Weekly Update - The American Plans

The American Jobs Plan is scheduled to be deployed over the next 8 years and marks a shift towards a more command-based economy. Biden’s intention is to steer investment and procurement spending towards those companies which aim to create domestic jobs. His policy priorities are clear – supporting US manufacturing, fighting climate change, reducing US dependence on China and maintaining its lead in technology. The plan is due to be paid for over the next 15 years, mainly by an increase in corporate taxes from 21% to 28%.

How will the money be spent? $621bn will go on transportation infrastructure (roads, bridges, public transportation, ports and airports) and electric vehicles; $561bn on green buildings, power upgrades and clean water; $480bn on subsidising manufacturing, including $180bn in R&D on artificial intelligence and semi-conductors; $400bn on care for the elderly and disabled; and $200bn on high-speed broadband and job-training. Biden’s pivot towards sustainability and the green economy runs through the programmes. Auto-makers will receive hundreds of billions to produce batteries and to retool plants, while the
administration invests in building a nationwide network of charging stations. Money will go to building energy-efficient buildings and retrofitting the existing stock of homes and commercial buildings. And Biden plans to modernise the electric grid via at least 20 gigawatts of high-voltage power lines, a long-standing weakness as shown by February’s power outages in Texas.

The plan clearly focuses on obvious weaknesses in the US economy – its dilapidated infrastructure is widely recognised by voters and a long-term drag on competitiveness. However, the tax increases will face fierce opposition from Republicans in Congress. Nonetheless, some voices on the left of the Democratic party say the plan – which amounts to 9.6% of GDP – doesn’t go far enough!

The House majority leader, Nancy Pelosi, hopes to have approved the bill by July 4, which would enable the Senate to pass it before Congress goes into its August summer recess. This calendar may prove somewhat optimistic, given the Democrats’ slim majorities in both chambers. The House of Representatives is split 219-211 in their favour and the Senate balanced 50-50, with the deciding vote cast by Vice-President Harris – Biden cannot afford to lose more than 3 Democratic votes in the House and none in the Senate if he is to get the legislation through.

Recognising this, the White House has declared that it is open to suggestions for changes in Biden’s proposals. The next few months will thus be devoted to detailed review and refinement of the plan. Given the size of the tax increases, the bill is unlikely to attract much support from Republicans, meaning that the Democrats will have to use the budget reconciliation process – this allows a party a single simple-majority Senate vote each year, thereby avoiding the “filibuster” tactic which can block bills which don’t attract 60 senators.

Bottom line. The sheer size of Biden’s two new plans is likely to keep inflation worries high and upward pressure on bond yields. On the other hand, the tax increases may cause concern that the recovery could be stymied and that the decrease in after-tax profits could hit the equity market. However, it should be noted that this is only a partial reversal of Trump’s 2017 cut of corporate taxes from 35% to 21% – half of the cuts will stay in place. All in all, we remain Neutral on US equities and continue to prefer more cyclically-sensitive markets in Europe and Japan.

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