Independent SEC-registered investment advisor at Stonnington Group, a wealth management and investment planning firm based in Pasadena, CA.
This administration’s economic policy agenda (“Bidenomics”) has its fair amount of supporters and detractors. But one thing is true: Government spending is increasing at a rate we haven’t seen in decades. And the verdict is still out on how it will affect interest rates and inflation.
Biden’s Covid-19 relief package, as well as his recent pushes for aggressive, new funding for education, transportation, and fighting climate change, mark a historic amount of spending, and we’re all curious how it will affect our economy and individual Americans.
His overall spending and tax proposals are rooted in three main goals:
1. Increasingly income redistribution via taxes
2. More federal spending on climate change mitigation and infrastructure
3. Stronger fiscal policy against underemployment and “lowflation”
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Income redistribution policy is not unusual when compared to Europe. In fact, as of 2019, pre-tax U.S. income inequality was high while safety net spending, corporate tax rates, and top 1% personal income tax rates—mostly for households in low-tax states—were low. Following through with Biden’s proposals would actually get the U.S. closer to the norms in Europe. That said, his proposed capital gains tax hike still skews a bit more progressive than most European countries.
When it comes to climate change, the U.S. is arguably already behind compared to other developed nations. Looking at the carbon emissions per capita, the U.S. is among the highest in the world, yet our infrastructure spending is quite low in comparison.
The Covid-19 relief package is as helpful for some as it is risky for others. There are millions of Americans who found themselves suddenly out of work due to the pandemic, and Biden’s stimulus packages helped many.
However, his decision to extend the $300/week federal unemployment supplement to September 6 may have contributed to keeping people out of work, shortages in the economy and a spike in inflation. In truth, many unemployed workers are making more from their unemployment benefits than their normal working wages, forcing businesses to increase pay rates or risk not filling open job requisitions.
This extreme uptick in spending may be risky for the economy—and potentially your investments. Here’s why: The increased spending could result in the economy and inflation getting too much of a kickstart, and the Federal Reserve will step in and increase interest rates. We’ve seen this before, at the beginning of Donald Trump’s presidency. He lowered taxes to invigorate the economy and then the Federal Reserve raised interest rates. The economy, and the stock market, collapsed. This was completely opposite of what Trump was trying to do, which was to help the economy to grow as the country was still recovering from a financial crisis at the time. It took a while but The Federal Reserve recognized their error and reversed course. The economy and the stock market went to new highs.
In recent times, we’ve seen the debt of the economy fuel market growth. Interest rates are low and consumer and corporate spending is steady, which is great for owners of equity assets such as stocks, real estate and commodities. But if the Fed slams on the brakes by tapering bond buying for their balance sheet, or worse, letting the bonds mature without replacing them, and even worse, eventually increasing interest rates (which they’re planning to do in the not-so-distant future), we can expect the stock market to drop.
The market is sensitive to the Fed and even mentioning a tightening monetary policy can result in a market drop. For good reason: stocks go up based on future earnings growth, which depends on the economy continuing to grow. When the Fed announces tapering, probably in November or December this year, if history is any guide, it will result in the economy slowing and wage growth slowing. Both of which will not only hurt the value of equity assets but will also hurt the Bidenomics goal of enriching the working families of our nation. Once again, as what happened in the prior administration, Bidenomics will be expanding the national debt to fuel growth only to have the Federal Reserve use its monetary policy to undo the government’s fiscal policy.
Another part of Biden’s administration’s proposed income and wealth distribution strategy could directly affect those with sizable estates. Senator Bernie Sanders unveiled a proposed estate and gift tax reform legislation in March 2021, and if Biden signs it into law, the implications are huge, including the proposed lowering of the federal estate tax exemption from $11.7 million to $3.5 million per person.
If your estate exceeds $3.5 million, the time to see an estate attorney is now. You can mitigate some of the tax implications by gifting early to heirs.
And it’s important to remember, tax policy changes depend on who is elected. In most cases, I recommend that the best course of action is to just wait it out. Policy could flip again.
Despite conflicting economic policies, punitive tax initiatives and exploding national debt, the stock market always seems to climb the wall of worry and find its way forward. We continue to recommend a buy and hold strategy of stocks.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.