As the presidential election approaches, investors are likely sharpening their focus on the potential economic outlook under either President Trump or Democratic presidential nominee Joe Biden.
President Trump hasn’t actually spelled out a specific economic plan, and the Republican party chose not to write a platform at its nominating convention. Likely, Trump would advocate for a payroll tax cut, but that’s unlikely to pass Congress due to its effect on Social Security funding.
Biden’s plan is much bigger and more detailed, and therefore, able to be analyzed. To that end, research group Oxford Economics and debt-rating agency Moody’s (NYSE:MCO) recently performed analyses of Biden’s plan, and both organizations believe it would create significantly more jobs and economic growth than the current trajectory — even in a more stripped-down form more likely to pass the Senate.
A Keynesian shot in the arm
According to Oxford, Biden’s current proposals before adjustments would amount to about $7 trillion of investments over 10 years across education, healthcare, child and elder care, a “Buy America” incentive for infrastructure and American manufacturing, and an increase to Social Security pay for low-income seniors.
That would be partially offset by roughly $4 trillion in net tax increases over 10 years, 93% of which would be paid by the top quintile of earners, and nearly half of which would paid by the top 0.1% of earners. Of note, that figure isn’t adjusted for macroeconomic after-effects of increased investment, which would mitigate that bill, should GDP go higher. That is, however, exactly what Oxford predicts; according to its forecast, the Biden plan investments would accelerate GDP and jobs growth significantly over the baseline.
However, Oxford notes that without a supermajority of 60 votes in the Senate, Biden’s plan is unlikely to pass in its current form. Still, even after adjusting for a more “realistic” version of the plan that could attract moderate Republican senators, Oxford forecasts a “Biden-lite” plan would still result in a substantial GDP and jobs boost.
Oxford predicts a stripped-down Biden plan of $3 trillion in investments against $2 trillion in tax hikes would pass through Congress. This assumes Biden’s payroll tax hike on earners over $400,000 is nixed by Republicans in the Senate, and that his corporate tax hike proposal to 28% (up from today’s 21% rate, but below the old rate of 35%) is taken down to 24%.
Meanwhile, investments in infrastructure and clean energy would be cut in half from the initial plan, as would education and child care spending. Health care investments to expand the Affordable Care Act, as well as the “Buy American” initiative, would be cut by two-thirds, and other spending on Social Security and housing would be cut by 80% from the original plan.
How growth shakes out in this scenario
Under Oxford’s assumptions, even the stripped-down Biden plan would result in U.S. 2021 GDP growth of 5.8% as the country bounces back from COVID-19, versus a “baseline” scenario of 3.7% growth if nothing happens. That’s because spending on infrastructure, education, and health would boost consumer spending by 6.4%, 1.7% higher than the baseline scenario.
Meanwhile, higher taxes would curtail some spending by the wealthy and corporations, but since three-quarters of the tax hikes in this scenario would be on earners of $840,000 and above, who will spend a lot anyway, that impact would be mitigated. Oxford also assumes the corporate tax increases wouldn’t lead to a 1-for-1 decrease in corporate investment, since the increase would be partially offset by higher revenue and growth due to a healthier consumer.
How the national debt would be affected
No doubt, since the gross difference between revenue and spending in Biden’s plan would total about $1 trillion in the “Biden-lite” scenario, the debt will go up. However, Oxford forecasts the associated GDP boost and extra tax revenue from that would lower that cost by about one-third. The resulting deficit would increase from about 5.1% to 5.3% of GDP, but debt-to-GDP would remain relatively unchanged at 110%, given higher GDP and a relatively small change in the deficit.
Is this analysis really bipartisan?
Of course, since this is election season, many may question the bias of the Oxford study. However, Oxford Economics is a global organization based in the U.K., not the U.S., so it’s less likely to be skewed by U.S. political partisanship. Oxford Economics also won the Consensus Economics’ Forecast Accuracy Award (FAA) in 2019, which awards the economic forecaster that has most closely matched reality over the past year.
In addition, debt-rating agency Moody’s also just released its own analysis of the Biden plan. Moody’s forecasts Biden’s plan would create 7 million more jobs versus Trump’s plan, lifting the average American’s after-tax income by $4,800 and lowering the unemployment rate below 4% by 2022, one and a half years ahead of Trump’s plan.
Many might assume a corporate tax hike in a vacuum would hurt the stock market, but at least these two research firms believe the Biden plan would also drive more growth and jobs, which would indirectly affect stock performance and could offset effects of a marginal corporate tax hike. Going into November, investors and voters should understand the puts and takes of each candidate’s plan to recover from the COVID-19-fueled recession.