This article is an on-site version of our Unhedged newsletter. Sign up here to get the newsletter sent straight to your inbox every weekday
Good morning. We’re delighted to collaborate with Adam Tooze of Columbia University for the second time. This letter will be featured in both Unhedged and Adam’s Chartbook newsletter (you should definitely subscribe!). We have two more collaborations coming up on the next two Thursdays. Today, we begin by examining Joe Biden’s presidency — how voters may perceive it next November and its lasting impact. We are eager to hear your thoughts: [email protected] and [email protected].
Unhedged: Evaluating Biden’s Presidency
The direct influence of US politics on markets and the economy is often overestimated. For instance, the answer to “what will a government shutdown mean for markets?” is typically “probably not much.” However, there is a strong causal link that runs the other way. Market movements can have significant and swift political consequences.
In 1980, Ronald Reagan, while running against Jimmy Carter, asked voters, “Are you better off than you were four years ago?” The president’s control over the answer to that question is greatly exaggerated. Unfortunately for Carter, the buck stops at the Oval Office, and elections are determined by psychology, not justice. With that in mind, let’s assess Biden’s “are-you-better-off” balance sheet:
Assets:
1. Employment and consumption: Biden’s greatest asset is a historically robust labour market. Capitalism thrives when labour markets are tight. Employers are compelled to compete for workers, who can then reinvest higher earnings into spending, supporting companies. Though the labour market was initially distorted by the pandemic during the early months of Biden’s term, it has since stabilized. The power dynamic remains in favour of workers, bolstering strong consumption growth. Real spending is on par with pre-pandemic levels, defying higher interest rates.
2. Wealth: Americans’ net worth has increased significantly since Biden’s inauguration in January 2021. This rise can largely be attributed to increased real estate values and private business ownership. Encouragingly, the bottom half of the wealth distribution has experienced the greatest percentage gain (25%), driven by surging house and car prices.
3. Union activity: Americans’ approval of unions is at its peak in six decades. Biden has shown support for unions, marching alongside striking car workers and implementing pro-union policies such as increasing penalties for employers who terminate workers prior to union elections. Pro-labour voters have good reason to back Biden.
Liabilities:
1. Real wages: It is difficult to measure the increase in wages relative to prices, but it is roughly balanced. Real wages, as determined by the employment cost index and GDP deflator, are just slightly lower than they were at the beginning of 2021. An economist might argue that despite the inflationary effects of the pandemic stimulus response, wages have kept pace, and full employment has been achieved, which is a success. However, voters do not see it that way. They are more likely to focus on the rising cost of living, which has increased by almost a fifth in three years, making nominal wage gains feel less significant.
2. Petrol prices and energy costs: When Americans are asked about the state of the economy, they often mention petrol prices. Since Biden’s inauguration, prices have increased by about 70% and have been highly volatile.
3. Market performance: The S&P 500 has delivered a 15% return under Biden. If you held a 70/30 stocks/bonds portfolio, your return would be a meagre 5%. Considering the strong performance of risk assets since the financial crisis, this lacklustre performance is not unexpected, as returns tend to revert to the mean. However, everyone has become accustomed to high returns across the board, which has not materialized in recent years.
4. House prices: The current housing market is grim for prospective homebuyers, especially young people. Even renters are in a precarious situation, with the national rent-to-income ratio surpassing 30%, the threshold for being “rent burdened,” according to Moody’s.
Taking a step back:
Assessing the long-term economic impact of Biden’s policies falls more within Adam’s area of expertise. However, we have identified three areas that stand out as most significant:
1. A revitalized regulatory state: Lina Khan’s Federal Trade Commission and Gary Gensler’s Securities and Exchange Commission have been implementing aggressive antitrust measures against private equity and companies like Amazon and Google. The reshaping of disclosure rules and Biden’s industrial policy push are also influential in shaping future assumptions and attitudes.
2. Domestic spending: The American Rescue Plan, Biden’s fiscal response to the pandemic, included various social support programs that deviated from traditional welfare policies and provided a “proof of concept” for future administrations. The expansion of the child tax credit, despite a partial rebound in child poverty upon its expiration, was considered a success. However, this has resulted in historically large peacetime fiscal deficits. How this deficit will be financed (through tax increases, reduced spending, or higher inflation) and whether the massive increase in Treasury issuance will disrupt the bond market remains to be seen.
3. Geopolitics: The unwavering support for Ukraine and a tough stance on China will undoubtedly have repercussions. The stalemate with Russia has demonstrated the value of being a US ally. However, the aggressive approach towards China may be less certain. Some argue that the lack of concrete demands presented by Biden has hindered progress in US-China relations.
Adam, what are your thoughts?
Chartbook responds:
Historians will likely view the Biden years as a period of bold economic policy. The $1.9tn American Rescue Plan stands as one of the largest fiscal stimulus acts in history. In response to inflation, the Fed raised interest rates more than anticipated, causing the “Greenspan put,” the implicit guarantee of rate cuts to support asset prices, to lose its effect. The administration adopted an aggressive anti-China policy and took on big tech. It is too early to determine the ultimate outcome for corporate America and investors.
Had it been up to the administration and the left-wing of the Democratic party, it might have been a period of bold social policy as well. However, due to opposition from the Republican party and Democratic Senator Joe Manchin’s concerns regarding inflation, fiscal balance, and welfare spending, this was not the case. Shockingly, after significantly reducing child poverty, Congress decided that the child tax credit was not a priority and allowed poverty rates to rise again. Congress did pass three notable industrial policies — the bipartisan Infrastructure Investment and Jobs Act, the Chips Act, and the Inflation Reduction Act — providing significant subsidies for green industries, solar panels, electric vehicles, infrastructure, and microchips.
For policy wonks and market commentators, it has been quite the feast. When evaluating the electorate’s reaction, Reagan’s question that you mentioned is an obvious starting point. Biden and his team undoubtedly hope that voters…
Denial of responsibility! Vigour Times is an automatic aggregator of Global media. In each content, the hyperlink to the primary source is specified. All trademarks belong to their rightful owners, and all materials to their authors. For any complaint, please reach us at – [email protected]. We will take necessary action within 24 hours.
