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Economic Research: Next Steps For President-Elect Biden: Containing Coronavirus And Stabilizing The U.S. Economy

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Economic Research: Next Steps For President-Elect Biden: Containing Coronavirus And Stabilizing The U.S. Economy

Despite one of the most unusual election seasons in U.S. history--given the pandemic and related recession--Americans' participation in the 2020 election was the highest in more than 100 years, with a massive amount of mail-in ballots and more early voting options. Nearly 65% of the voting-age population cast ballots.

President-elect Joe Biden won the popular vote and surpassed the 270 votes needed for an Electoral College victory. However, the results were tighter than what most polls expected, with President Donald Trump seeing sizable gains in support. Additionally, while Democrats kept a majority in the House of Representatives (but lost a few seats in the process), control of the Senate has yet to be decided. Georgia will host two runoffs for Senate seats on Jan. 5. Moreover, the Senate will be up for grabs again in two years, with 22 Republican seats at stake in the 2022 midterm elections, relative to the 13 Democrats hold. However, Republican control of state houses to affect redistricting could make it challenging for Democrats to hold the majority in the House in 2022.

If President-elect Biden starts his first term with a gridlocked Congress, many of his long-term structural policy promises will likely remain unfulfilled for at least a while. If the Republicans keep the Senate in 2022, the new president's big structural policy promises could languish in the last two years of his first term. Still, we never thought President-elect Biden would focus on long-term structural policy issues right out of the gate. We believe his first year (and certainly his first 100 days, given the rapid spread of COVID-19) will be dominated by stabilizing the health of both the American people and the U.S. economy.

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First, the new administration will likely focus on containing the virus and getting better treatment and/or a vaccine to American households. The next important task is simple: helping those hit hardest by the pandemic--industries struggling from lost economic activity and workers displaced by the virus. The goal will be to create jobs as an investment in our future.

But, as we've seen in the current fight to extend emergency stimulus, a gridlocked Congress may not only limit President-elect Biden's plans to fight the health and economic effects of the virus, but it may also impede his policy options later on. As has been the case with presidencies of late, executive order and other nonlegislative powers will be significant tools.

In this light, we've looked at the Democratic Party's platform in the areas of taxation, trade, infrastructure, health care, and regulation (including climate policy and immigration), and the potential effects on the world's biggest economy.

Interestingly, there is some overlap in the Democratic and Republican agendas in areas such as trade and national security. There may also be bipartisan support for increased infrastructure spending. Indeed, with the U.S. still struggling to contain the pandemic in the fourth quarter, there may be public support to invest in public health infrastructure during the president-elect's term.

Once COVID-19 is behind us and the economic recovery is able to stand on its own, President-elect Biden may turn to achieving his long-term policy objectives. By then, Congress will have begun its election cycle, and pushing more divisive policy issues runs the risk of leaving fellow Democratic lawmakers vulnerable in 2022. This suggests little action on a number of these structural policy issues until at least 2023.

S&P Global Ratings believes there remains a high degree of uncertainty about the evolution of the coronavirus pandemic. Reports that at least one experimental vaccine is highly effective and might gain initial approval by the end of the year are promising, but this is merely the first step toward a return to social and economic normality; equally critical is the widespread availability of effective immunization, which could come by the middle of next year. We use this assumption in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

President-Elect Biden's First Year: COVID-19 Will Call The Shots

Before President-elect Biden addresses his longer-term initiatives, he must get to the business of steering the American people and economy back to health.

The historic 33.1% annualized jump in third-quarter GDP was a positive piece of news. But the economy still needs to regain over one-third of the $1.95 trillion lost to get back to GDP levels of the fourth quarter of last year. And while third-quarter gains were driven by home sales, home improvements, and consumer spending, the dim job prospects for many people with lower-paying jobs mean not everyone enjoyed the benefits.

The drop in headline unemployment to 6.9%, from the 80-year high of 14.75%, was also a relief. But factoring in all the people who left the jobs market since February and misclassification issues by the Bureau of Labor Statistics, the adjusted unemployment rate is 9.3%. Moreover, we believe that was the easier half of the labor-market recovery. The next half will take some time as we go through the "sticky" part of the unemployment pool (long-term unemployed and those who have permanently lost jobs), which means that the unemployment rate won't reach its precrisis level until mid-2024. That's assuming the virus is contained. Until then, there are still 21 million people receiving unemployment benefits, traditional unemployment benefits, Pandemic Unemployment Assistance (PUA), and Pandemic Emergency Unemployment Compensation (PEUC). PUA and PEUC are about to expire at year-end, assuming no extension.

