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The Biden administration launches economic reforms in fiscal and monetary stimulus, global trade, finance, and technology.
President Joe Biden proposes several moderate to progressive economic policies. On U.S. public finance, Biden views high health care and energy costs as the major threats to the economic prosperity of American corporations and small-to-medium enterprises. Addressing these key economic issues can help most U.S. companies better compete with their non-U.S. multinational counterparts worldwide. Moreover, Biden supports better balancing the fiscal budget with deficit reductions and proper corporate income tax increases. This fiscal policy stance contrasts with big tax cuts under the previous Trump administration. Biden bolsters the essential need for U.S. banks to operate under the 5 major pillars of financial regulation: capital rules, low-leverage limitations, short-term liquidity requirements, macroprudential stress tests, and deposit insurance constraints. On agriculture, Biden opposes importing non-native species, which inadvertently alter domestic vegetation, compete with native species, introduce new diseases, and interfere with maritime commerce. Moreover, Biden supports the recent $15 minimum wage proposal, higher taxation on capital investment income, zero tuition for public college students, student loan debt relief for high education, and broader infrastructure.
Despite the recent progress toward a bipartisan infrastructure bill, many observers see major challenges to passing much of the Biden economic policy agenda in this manner. Some economists convey deep concerns about reflation risks or inflation fears in light of longer-run economic growth retrenchment. One of the pivotal policy implications can be a higher neutral interest rate. This higher neutral interest rate helps sustain economic growth, development, and maximum employment with low and steady inflation. On balance, the higher neutral interest rate can cause several distortions in the long prevalent macrofinancial market trends of both asset market stabilization and economic inequality.
The Biden administration is likely to introduce several key moderate to progressive economic policy proposals in the recent evolution of both asset market stabilization and economic inequality worldwide.
President Biden has set his core economic priorities for America. Biden strives to make the tax and transfer system more progressive. Also, Biden plans to increase capital investment accumulation in climate change and carbon emission mitigation. Moreover, Biden continues to boost government expenditures on infrastructure to help blue-collar labor-intensive workers for better middle-class economic equality in America. This infrastructure program follows from the prior Trump administration. Biden further strengthens the use of both fiscal and monetary stimulus in order to counterbalance the broad repercussions of the recent rampant corona virus crisis of 2020-2021. The Biden administration tends to launch several economic reforms in the new progressive era in America as Congress begins to debate many aspects of the American Families Plan (AFP) and the American Jobs Plan (AJP). In reality, many economists and politicians expect Biden to be more progressive than Obama but less progressive than Franklin Delano Roosevelt (FDR). The Biden moderate-to-progressive economic policies rely heavily on substantial fiscal stimulus, higher corporate income and capital gains taxation, quantitative-easing large-scale asset purchase stimulus at the monetary interest rate zero lower bound, and a conscious response to constituent interests in greater infrastructure, education, trade, finance, and technology etc.
Bidenomics can likely move the U.S. towards its more progressive global peers on income redistribution, climate change risk management, and infrastructure. In fact, the U.S. has already been progressive in terms of countercyclical macroeconomic policies. On the economic front, Bidenomics would move the mega trend further in the same direction. Many economists regard the structural shift as an extension of the trend towards less concern about fiscal deficits and government expenditures with greater use of countercyclical macroeconomic policy levers. In fact, the recent rampant corona virus crisis appears to accelerate this macro trend. This pendulum shift swings towards ubiquitous support among U.S. citizens for the expansive role of government in the modern American democratic society.
Despite its significance size and ambition, Bidenomics still lands on the economic policy continuum of recent Democratic administrations. President Biden continues to insist that at least part of the progressive economic policy agenda depends upon higher corporate and capital income taxes. The additional fiscal tax revenue helps finance student loan debt relief and Medicare for all. Moreover, Bidenomics serves as a major departure in macroeconomic governance in terms of both its emphasis on fiscal stimulus (for the American economy to return to full employment) and the pervasive commitment to tackling longer-term structural issues such as education, infrastructure, income and wealth inequality, and multilateral cooperation on global problems from climate change risk control and rare disaster prevention etc to cyber security, bank capital regulation, and asset market stabilization. From a historical perspective, the Biden administration tends to be between the FDR New Deal and the slightly more moderate economic policy agenda items such as Obamacare and Warren wealth taxation. The ultimate judgment depends upon how much Congress passes as legislative changes in addition to executive orders from President Biden. When push comes to shove, the basic law of inadvertent consequences counsels caution. Incremental legislative changes and executive orders are more probable than comprehensive countercyclical macroeconomic reforms.
