_ Dr. Evgeny Vinokurov, chief economist, Eurasian Development Bank and Eurasian Fund for Stabilization and Development. Moscow, 16 September 2021.
Currently, the United States is discussing a two-component plan, which involves further gigantic fiscal injections into the economy. The United States produces a quarter of the world’s nominal GDP, and the transmission channels from the American economy to the world are very strong. Thus, an increase in the growth rate of the US economy by 1 percentage point leads to an increase in growth rates in the rest of the world by 0.7 percentage points. But systemic risks are no less effectively transferred, as evidenced by the history of the 2008 global financial crisis. The state of the American economy, its development and structural transformation largely determine the economic development of other states. Implementation of Joe Biden’s plans can not only structurally change the vector of development of the American economy and society, but also significantly affect the world economy as a whole. That is why it is important for other countries to form an understanding of what benefits and risks the implementation of Biden’s plan may have.
What is Biden’s agenda?
The current President of the United States is actively promoting the agenda for the structural transformation of the American economy – the “Build Back Better” agenda. By the end of September 2021, the United States plans to approve an additional 4.5 trillion USD of budget expenditures – about 20 percent of the country’s annual GDP, which at the end of the year is estimated at 23 trillion USD. A significant increase in spending is associated with the implementation of the agenda of Biden to improve infrastructure within the next 10 years.
The package for 4.5 trillion USD actually combines the key initiatives of president Biden, which were announced back in April-May 2021. These are “The American Jobs Plan”, which initially assumed the financing of infrastructure, and “The American Families Plan” – investment in human capital. In the final version of the bill, the total investment amount consists of:
1 trillion USD for the infrastructure plan (roads and bridges, modernization of public transport, airports, water and electricity systems, ensuring reliable access to broadband Internet, other physical infrastructure);
3.5 trillion USD for the “social infrastructure” financing plan. It focuses on infrastructure investments in human capital (medicine, free education, vocational education and retraining, childcare, transformation of the country’s energy system – green energy, investment in R&D).
Why is this significant for the American economy?
The aim of the initiative is, in fact, to restructure the economy to meet current challenges. Long-term priorities include developing a green economy, increasing competitiveness, creating jobs, improving the skills of the workforce, and reducing inequality.
Who will pay?
The main financing is planned to be realized at the expense of large American companies through an increase in the corporate tax rate from 21 percent to 28 percent and the capital gains tax rate from 20 percent to almost 40 percent for investment profit in excess of 1 million USD.
Of course, additional financial resources are expected from an increase in the growth rate of the economy, which will generate additional tax revenues.
At the same time, the authorities forecast an additional growth of the budget deficit. This means that part of the costs will be realized through further expansion of public debt. The Congressional Budget Office estimates the budget deficit at 3 trillion USD in 2021 and 1.2 trillion USD on average annually in 2022-2031. Implementation of the agenda can increase the budget deficit by an additional 150 billion USD annually. The increase in public debt will be about 7 pp. over a 10-year period, which will entail an increase in the US national debt above 110 percent of GDP.
Economic consequences for the USA and the world
The question of the macroeconomic consequences for the United States and the world markets from such large-scale cash infusions is becoming quite natural. In general, Biden’s agenda is a long-term investment in infrastructure (physical and human capital). In fact, their implementation will become a structural transformation of the economy. The effects of the sale will manifest themselves in the long term and, in my estimate, will lead to an increase in the potential growth rate of the US economy from 1.8 percent to 2 percent.
Such a large-scale fiscal stimulus always carries risks of additional inflationary pressures. Much will depend on the coordination of actions of the fiscal and monetary authorities and the efficiency of the use of funds. However, the possibility of an increase in average inflation rates on a permanent basis in the 2020s cannot be ruled out. It is possible that the situation is structurally changing, and inflation in the United States over the current decade will be steadily higher than the values of the 2010s. A corridor of 2–4 percent is possible. This is what was the norm before the global financial crisis. For example, in the United States, the average inflation rate in the 2000s was 2.6 percent, and in the 1990s – 3 percent (compare with the 1.8 percent average for the 2010s).
In the sectoral context, within the framework of the implementation of the agenda, great development potential is seen in such areas as clean energy, medicine, biotechnology, education, battery technologies, and computer chips. Significant support can be obtained by American construction companies working in both residential construction and, even more so, in industrial and infrastructure construction.
For the world economy, the implementation of Biden’s agenda, on the one hand, is positive, as the external demand for goods and services is expanding. As already mentioned, the World Bank estimates that an increase in the growth of the US economy by 1 percentage point leads to an increase in growth in the rest of the world by 0.7 percentage points. On the other hand, such large-scale injections can increase prices for certain commodities, such as fuel, building materials and metals. And this is fraught with inflationary consequences, primarily for emerging markets.