Biden’s $US7 trillion punt on US growth and economic supremacy

For the first time in two decades the US economy seems likely to grow faster and contribute more to global growth this year than China’s. Whether that’s a good thing is in the eye of the beholder.

Since 2000 China has been the major contributor to global growth. That position was enhanced by its response to the 2008 financial crisis, when its massive stimulus programs powered its growth rate even as other large economies floundered and then stagnated.

Higher long-term interest rates could end the extraordinary bull run for giant tech stocks in the US and China.
Higher long-term interest rates could end the extraordinary bull run for giant tech stocks in the US and China. Credit:NYSE

It has emerged from the pandemic with an economy less damaged and recovering faster than any other major economy. While its GDP growth of 2.3 per cent last year was its lowest for 45 years it was still the only large economy to record positive growth. The US economy shrank 3.5 per cent in 2020 and the European Union’s 6.2 per cent.

Yet its target for 2021 – above six per cent – surprised economists with its apparent modesty, given the economy is still rebounding from the pandemic amid a global recovery.

The reason for such a moderate growth target (by China’s standards) is that the authorities have resumed an economic strategy that was temporarily abandoned during the pandemic.

The legacy of its response to the 2008 crisis was a lot of leverage, over-capacity and poorly deployed capital in its industrial base and financial system.

Leading into the pandemic it had been trying to manage a de-leveraging and restructuring of its industries before being forced to unleash another, albeit far smaller, bout of stimulus to counter the economic impacts of the pandemic. It is now unwinding the stimulus as it reshapes the domestic economy.

The US economic response to COVID has been far more aggressive than China’s.

The Trump administration’s initial reaction was a $US1.9 trillion relief package, along with a reactivated and open-ended Federal Reserve Board quantitative easing program that has injected about $US3 trillion into the US economy.

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Last December there was another $US900 billion of relief/stimulus approved by Congress and then the Biden administration successfully managed another $US1.9 trillion through Congress last month. The December and March spending alone total about 13 per cent of US GDP.

Joe Biden’s not done with yet. Last week the administration unveiled its planned $US2.25 trillion infrastructure plan – about half of it for physical infrastructure and the other half for social infrastructure.

If it can navigate Congress again that would mean that in the space of about a year the US would have injected or planned to inject (the infrastructure spending will be spread over nearly a decade) about $US7 trillion into its economy, or about a third of its current $US21 trillion GDP.

The US spending spree will have an impact on global growth and the American contribution to it. The OECD has lifted its forecast for US growth this year from 3.2 per cent to 6.5 per cent and analyst forecasts for global growth have been revised up from about 5.3 per cent to 6.1 per cent largely as a consequence of US stimulus.

While it might appear that the US and China will have roughly the same growth rate, the US economy is about a third larger than China’s, so it will have a much bigger impact on the global outcomes.

The biggest beneficiaries of super-charged US growth will be those economies with which it has the strongest trading relationship — Canada, Mexico, Japan, Germany and, of course, China – but there will be spillover effects for the rest of the world.

Whether it will be a temporary or permanent shift in long-standing global economic trends is an interesting and potentially very important question.

Shipping containers next to gantry cranes at the Yangshan Deepwater Port in Shanghai, China, on Monday, Jan, 11, 2021. U.S. President Donald Trump famously tweeted that “trade wars are good, and easy to win” in 2018 as he began to impose tariffs on about $360 billion of imports from China. Turns out he was wrong on both counts.
Shipping containers next to gantry cranes at the Yangshan Deepwater Port in Shanghai, China, on Monday, Jan, 11, 2021. U.S. President Donald Trump famously tweeted that “trade wars are good, and easy to win” in 2018 as he began to impose tariffs on about $360 billion of imports from China. Turns out he was wrong on both counts.Credit:Photographer: Qilai Shen/Bloomberg

China is challenging America’s post-war economic and geopolitical leadership, a challenge given momentum from America and Europe’s economic stagnation and declining productivity since the financial crisis.

Donald Trump sought, largely unsuccessfully, to “Make America Great Again” with his $US1.9 trillion of tax cuts for companies and, mainly, the wealthy; his widespread deregulation and his trade wars.

Can Joe Biden’s profligate spending and rapprochement with the former US allies shunned and battered by the Trump administration succeed where Trump failed?

Some inflation and some normalisation of interest rates would be positive, and not just for the US

An American resurgence will depend on whether the growth that will be inflated by the Biden administration’s spending leads to sustainable increases in investment and consumption and improvements in productivity.

With about $US4 trillion of the previous stimulus/relief spending sitting in Americans’ bank accounts there is scope for a stimulus, infrastructure investment and consumption-driven economic resurgence.

The pandemic and its lockdowns and the increased reliance on technology, as work shifted from offices to home, may also help turnaround the decline in productivity that seems to have been boosted by the shift to working from home. Some of the changes to the way technology has been deployed and work undertaken during the pandemic will probably be permanent.

A critical caveat on the prospect that the Biden administration’s ambitious and expensive agenda might reignite US growth in a sustainable fashion is its impact on inflation.

Inflation equation

There’s a robust debate in the US – characterised by former Clinton administration Treasury Secretary Lawrence Summers on one side and Nobel Prize winners Paul Krugman and Joseph Stiglitz on the other – about whether the debt-financed stimulus packages represent too much stimulus.

Summers has described the Biden agenda as the least responsible macroeconomic policy for 40 years and warned it could lead to an outbreak of destabilising inflation; Krugman and Stiglitz have downplayed that threat, essentially arguing there is a lot of scope to stimulate demand in the economy before inflation becomes an issue.

If there were a breakout of inflation the Fed would have to raise US rates from their current negligible levels. The market is betting on some inflation and rate rises in 2023. The Fed thinks it’s not an issue until 2024 or beyond.

Some inflation and some normalisation of interest rates would be positive, and not just for the US, whose ultra-low rates have forced others, like Australia, to match them to avoid surging currency appreciation, which would undermine economic competitiveness and throttle growth.

Too much inflation and a Fed forced to hike rates aggressively in an economy – and world – that is highly leveraged and in which asset values are highly inflated by access to ultra-cheap credit would threaten deep recession and financial crisis.

The multi-trillion dollar economic experiment underway in the US therefore has real consequences — potentially either highly positive or highly negative — for the rest of the world and not just for America’s role within it.

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Source: Thanks smh.com