In light of the razor-thin Democratic margins in Congress, there is no clear mandate for comprehensive changes due to the substantial ideological polarization of both Democrats and Republicans today. There are decent odds that a narrow bipartisan infrastructure bill passes Congress. The rest of the Biden economic policy agenda can further pass on a party-line basis over time. Republican senators and key other congressional members can constrain the chances of passing Biden bills on many social and economic policy issues.
In the medium term, there can be reflationary risks (or inflationary fears) due to the significant amount of fiscal stimulus from the American Rescue Plan (ARP) over a short period of time. Fiscal-monetary policy coordination suggests that the Federal Reserve System is likely to postpone future interest rate hikes if there are continual shortages of high-skill knowledge workers in the U.S. labor market with transitory inflation risks. In the meantime, these inflation risks remain quite small as the Biden administration continues to boost government expenditures with fiscal deficits and debt-servicing costs in the next few rounds of fiscal stimulus. In comparison to key global trade partners and OECD countries, Bidenomics can further push the macro economic consensus further in the progressive direction. As the pandemic corona virus crisis has breathed new life into structural capital underinvestment in America, Britain, Canada, and Europe, the government should play a more important role in addressing the essential needs for greater global trade, finance, and technology.
Substantial fiscal deficits and green investments can result in a higher neutral real short-term interest rate in the next few years. This higher neutral real interest rate suggests that the U.S. economy can return to full employment with low and steady inflation. The Federal Reserve System can allow both CPI and PCE core inflation to hover around the broader reasonable range of 2.5% to 5%. Although this broad range of core inflation rates exceeds most market expectations, this unique macro policy asymmetry helps better align the longer-run U.S. average inflation rate with the fresh 2% average inflation target that Fed Chair Jerome Powell emphasizes in his recent remarks on the new Federal Reserve monetary policy framework. From better Treasury bond yield curve control to inflation normalization, the structurally bullish asset price backdrop helps better balance the long-term return performance of cyclical value versus growth stocks worldwide. The current economic recovery continues to show long prevalent global market trends of asset market stabilization. In response, U.S. stock market investors can tilt their asset portfolio combinations toward cyclical value stocks with high dynamic conditional alpha stock signals with better asset return prediction and performance over time. There are many different ways for institutional and retail stock market investors to skin the cat, and all roads eventually lead to Rome. The better is often the worst enemy of the good. The vast majority of U.S. stock market investors learn to strike a delicate balance between higher asset returns and inflation risks in the next few years. Fiscal and monetary stimulus, global trade, finance, technology, disruptive innovation, and asset market stabilization continue to be the top priorities on the Biden economic policy agenda. A wise man hides his light under the bushel and bides his time.
President Biden strives to better balance fiscal deficits and stimulus programs with higher corporate income taxes and individual capital income taxes.
Under the Biden administration, Congress has approved government expenditures worth more than 25% of U.S. GDP over the course of almost one year. A bipartisan congressional committee now delves into further fiscal stimulus worth hundreds of billions of dollars. In reality, the current corona virus crisis seems to help accelerate this bipartisan legislative joint effort. The global mega trend toward greater use of countercyclical economic policy instruments appears already in motion prior to the Biden administration.
President Joe Biden proposes several moderate to progressive economic policies. On U.S. public finance, Biden views high health care and energy costs as the major threats to the economic prosperity of American corporations and small-to-medium enterprises. Addressing these key economic issues can help most U.S. companies better compete with their non-U.S. multinational counterparts worldwide. Moreover, Biden supports better balancing the fiscal budget with deficit reductions and proper corporate income tax increases. This fiscal policy stance contrasts with big tax cuts under the previous Trump administration. President Biden strives to better balance fiscal deficits and other stimulus programs with higher corporate income taxes and individual capital income taxes. The Biden administration has called for more fiscal deficits and government expenditures than any other Democratic administrations in the last few decades.
U.S. consensus views on fiscal deficits seem to have changed substantially due to low interest rates around the zero lower bound. Today, U.S. Treasury debt interest expenses account for about 1.5% of U.S. GDP or 5% of government expenditures. Since the Global Financial Crisis of 2008-2009, the minimal ripple effects of public debt accumulation seem to have calmed most American fiscal concerns. President Biden plans to offset most of additional fiscal deficits and government expenditures with corporate and capital income tax increases. Hence, U.S. public debt concerns are no longer at center of the macro policy debate.
