A U.S. Economy Under Biden

SMITH BRAIN TRUST – How will a Joe Biden presidency affect the American economy, and what will it mean for the U.S. role in global economies, including China’s?

Following Biden’s projected election victory, experts David Kass and Kislaya Prasad at the University of Maryland’s Robert H. Smith School of Business offered insight from different perspectives. 

Prasad, research professor and academic director of Maryland Smith’s Center for Global Business, also is a Brookings Institution guest scholar. Kass, a clinical professor of finance, has served as an economist in senior positions with the Federal Trade Commission, General Accounting Office, Department of Defense, and the Bureau of Economic Analysis and blogs about Warren Buffett, Berkshire Hathaway and the stock market.  

The pair responded separately in the merged Q&A below.

How will Biden’s policies, as proposed, change the American economy and society? 

Kass: A Biden administration will likely result in a large stimulus bill passed by Congress that would help plug the hole in the U.S. economy until a safe and effective vaccine for Covid-19 is widely distributed sometime in 2021. Joe Biden will propose legislation leading to a more-universal health care system, improve educational opportunities, and focus on the environment and improving our infrastructure. A Democrat-controlled House of Representatives along with a likely 52-48 Republican controlled Senate should permit Biden to achieve many of his spending goals. His proposed tax increases on corporations and high-income individuals are likely to be blocked by the Republican-controlled Senate. The U.S. economy should continue to recover and grow rapidly under the stimulative fiscal policy led by the Biden Administration along with the corresponding accommodative monetary policy of the Federal Reserve.

Prasad: The campaign was in many ways a referendum on President Trump's handling of the pandemic and obviously is the first priority. Biden has already announced a task force, and planning of the response is well under way. At the core of his "build back better" message is a new economy that protects healthcare for all, improves infrastructure, builds back manufacturing and addresses increasing inequality. The protests for racial justice over the summer laid bare U.S. problems, and many of the protestors provided energy to the Biden campaign. They will be looking for serious action on the issue, which Mr. Biden has promised. And finally, Biden has promised action on climate change. These are all ambitious (and sometimes contentious) goals, but progress on these will determine whether the Biden presidency is judged a success. Biden also claimed in the campaign to be fighting for the "soul of the nation." His most ardent supporters argue that U.S. democratic institutions and the rule of law were under attack during the Trump presidency, and that Biden's election is a return to core-American democratic values.

Will China-US relations return to the original path, break new ground or deteriorate?

Kass: It is clearly in China’s interest, and that of the rest of the world, for a President Biden to restore U.S.-China relations to the less confrontational approach that preceded President Trump. Biden is likely to form a coalition with our trading partners in Europe and then confront China in a less hostile fashion and be better able to negotiate our differences from a position of greater strength. The tariffs that President Trump introduced would likely be eliminated or substantially reduced. The level of international trade would then increase to the benefit of consumers in all countries that were impacted by the Trump tariffs. Tariffs are taxes on consumers that increase the prices of goods and thereby discourage their purchase. Both producers and consumers are worse off as a result of tariffs. Tariffs played a major role in contributing to the severity of the Great Depression of the 1930s.  

Prasad: President-elect Biden is likely to take a more multilateralist approach to China, in conjunction with European and Pacific allies. There are a number of outstanding issues, such as involving Taiwan, Hong Kong, the South China Sea, technology and intellectual property protection, environment, trade, etc. I expect he will work with allies to develop a common strategy. Since several allies have more significant commercial interests in China, the relationship may not be as antagonistic as recently. It has been said that Biden views China more as a competitor than an adversary, and I think there is some truth to that. However, I do not anticipate a quick reversal to Obama-era policies, even when it comes to tariffs and the trade war. It is now generally accepted that China's accession into the WTO had an adverse effect on manufacturing wages. In fact, Trump won in 2016 by winning states that had been hurt by import competition. There are strong elements within the Democratic parties that agree with elements of the Trump trade policy, and the need to protect U.S. industry from Chinese competition. So, a reset will be difficult. I don't believe that Biden and his advisers are singularly focused on the trade deficit, but the politics of unraveling the tariffs will be politically difficult, at least in the near term. The Biden campaign included significant protectionist elements – on "buy American" in government procurement, and in the expressed need to re-shore supply chains and strategic technology – and I expect these will move forward. 

I don't believe that China-US relations will deteriorate further (unless this is precipitated by a major geopolitical event). This is partly from Biden's long history of supporting the post-war international order and global stability (and a personality that is not as impulsive as Trump's). Most importantly, Biden will be focused on the domestic response to the pandemic and the economy. There will be greater stability, and a gradual improvement. But I am not expecting anything major happening soon. 

How will the United States under Biden rejoin the global integration process?

Prasad: I anticipate the U.S. will rejoin the Paris accord and the World Health Organization as soon as Biden is President. He will attempt to repair the Atlantic alliance and will play a more constructive role in international institutions such as the World Trade Organization. I believe the U.S. also will play an important role in the distribution of a COVID vaccine in lesser-developed countries. 

Which of Biden's economic policy proposals represent a radical shift from those of his predecessor?

Prasad: Among his proposals, the most radical are those relating to the environment. This will start with reversing some of the Trump-era loosening of environmental restrictions, but the more ambitious goal is making U.S. energy production carbon-free by 2035 and net-zero emission by 2050. This will start with a plan to spend $2 trillion to upgrade buildings to make them more energy efficient. There are plans to invest in, and incentivize ownership of, electric vehicles. His ability to follow through will depend on which party controls the Senate. 

How will a Biden presidency influence the global economy overall?

Kass: A Biden presidency is likely to lead to a more cooperative trading environment with countries in Western Europe and a less confrontational trading relationship with China. There should be fewer restrictions placed on investments in foreign or other tech equities. The United States is likely to form a coalition with Western European countries in negotiations with China on intellectual property rights and national security issues. A Biden administration will lead to a much more cooperative, and less confrontational, foreign policy.  International trade will increase, the economies of all countries will benefit, and the risk of a military conflict will be substantially reduced. This reduction in international confrontation will reduce the overall risk facing world economies and the financial markets.

Related Video: As part of the Center for Global Business' Global Pulse series, finance professor Albert “Pete" Kyle overviews current sources of stock market uncertainty. This significantly includes, he says, the role of corporations in the economy: "[President-elect Biden] had campaigned on a promise of raising taxes on corporations and wealthy people. Given that [a Republican-led] Senate may not go along with high taxes, one thing you might look for is more aggressive antitrust policy aimed at many of the big companies — the tech companies — and probably the growth stocks.”