Chart 1

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S&P Global Economics expects real GDP to contract 4% this year and grow a modest 3.9% in 2021. All of this assumes passage of a $500 billion stimulus package before year-end. Even with that boost, by the fourth quarter of 2023, real GDP would still be $115 billion (or 2.2%) smaller than what we expected in our December 2019 forecast. Adding to the pain is that the U.S. unemployment rate is unlikely to fall to its precrisis low until mid-2024.

Stimulus negotiations during a lame-duck presidential period are tricky, for sure. We assume Congress will reach an 11th-hour compromise on a continuing resolution to keep the government open before Dec. 11. But risks are high. Already-extended jobless benefits have expired, and with the majority of out-of-work Americans unemployed for at least 27 weeks, their traditional benefits will also expire soon. Moreover, further job cuts from state and local governments, whose budgets have been crushed by COVID-19, will add pressure if federal stimulus isn't available. They would need to tighten their belts further, increasing chances of more jobs lost in December.

In the face of the recent COVID-19 surge, our baseline forecast may seem optimistic. In looking at the trajectory of GDP as this sluggish recovery unfolds, the risks to our forecast include a further flare-up in COVID-19 cases, the "bridge" from government stimulus only making it halfway to the other side, and an increase in trade tensions with China.

Chart 2

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Chart 3

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We see the risk of recession in the next 12 months at 25%-30%, though nearer to the high end of the range. It's not far-fetched to think that we could see a scenario (our September downside forecast) of no more fiscal stimulus and the pandemic crippling growth in the fourth quarter, followed by a slow recovery in a politically divided New Year.

In this scenario, consumer spending would plunge late this year, with further disruption in early 2021. The contraction in consumer demand and output in this pessimistic forecast would be much sharper. From both postelection tensions and "stimulus fatigue," Washington would be slow to approve additional measures, delaying the recovery further.

Owing to the sharper contraction and slower recovery in consumer spending and related spending by businesses, GDP would plunge 5.1% this year, in our September pessimistic scenario, with barely a nod to recovery in 2021, with just 2.8% growth.

Chart 4

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Fortunately, the health care system has been able to better manage the pandemic, reducing fatality rates. Travel has remained curtailed since March, to limit the disease's reach, and the Federal Reserve has indicated that it stands ready to move in the case of another shock. (We expect the Central Bank's new flexible stance on inflation targeting gives it reason to keep rates at near zero until later in 2024.) However, with the U.S. population heading indoors during the fall, and with the holidays encouraging more family visits, the number of coronavirus cases could surge even higher.

And yet, the U.S. government remains frozen on reaching an agreement to extend benefits. Perhaps signs that the pandemic has reached crisis levels may spur Congress to pass measures exceeding the $500 billion we expect.

For President-elect Biden's part, he could redirect some of the money from the Coronavirus Aid, Relief, and Economic Security (CARES) Act that hasn't been spent to improve health care for many Americans and rapid COVID-19 testing. Other unused money could be redirected to schools that are in need of funds to improve their online teaching tools or safety measures at school buildings. But, assuming our downside scenario is anywhere close to being right, the larger hit to economic growth would translate into a higher unemployment rate and more people in need of relief.

The President-Elect's Longer-Term Goals

President-elect Biden has a long list of big structural policy changes that he'd like to move through Congress. But wish lists don't always make it into law.

The Democratic Party's platform in the areas of taxation and health care, for example, will likely face significant roadblocks from the Republican-controlled Senate. The Senate may also limit President-elect Biden's cabinet and Fed choices.

Although the GOP would like to limit some of the president-elect's regulatory promises in areas such as climate policy and immigration, he will likely have more authority changing current law given use of presidential executive order. He has already indicated that he plans to use his pen this way on day one.

Although the gap between the two parties on Capitol Hill is wide and deep, there is some overlap in areas such as trade and national security. There may be some bipartisan support for increased infrastructure spending, depending on the project.