The Democratic response to the dual Biden corporate and capital income tax hikes suggests some unease and apprehension among centrist Democrats. In practice, their support would be necessary for the passage of the dual Biden corporate and capital income tax increases. In recent times, President Biden strives to convince 50% to 67% of American citizens to support the tax increases on high-income high net-worth billionaires and corporations in order to finance infrastructure, education, and other capital investment accumulation etc. The path of least resistance would seem to be a major capital investment boost in combination with smaller corporate and capital income tax increases. The net effect would involve marginal increases in U.S. fiscal deficits and Treasury debt levels. Democrat razor-thin margins in both chambers of Congress make it difficult for most experts and economists to predict the next legislative path of economic results. U.S. median voters, Republicans, and Democrats can probably benefit from clear and present forward guidance from the Biden administration.
At least 3 pieces of relevant legislation can determine how much of the Biden policy agenda becomes law in the next few years. First, a bill authorizes $250 billion new federal expenditures for the Biden administration to enhance American economic competitiveness. This fresh bill has already passed the Senate and looks likely to become law in due course. However, the bill includes neither budgetary offsets nor commensurate tax hikes and would therefore expand U.S. fiscal deficits in the next decade.
Second, the Biden administration proposes the $1 trillion infrastructure bill in favor of many blue-collar workers in America over the next 8 years. This comprehensive bill offers $109 billion for roads and bridges, $66 billion for railways, $49 billion for public transport systems, $25 billion for airports, $73 billion for electric power grids, $65 billion for nationwide broadband Internet connections etc. Some of the residual infrastructure finance would help the U.S. Inland Revenue Service beef up tax law enforcement across the country.
Third, the Biden administration strives to introduce a new budget reconciliation bill in order to include core aspects of the American Jobs Plan (AJP) and the American Families Plan (AFP). President Biden proposes another $3.5 trillion fiscal package for better climate change risk control, education, parental leave, and childcare etc. As a self-made democratic socialist, Senator Bernie Sanders helps draft this other fiscal bill for the Biden administration.
On balance, the Biden administration plans to raise corporate and capital income taxes by at least $3.5 trillion over the next decade. These tax increases help better balance U.S. fiscal deficits in light of inflation fears and economic growth concerns. A 25% corporate income tax rate looks more likely than the previous range of 28% to 30%. Another core capital income tax rate rises to the reasonable range of 20% to 25%. The Biden administration can also raise the top marginal income tax rate for high net-worth billionaires. Overall, these tax increases can boost U.S. Treasury public finance by $3.5 trillion to almost $4 trillion in the next decade. In this positive light, a delicate balance between fiscal deficits and tax hikes looks plausible under the Biden administration. This delicate balance helps persuade some Republicans to join bipartisan support for some or all of the moderate-to-progressive Biden bills to pass in both chambers of Congress. If we are correct about the political limits of U.S. fiscal deficit expansion and corporate and capital income taxation, the overall size of a Biden budget reconciliation pact should probably not exceed $2.5 trillion over 8 years. In effect, these political limits help contain government expenditures well under 2% of U.S. GDP. The wider reasonable range of economic results would be far less than the U.S. fiscal support put in place in recent years. Both Democrats and Republicans should learn to compromise a fair bit to help enrich the economic lives of most residents in America. From a fundamental viewpoint, this compromise would probably not trigger any additional inflation risks and economic growth fears. Bidenomics better balances both U.S. Treasury fiscal deficits and tax hikes to help enhance the economic quality of life, liberty, and the happy American dream.
The Biden administration offers greater government expenditures on Medicare for all, infrastructure, student loan debt relief, higher education, child care, higher labor force participation for women, and paycheck protection in the progressive direction.
Bidenomics is an important incremental step in the more progressive direction. The macro policy shift is more of an evolution than a revolution. Bidenomics is big and progressive, but the main policy spirit is still on the continuum of economic policies by the recent Democratic administrations from Clinton to Obama. The $4 trillion to $5 trillion government expenditures on infrastructure, child care, and education etc turn out to be larger than any progressive pacts by Presidents Obama and Clinton. President Biden insists that at least some additional corporate and capital income taxes help fund fiscal deficits in the next 8 years. There is enough fiscal space for more deficit-driven capital investments and government expenditures in the more progressive aspects of U.S. economic policies. After all, tomorrow is another day. Bidenomics includes core gradual economic policy improvements over many years instead of radical reforms overnight.
The relative magnitude of Biden tax hikes is larger than the tax changes by Obama and Clinton. Over the past 20+ years, U.S. income taxes have fallen steadily (both in absolute terms and as a percentage of American economic output). Biden hence proposes keeping most of the middle-class tax cuts from the past 20+ years. Biden plans to make up for the lost tax base by raising taxes on high-income households and corporations. In many respects, there has not been a major sea change in the generic conduct of U.S. fiscal policies over time. Much economic policy uncertainty surrounds the mid-term elections in 2022. For this reason, it may be premature to declare that any substantive fiscal deficit-driven pact is close to a done deal.
