few weeks after an election, we just don’t know. It is worth remembering that on the night Donald Trump was elected in 2016, the futures market indicated that American stocks would open the next day down by as much as 4%. Instead, by the end of the day there were solid gains. So we will make no predictions about the very near term. However, in the medium term, we expect that a Biden administration, particularly if coupled with a Democratic majority in the Senate, would be good for the US economy. Here are six reasons why.
- An End to the Trade Wars
The Trump era has been remarkable for its pugnacious and counter-productive trade strategy. Using a series of tariffs, often imposed by executive order and therefore with no legislative input, the US has damaged its trading relationships with almost all of its major trading partners including Canada, China and many European countries. The goal of the policy has been to reduce the persistent US trade deficit in goods, mainly by restricting imports. This policy has failed in all regards. The US trade deficit is at record levels but at the same time, the tariffs have led to increased costs to consumers for many staple items. Retaliatory tariffs have devastated some US sectors, such as soy bean production, which has led to the need for expensive bailouts. Important international organizations such as the World Trade Organization had been weakened. There is every reason to believe that a Biden government would pursue rational, mutually enriching trade agreements with partners, and would seek to strengthen important international bodies.
- An End to the War on Immigration
Like most western countries, the US is in demographic decline. The birth rate is no longer able to produce enough young workers to replace retirees. This has increased the percentage of the population who are out of the labour force, and this problem will accelerate as the baby boomers retire in great numbers for the next ten years. Eventually, the ratio of productive workers to non-workers will get so low that economic growth will go into a permanent decline. The best solution to this problem is immigration, particularly immigration of young, educated and skilled workers. This is the policy that Canada has pursued with success over the past two decades.
Under the Trump administration the absolute opposite has occurred. Visa availability and regulations have been changed to exclude the very workers the U.S. needs the most, including top students educated at Ivy League schools. The war on Mexican and other Latin American immigrants, legal and otherwise, is also counterproductive as it has made manual labour industries such as agriculture less productive.
We would expect these policies to change. Whether it is politically possible to admit the number of immigrants needed to move the demographic needle, likely at least 2 to 3 million per year, is unknown, but any change will be for the better. Young households, no matter what language they speak, are big consumers and lead to faster economic growth.
- A Major Infrastructure Initiative
A center-piece of the Biden campaign is a commitment to a major infrastructure initiative to renew decaying and obsolete US roads, bridges, sewer and water utilities. This is actually a promise that Trump had made in 2016, but which was never fulfilled. Here is a map showing, for example, the structurally deficient bridges in the US (Tip: avoid driving in south-west Iowa and central Oklahoma):
As well as creating jobs in construction, engineering and materials extraction, this initiative will increase productivity and likely save lives. The deaths and illnesses in Flint, Michigan caused by an old and dangerous water system are well known, but are only the tip of a much larger iceberg. Biden plans on spending up to $1 trillion on these long postponed and much needed projects, particularly in rural areas.
- Promotion of Sustainable Energy
Trump ran on a promise to revive the coal industry and bring much needed jobs back to the hard-hit coal belts states such as Kentucky and West Virginia. Luckily for the environment, but sadly for the workers, this failed.
Coal mines are closing and coal power generation is being replaced by wind, solar, hydro and biomass facilities. Current federal laws and regulations under the Trump administration are heavily weighted towards fossil fuels. Biden is committed to a future of sustainable energy in the US. This will lead to major investment in modern generation capacity and will hasten the demise of sunset industries such as coal mining and eventually, the use of oil for heating and power generation. Government encouragement will lead to a major boom in retro-fitting of homes and businesses, and eventually, replacement of gasoline and diesel power motor vehicles by more efficient and cleaner electric vehicles. The coming boom in sectors such as new battery technologies and use of hydrogen as a fuel source should more than make up for the shuttering of companies and loss of employment in the old-style energy industries.
- Enhanced Enforcement of Laws and Regulations
Nobody but the cheaters win when rules are not enforced. Sacking income tax auditors, putting industry lobbyists in charge of environmental regulation and preventing the Department of Justice from prosecuting white collar criminals has enhanced a culture of corruption and non-compliance. In the world of Trump, only suckers and losers obey the law, and only the little people pay taxes. The erosion of confidence that government is fair and unbiased will likely take years to rebuild, but it is a necessary, indeed crucial, chore. No democratic society can thrive without voluntary compliance and widespread obedience to laws which are deemed to be fair and reasonable. The only two alternatives are police states such as China, or failed or failing states such as Venezuela or Syria. The amount of tax revenue lost to tax evasion, corruption and non-compliance in the U.S. is in the hundreds of billions per year. The trend must be reversed.
- Arresting the Increased Concentration of Wealth and Income
One of the first concepts taught in the study of economics is “Marginal Propensity to Consume”. The fancy title reveals a very simple truth: Poor people spend a higher proportion of their income than rich people. They have no choice. Most spend pretty much every dollar they make. For the rich, at some point most additional (or marginal as economists would say) income simply gets saved, rather than spent. The richer a person gets, the lower the marginal propensity to consume. The problem with this is that as the rich garner a larger and larger share of an economy’s income, the amount that gets spent is necessarily reduced. This hinders economic growth and can lead to a glut of savings. This is exactly what is happening in the U.S., where the share of wealth accumulated by the top 1% of the population is at a record high level of more than 35%, and the share of the bottom 50% is essentially zero.
Maldistribution of wealth and income lead those in the bottom categories (in the US at least 50% of the population) to believe that the system is rigged against them. This leads to a host of social ills ranging from non-participation in the labour force, epidemics of the diseases of despair – alcoholism, drug addiction, obesity and suicide – and loss of faith in government and the greater society.
Changes in tax laws, labour laws, health policy and housing policy have exacerbated a trend that was already evident 40 years ago. Biden has made reversal of this trend a cornerstone of his economic policy, and it is this, most of all, which scares conservative voters, and has given rise to Trump’s use of the dog-whistle term “socialist” to characterize the Democratic platform.
However, even the ardent capitalists at JP Morgan and Goldman Sachs have recognized that the concentration of income and wealth must be stopped. They have examined the Biden platform carefully and have declared it as sound, good for the economy and good for the markets. We agree.