Tax policy: Proposal to reverse some tax cuts

President-elect Biden has promised to reverse some of the Trump Administration's tax cuts, under the premise that the U.S. federal tax regime needs to be retooled to level the playing field.

The president-elect's proposals would increase taxes on high-income individuals and corporations. He would expand tax credits for middle- and lower-income Americans and for new investments in domestic manufacturing. According to the Tax Policy Center, his proposals would increase federal revenues on net by about $2.1 trillion in the next decade. The highest-income households would see substantial tax increases, and tax burdens would fall for households in the bottom three income quintiles. It also found that in 2022, when President-elect Biden's temporary expansion of the child tax credit would be in effect, tax burdens would also fall for households in the fourth income quintile.

However, promises don't always become policy. Introducing a tax hike during a crisis would probably not be well-received, especially by businesses already hurt by lost revenue from social distancing. Even if a tax hike were to go through, S&P Global Ratings believes there would be little effect on credit. The president-elect's proposal to raise the nominal corporate tax rate to 28%, from 21%, would claw back only half of the cut under the Trump Administration's Tax Cuts and Jobs Act of 2017.

Chart 5

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While we suspect President-elect Biden will start talking about his administration's policy proposal after the COVID-19 crisis has past, we doubt that it'll get much play until after the midterm elections. The current Senate GOP won't give it any air time, and moderate Democrats (those up for 2022 reelection) would have a hard time supporting the proposal. If the unemployment rate is dramatically above precrisis levels, critics would have more reason to dismiss the proposal. And chances of any success for the president-elect's tax proposal after the midterm elections depend on the shape of Congress. While more Republican Senate seats are up for grabs in 2022, it's nowhere near certain that the Democrats will win the majority. Moreover, Republican control of state houses could make it challenging for Democrats to hold the majority in the House in 2022. That leaves chances of any changes to tax policy during President-elect Biden's first term slim.

Infrastructure: Is now the time?

Infrastructure enjoys bipartisan support, comparatively speaking. The prospects for job creation and kick-starting the economy through the so-called "multiplier effect" (which is greater when the economy is in recession or early recovery, as we are now) appeal to both parties' bases. The Biden campaign laid out a plan to pump $2 trillion into physical infrastructure, including roads, bridges, water systems, electricity grids, and universal broadband, while also investing in care services and facilities.

S&P Global Economics has published extensively on the potential economic benefits of infrastructure spending. Prudent investment can boost an economy in many ways, including adding jobs--mostly middle-class jobs (and not just during a project's construction)--increasing income, and raising property values. With interest rates at historic lows, materials costs affordable, and high unemployment, now seems like a good time to act.

In our analysis earlier this year, we found that a $2.1 trillion boost to public infrastructure spending over a 10-year period could add as much as $5.7 trillion to U.S. GDP in the next decade. That's 10x what we lost during the recession. It would also create 2.3 million jobs by 2024 as the work is being completed, and the additional 0.3% boost to productivity per year that it would generate would add a net 713,000 jobs by 2029.

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Trade: A coalition with allies to achieve trade goals

With regard to the U.S. approach to trade--in particular, the dispute with China--President-elect Biden seems unlikely to be soft on China, which is on pace to become the world's biggest economy within a decade. With broad American support to confront China trade policy that hurts U.S. industries, it's not surprising to think he will continue to play hard ball.

But unlike President Trump's earlier "America First" approach to foreign policy, the president-elect would be more likely to build a coalition with allies to achieve the U.S.'s trade and economic goals. While the uncertainty that trade tensions cause is never good for markets, a more ordered trade policy that builds on relationships with U.S. trade partners will likely calm markets. Indeed, some corporate sectors, such as autos, technology, and capital goods, could benefit from less uncertainty around tariffs and more clarity in decision-making.

The Biden Administration may also look to bring the U.S. back into the Trans-Pacific Partnership (TPP), from which President Trump withdrew in 2017, something he can do without the blessing of a divided Congress. However, when addressing TPP, he would have to balance the split between moderate and progressive congressional Democrats, with Progressives blaming trade deals for favoring corporate interests at the expense of American workers, and the division between Republican policymakers, with its populist base opposed to trade deals. And we suspect the president-elect may unwind tariffs President Trump levied on certain goods from Europe. Closer to home, he may consider opening up negotiations with Canada to address the current tariff on softwood lumber.