The top 2 priorities of the progressive wing of the Democratic Party are now student loan debt relief and Medicare for all. Although President Biden seems skeptical of the modern monetary theory (MMT), the government can somehow increase fiscal deficits with few economic repercussions in an ultra-low interest rate environment. President Biden strives to better balance new government expenditures with extra tax increases. Hence, the Biden administration introduces economic policies in the more progressive direction, but the current Biden policy agenda seems much more moderate than the democratic socialist ideology from Senator Bernie Sanders. In the same spirit, the Biden administration embraces the economic notion that more inclusive institutions help promote economic growth with lower wealth and income concentration in America. Many core Biden economic advisors serve as moderate-to-progressive centrists in the Democratic Party.
The current inflation risks and slow job growth prospects depart substantially from most market expectations. Inflation can be a legitimate concern when we analyze the positive economic ripple effects of the $1.9 trillion American Rescue Plan (ARP) in response to the recent rampant corona virus crisis of 2020-2021. However, any further inflationary fears about new fiscal pacts may not make sense from a longer-run perspective. The Biden administration aims to push the U.S. economy back to full employment with low and stable inflation. This Biden economic policy goal can help achieve maximum employment and price stability in the Federal Reserve dual mandate.
The Biden administration can view the current Democrat razor-thin margins in both chambers of Congress as a small asset. President Biden and his central economic advisors can agree to some compromise on a new legislative framework. Despite this compromise, passing a bipartisan bill requires getting 10 Republican Senators, keeping 50 Democratic Senators on board, and passage in the House. In practice, the Democratic caucus is quite comfortable with raising the corporate income tax rate to 25% and the top personal income tax rate to 40%. Treasury Secretary Janet Yellen proposes a 15% global income tax on U.S. multinational corporations. From this tax base viewpoint, it is highly probably for the Biden administration to balance fiscal deficits with new sources of U.S. tax revenue in the next few years.
For the Biden administration, it is long overdue for the government to invest in child care, labor force participation for women, and universal Medicare for all in America. These government expenditures and capital investments can benefit a wide swath of Americans in the long run. New government expenditures emphasize research and development, climate change, and infrastructure etc. Due to reflationary risks, such fiscal deficits can cause core inflation expectations to hover in the reasonable range of 2.5% to 5% (or well above the 2% average inflation target) in the medium term. Despite nominal rigidities, sticky prices and wages, and menu costs etc, the long-term welfare cost of a 10% increase in core inflation is no more than 0.1% to 0.3% of U.S. GDP in most empirical studies. Also, the Phillips curve depicts a flat relation between inflation and unemployment. For this reason, there is virtually no longer-term trade-off between price stability and maximum employment. For better economic growth and sustainable development, Bidenomics relies heavily on both fiscal and monetary stimulus programs to substantially boost U.S. economic output. In the current low interest rate macro environment, it would probably be fine for the Biden administration to keep national debt at 125% to 150% of U.S. GDP. Treasury 10-year bond yields can probably increase to the target range of 3% to 5% in order to accommodate more debt with no major disruption. Sound and robust yield curve control suggests no near-term imminent risks of another severe financial downturn. Both macro fiscal and monetary stimulus programs can safeguard against extreme losses in rare times of severe financial stress.
Bidenomics first focuses on getting the U.S. economy back to full employment and then tackles more structural reforms with fiscal and monetary stimulus.
Bidenomics serves as a pivotal policy shift from the recent Democratic Clinton and Obama administrations in at least 2 fundamental ways. First, Bidenomics places a greater emphasis on getting the U.S. back to full employment in the short term. In response to the recent rampant corona virus crisis of 2020-2021, President Biden forcefully persuades Congress to pass the landmark $1.9 trillion American Rescue Plan (ARP). Many economists now expect this substantial fiscal stimulus to induce the U.S. economy back to full employment by late-2022 to mid-2023. As part of the ARP, the Biden administration expands the Child Tax Credit in order to help reduce child poverty by 50%; increases subsidies in the Obamacare public health program; and then caps premiums at 8.5% of net personal income to make health insurance more affordable for many middle-class households in America.
Second, the Biden administration plans to launch some further fiscal stimulus pacts. Through the American Jobs Plan (AJP) and American Families Plan (AFP), Biden aims to catch up with several other OECD countries in climate change risk control, affordable child care, and greater labor force participation for women. If the Biden administration can convince both chambers of Congress to pass these economic policies, the incremental steps can cause substantial positive ripple effects on U.S. economic output, employment, and sustainable development in the next decade. The more progressive Democrats such as Senators Bernie Sanders and Elizabeth Warren cannot account for the majority of the Democratic Party, but these central members now comprise a substantial portion of the Democratic constituency. For this reason, Bidenomics becomes more progressive than what moderate centrists expect to see in the next few years. From the Council of Economic Advisers and Federal Trade Commission to the Treasury, Federal Reserve, and Congressional Budget Office, many economists would expect large fiscal stimulus to complement monetary stimulus. The former entail big fiscal stimulus pacts (e.g. ARP, AJP, and AFP etc). The latter manifests in the form of quantitative-easing large-scale asset purchase programs when the Federal Reserve continues to keep the federal funds rate near the zero lower bound. Most economists expect Fed Chair Jerome Powell to reconsider interest rate liftoff until a later stage of the current real business cycle from late-2023 to mid-2024.
In terms of reflation risks or inflation fears, most of the recent price and wage hikes have been due to temporary worker shortages in association with the post-corona virus economic recovery. These inflation fears tend to be transitory. In light of the new average inflation target framework, the Federal Reserve System can perhaps allow inflation to drift in the reasonable range of 2.5% to 5% for some time. In fact, this reasonable range is asymmetrically higher than the 2% average inflation target that the Federal Reserve System has implicitly followed in recent decades. Insofar as the welfare cost of higher inflation is low, the central bank can tolerate transitory general price increases in exchange for better economic growth and employment. The net effect would be positive for the U.S. economy and its major trade partners worldwide.
Bidenomics tilts more aggressive income redistribution through the tax and transfer system, boosts government expenditures on infrastructure and climate change risk mitigation, and maintains strong fiscal and monetary stimulus against reflation risk and unemployment on a global scale.
From an international perspective, Bidenomics lands on the progressive spectrum of economic policies relative to most other countries. The progressive-to-moderate Biden economic policy agenda focuses on pervasive American wealth and income redistribution through the tax and transfer system. Also, Bidenomics launches new government expenditures on climate change risk management, infrastructure, high education, Medicare, child care, and greater labor force participation for women in America. Further, Bidenomics introduces substantial fiscal and monetary stimulus programs to better balance low-inflation economic growth and under-employment. Some recent empirical studies show that some greater toleration for low and stable inflation can help reduce economic inequality in terms of better wealth and income redistribution. This global consensus view has profound public policy implications for Bidenomics.
The U.S. now gradually moves toward its major trade partners in terms of income redistribution. Bidenomics increases government expenditures on child tax credit, child care, and higher education. These new government expenditures would shift the U.S. closer to international norms on social safety net investments. Ubiquitous asset market expectations of a statutory corporate income tax rate increase to 25% would shift the effective U.S. corporate tax rate closer to international benchmarks. In a similar vein, the average federal, state, and local U.S. top marginal individual income tax rates tilt toward the reasonable range of 35% to 40%. For Bidenomics, the full implementation of these tax base increases would partially close the fiscal gap. High-income billionaires and multinational corporations would pay their higher fair share of total tax revenue in America.
By contrast, capital gains taxes are relatively higher in America and further tend to exceed the international norms among most OECD countries. The federal capital gains tax rate is likely to land in the reasonable range of 28% to 39.5%. Many other OECD countries may not emulate U.S. capital gains taxation in the near-term. This U.S. race to the top may inadvertently heighten the costs of capital investments in stocks, bonds, and currencies etc. Better bank capital regulation and asset market stabilization would continue to be the central economic policy priorities on the radar for the Biden administration. Moreover, the recent G7 summit of finance ministers plans to impose a global minimum corporate tax on multinational corporations. In effect, this global tax reform can eradicate loopholes for multinational corporations worldwide. This tax reform shows the global repercussions of the progressive shift in U.S. economic policies under the Biden administration.
Bidenomics plays catch-up on climate change risk control and infrastructure. The Biden administration aims to achieve a 53% reduction in net U.S. greenhouse gas pollution from the recent peaks of 2001-2005 by 2030. U.S. infrastructure has been relatively low in comparison to Australia, Britain, Canada, China, France, Germany, and Japan etc. The Biden administration can substantially boost U.S. infrastructure expenditures in order to attract more median voters, blue-collar workers, or special interest groups from the prior Republican Bush and Trump administrations.