With the phase one deal with China having stalled, we believe President-elect Biden will keep the tariffs on Chinese goods in place for the foreseeable future. These, combined with retaliation from China, will directly shave off about 20 basis points (bps)-30 bps from U.S. GDP in the next 12 months, if they remain in place over that time. More important may be the secondary effects, such as increased uncertainty and the resulting reduction in business investment. That will slow U.S. growth in an economy that is only slowly gaining traction.

The direct economic effects from the tariffs in and of themselves aren't enough to threaten the U.S. expansion. However, on top of the other protectionist policies, they don't help. Tariffs on intermediate goods hurt American companies, and tariffs on end products hurt American consumers. Nontariff barriers would make the economic conditions even worse for the U.S. companies that do significant business with China. And all lead to fewer jobs for American workers.

Chart 6

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Health care: Expanding the Affordable Care Act

Health care was a top campaign issue, as it has been in every presidential race in recent memory, and the loss of insurance for many Americans during the pandemic-induced recession has cast a brighter spotlight on the issues of coverage and cost.

Under a Biden Administration, we could see policy changes to the Affordable Care Act (ACA), including a federal public option, new funding incentives for states to expand Medicaid, early buy-in for Medicare, and expanded subsidies for ACA individual products. The president-elect also supports drug-pricing reforms, a popular position on both sides of the aisle. However, many of these policy changes may be difficult to implement because they may require more than a simple majority in the Senate. Assuming the Supreme Court validates the ACA in the California v. Texas case next year, any dramatic policy changes to Obamacare don't seem to be in store in the next two years.

Regulation: Executive order is key in meeting policy objectives

One area in which President-elect Biden has nonlegislative power, regardless of who controls Congress, is executive order. The president-elect has already announced that he plans to begin governing at the get-go with a slew of executive orders--including rejoining the Paris Agreement and the World Health Organization, repealing travel bans from some Muslim-majority countries, tightening environmental rules, and reinstating the Clean Air Act. In this regard, his proposed regulatory measures could weigh on the U.S. energy sector broadly, and on oil and gas production, in particular. In line with this thinking, S&P Global Platts Analytics estimated that a ban on new federal drilling leases could reduce U.S. production by as much as 2 million barrels per day by 2024 versus its existing outlook.

President-elect Biden has also promised to address labor regulation (the federal minimum wage and parental leave for federal workers) and immigration issues, such as increasing work visas. Any changes to the federal minimum wage requires congressional support--given the current congressional makeup, a challenge at best. He would remove uncertainty regarding Deferred Action for Childhood Arrivals (DACA) by reinstating the program within his first 100 days in office, which currently has popular support. (A Pew Research Center survey estimated 74% of Americans in June said they favor legal status for "Dreamers.") He has embraced citizenship rights for 11 million undocumented immigrants and has said he would look to increase the number of visas awarded for permanent, employment-based immigration.

In most cases, immigrant labor largely complements--rather than displaces--the domestic workforce. S&P Global Ratings believes immigration reform that would further open U.S. borders to a significant number of highly skilled foreigners who could lawfully enter the country permanently or temporarily would be a boon to the economy (see "Adding Skilled Labor To America's Melting Pot Would Heat Up U.S. Economic Growth," published March 19, 2014). We've found that such a measure could add roughly 3 percentage points to real GDP in a 10-year period, and that the tax revenue generated would chip away at the government's budget problems.

Moreover, highly skilled workers generally earn much-higher-than-average wages, with those in the STEM fields (science, technology, engineering, and math) earning almost twice the average. An influx of young, skilled labor would spur economic growth, reduce the federal deficit, add to innovation, and help offset the economic drag of an aging U.S. population. In addition, if reform focused on highly skilled immigrants, the ripple effects on productivity, the tax base, and jobs would be even larger.

The views expressed here are the independent opinions of S&P Global's economics group, which is separate from, but provides forecasts and other input to, S&P Global Ratings' analysts. The economic views herein may be incorporated into S&P Global Ratings' credit ratings; however, credit ratings are determined and assigned by ratings committees, exercising analytical judgment in accordance with S&P Global Ratings' publicly available methodologies.

This report does not constitute a rating action.

U.S. Chief Economist:Beth Ann Bovino, New York + 1 (212) 438 1652;
bethann.bovino@spglobal.com

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