In global economic history, American fiscal and monetary policies have long taken a more aggressive approach to managing real business cycles. When Bidenomics attempts to push macroeconomic policies in the more progressive direction, these U.S. macro policies move further away from the global norms. Key countercyclical fiscal stimulus pacts contribute to household income and asset market stabilization. At the same time, monetary stimulus programs such as zero interest rates as well as large-scale asset purchases help the real economy return to full employment in accordance with the asymmetric average inflation target above 2%. To the extent that the Federal Reserve System tolerates higher inflation in the reasonable range of 2.5% to 5% in the short run, Bidenomics better achieves higher economic growth, employment, and capital investment accumulation through larger fiscal deficits and government expenditures. In light of this fiscal-monetary policy coordination, better inclusive institutions help empower many people to apply their skills and talents in the lofty pursuit of economic growth and prosperity in the American dream.
Bidenomics reflects compromise in the dynamic structural shifts in the U.S. political economy of both Democrats and Republicans in Congress.
The self-identification of U.S. political parties has changed quite dramatically in the past 40 years. In 1980, about 40% of conservatives were Democrats, and 20% to 25% of liberals were Republicans. Today, there are relatively few conservatives in the Democratic Party and relatively few liberals in the Republican Party. Near 75% of Republicans consider themselves to be conservative, and more than 75%-80% of Democrats consider themselves to be liberal. In America, this polarization trend may inadvertently cause unfair political tribalism and insulation along the party line. Across the political spectrum of Democrats and Republicans, some political tribes often choose to defend their own respective teams (just as in the Olympic Games). When some ethnic and religious groups feel persistent threats, these groups often retreat to political tribalism in support of greater social identity protection over time. However, the political tribes tend to make relatively irrational choices and decisions because these tribes voluntarily ignore the objective and even scientific facts. This unfortunate outcome reflects the inconvenient truth that many American tribes can no longer express their own angst and anxiety in regard to the broader social and economic issues such as free trade, immigration, health care, consumer protection, financial regulation, tech titan dominance, and asset market stabilization etc. The ultimate solution depends on how well the political tribes can find common ground from different perspectives to forge friendship and collaboration in due course.
President Biden is more progressive than Obama and Clinton, but less progressive than Franklin Delano Roosevelt (FDR). Bidenomics can find some middle ground between Obamacare and the New Deal by FDR. The Biden administration has to learn the fact that Democrats have smaller margins in both chambers of Congress. A bipartisan bill entails 10 Republican Senators, 50 Democratic Senators on board, and passage in the House. The House appears to be more liberal with Democratic control, and the Senate seems to be a bit more moderate (due to prior Republican control). In any given mid-term election, perhaps 30 to 40 House seats can swing between parties. Only liberals and conservatives are willing to run for Congress as independent candidates lack political campaign finance to garner sufficient median voter support.
On the infrastructure bill, bipartisan negotiations have made some good progress. The probable outcome depends on whether these bipartisan negotiations can help capture enough other Democrats and Republicans to reach a majority. Center-out coalitions can help induce moderate legislators to support several other aspects of Bidenomics. For this reason, it would be even tougher for Congress to pass many other parts of the Biden $6+ trillion economic policy agenda. A major problem today is that the Democratic razor-thin margins reduce incentives for some Republicans to compromise in Congress. The problem can therefore impede bipartisanship, but any hindrance may jeopardize winning control of Congress in the next election. In U.S. political history, this impasse can change only when one party keeps winning re-elections. In effect, this persistence forces the other party to change over time. Anyway, some bipartisan agreement seems essential in the U.S. political economy. Bipartisan conflict resolution can often help restore mutual trust and legitimacy for both parties to enrich the economic lives of most residents in America.
What are the monetary policy implications of Bidenomics for the short-run interest rate forward guidance?
In a fundamental view, the U.S. progressive policy shift and global economic trend suggest that the neutral real short-run interest rate (r*) remains near the zero lower bound in the foreseeable future. This neutral real short-term interest rate accords with full employment and stable inflation slightly above the asymmetric 2% average target. Most market expectations align with this interest rate adjustment over time. The Taylor interest rate rule suggests that any future Federal Reserve interest rate increases from the zero lower bound can serve as a joint response to price inflation, wage inflation, asset market stabilization, and the U.S. GDP output gap.
In global economic history, the actual real short-term interest rate (r) tends to hover around the reasonable range of 1% to 3.5% over the real business cycle with low and steady inflation. There is often a great deal of economic policy uncertainty and variability around this reasonable range across most OECD countries. Bidenomics shows that fiscal deficit-driven government expenditures on infrastructure, net zero carbon emission, green energy, student loan debt relief, Medicare for all, child care, and greater labor force participation for women would likely boost the neutral real short-term interest rate (r*) by about 75 basis points to 155 basis points in contrast to the recent real business cycle from the Global Financial Crisis of 2008-2009 to the current corona virus crisis of 2020-2021. This fundamental analysis of the more progressive policy shift in U.S. fiscal-monetary stimulus coordination supports the notion that the neutral real short-term interest rate (r*) can start to increase again when the Federal Reserve System remains ready to offer forward guidance on the prospective liftoff path of neutral interest rates from early-2023 to 2025. In the best likelihood of success, the terminal real neutral short-run interest rate can reach the reasonable range of 3.5% to 5.5% in the next few years. The resultant interest rate adjustments depend on how soon the U.S. real economy returns to higher positive economic growth, full employment, and productive capital accumulation.
The International Monetary Fund (IMF) presents some recent evidence in support of the prescient alternative view that many tech titans from Apple and Amazon to Microsoft and Facebook maintain large and persistent price markups for their core products and services. These products and services range from e-commerce and mobile connectivity to software and social media. This mega trend often tends to dampen the real ripple effects of U.S. interest rate adjustments or monetary policy decisions on inflation risk control. If tech-savvy large corporations continue to keep their price markups and profit margins with some monopoly power, these nominal rigidities can translate into gradual reductions in the efficacy of interest rate terrains in the broader Federal Reserve monetary policy framework. When push comes to shove, the basic law of inadvertent consequences counsels caution. Bidenomics can help reinforce the current global economic recovery from Covid-19 with several further fiscal and monetary stimulus programs. Closer antitrust scrutiny shines new light on whether the interest rate liftoff path can help dampen asymmetrically higher inflation expectations under the Biden administration.
Bidenomics can reinforce the post-pandemic global economic recovery in light of the long prevalent policy implications of both fiscal and monetary stimulus for better asset market stabilization, bank capital regulation, and economic inequality.
Bidenomics can reinforce the case that the post-pandemic U.S. economic recovery may inadvertently reverse the long prevalent asset market trends (especially if the Biden economic policies prove to be persistent over time). Beyond the mere details of individual policy proposals, the Biden administration focuses on 3 major macro economic policies for asset market stabilization in due course. First, expansionary fiscal stimulus programs help tame economic recessions through sustainable fiscal deficits. Second, the greater Biden focus on household income support and capital accumulation seems to target climate change risk control and infrastructure. These fiscal investments require additional public finance from high corporate and capital income taxes. In a nutshell, higher taxes help redistribute wealth and income from high net worth billionaires and corporations to blue-collar workers and middle-class households. Third, the Biden administration complements near-zero interest rates and quantitative-easing large-scale asset purchases from the wider U.S. monetary policy framework with fiscal cash transfers in order to better stabilize the economy, currency exchange, and stock and bond markets. The mid-term elections in 2022 can help determine whether these 3 mega trends extend or reverse in due course. Most economists argue that the Biden fiscal and monetary stimulus programs can help promote macroeconomic stabilization in rare times of severe macro-financial stress.
If these mega trends prove to be persistent in the next few years, these trends can reinforce the post-pandemic global economic recovery. Next, Bidenomics supports the reversal of fortune in American stock markets from high-tech growth stocks to cyclical value stocks. The U.S. real business cycle can induce a steeper drift in the Treasury bond yield curve, asymmetric inflation normalization, a structurally bullish commodity backdrop, and better asset return performance for cyclical value stocks. These macro economic developments can turn out to be the tailwinds to the neutral short-term real interest rate. This neutral interest rate accords with full employment and low and stable inflation. Over the past 20+ years, the substantial decline in the neutral interest rate has been a huge core fundamental force across the U.S. stock and bond markets. Robust Treasury yield curve control suggests substantial carry trade in U.S. bond and currency markets. Federal Reserve interest rate liftoff and its future forward guidance can cause better market prices for cyclical value stocks, high-duration stocks, and bank stocks etc. Greater capital mobility further suggests some downward pressure on gold prices. In summary, Bidenomics helps the U.S. economy transform from the pandemic corona virus crisis of 2020-2021 to the next economic boom beyond 2022-2025.
Both the green energy investment cycle and stronger support for low-income U.S. households are helpful tailwinds to a bullish commodity demand story over the next few years. Stronger fiscal stimulus and more robust income redistribution can also support credit quality at the lower end of the household debt spectrum. Key cyclical value stocks, bank stocks, and high-duration stocks can benefit from these macro economic developments.
A deeper question concerns whether Bidenomics affects asset prices and returns. A higher neutral real interest rate, fiscal support, and countercyclical asset market stabilization policies can offer greater cash transfers to the middle-class Americans. These middle-class Americans can further invest in long-duration value stocks and high-yield bonds as inflation hedges. These economic policy shifts offer equivalent positive ripple effects on U.S. asset market stabilization as most conventional rate cuts. To the extent that high Treasury bond yields further compress the U.S. equity risk premium, the Biden structural shift from a Fed put to a fiscal put can alter the nature of countercyclical assets such as high-duration value stocks, which receive government support in response to most economic recessions. These recessions include the Great Depression of the 1930s, the Global Financial Crisis 2008-2009, and the recent rampant pandemic corona virus crisis of 2020-2021.
The Federal Reserve zero interest rates and quantitative-easing large-scale asset purchases lend further credence to the negative correlation between stock returns and bond yields. Longer-run Treasury bonds can serve as valuable cyclical hedges. The resultant low term premium suggests a more bullish U.S. stock market outlook in the foreseeable future. As the U.S. Treasury and Federal Reserve System can better coordinate their fiscal and monetary stimulus programs, it is quite plausible for the Biden administration to strike a delicate balance between price stability and maximum employment in the dual mandate.
Reflation risk resurgence remains an imminent threat to Bidenomics.
In the post-pandemic global economy recovery, the Biden administration launches substantial fiscal and monetary stimulus programs to push the U.S. real economy back to full employment. The recent fiscal deficits and asymmetric average inflation target above 2% may have stoked broad concerns that the U.S. economy tends to substantially overheat in the near-term. U.S. Treasury bond yields are on the rise, and recent inflation expectations can induce the Federal Reserve interest rate liftoff forward guidance of late-2023 to mid-2024. Our fundamental analysis of the more progressive policy shift in U.S. fiscal-monetary stimulus coordination supports the notion that the neutral real short-term interest rate (r*) can start to rise again when the Federal Reserve System remains ready to offer new forward guidance on the prospective liftoff path of neutral interest rates from early-2023 to 2025. In the best likelihood of success, the terminal real neutral short-run interest rate can reach the reasonable range of 3.5% to 5.5% in the next few years. The resultant interest rate adjustments depend on how soon the U.S. real economy returns to higher positive economic growth, full employment, and constructive capital accumulation.
Gradual declines in high-skill labor shortages help close the economic output gap. During this gradual evolution, Bidenomics provides substantial fiscal and monetary stimulus to boost the U.S. real economy and stock market momentum. Many core economists expect inflation to hike to the reasonable range of 2.5% to 5% or above 2% in the medium term. The Federal Reserve System tolerates the relatively small welfare costs of asymmetric core inflation rates above 2%, remains ready to taper large-scale asset purchases, and then eventually determines the interest rate liftoff path in the next few years. In this positive light, many economists recommend U.S. stock market investors to hold cyclical value stocks, bank stocks, and high-duration stocks over the medium term. At the same time, U.S. stock market investors learn to avoid long-run Treasury bonds, big tech growth stocks, and other rate-sensitive assets. The reflationary backdrop sets the stage for a sustainably bullish stock and commodity market boom. As Bidenomics restarts expansionary economic policies in support of wealth and income redistribution, these populist policies can increase knowledge-intensive expenditures from low-income and middle-class households. It is reasonable for U.S. stock market investors to re-consider buying cyclical value stocks when their market prices temporarily fall below their book values. Insofar as these cyclical value stocks exhibit robust fundamental competitive moats and first-mover advantages in the respective industries, several institutional investors such as Warren Buffett and Bill Ackman regard these value stocks as the likely winners in the longer run. These value stocks can further serve as effective inflation hedges. In essence, Bidenomics better balances the dual economic mandate of maximum employment and price stability with both fiscal and monetary stimulus programs in order to tolerate asymmetrically higher core inflation in return for wider wealth and income redistribution for most Americans. In global economic history, a bit higher core inflation helps reduce economic inequality worldwide. In the pursuit of greater economic equality across the U.S. economy, the Biden administration can perhaps learn from this empirical fact. When push comes to shove, the basic universal law of inadvertent consequences counsels caution. The better is often the worst enemy of the good. There can be many different ways for the Biden administration to skin the cat, but all roads eventually lead to Rome. A wise man hides his light under the bushel and bides his time. From time to time, we can re-assess Bidenomics on the basis of its positive ripple effects on economic growth, full employment, and capital investment accumulation. As Bidenomics shines fresh light on the post-pandemic global economic recovery, core inclusive institutions can often help promote better economic growth and prosperity in the modern U.S. democratic capitalist society. As a consequence, the real economy can benefit from higher U.S. GDP per capita with less wealth and income concentration over the next decade.
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