Now that the 2020 Election is officially over, and even as the Trump administration has not conceded and continues to pursue legal challenges, the Biden/Harris team has officially initiated the transition process as it for the inauguration. That being said, it seems prudent to begin contemplating how a potential Biden administration’s economic policies will impact small to medium-sized businesses in the middle-market.
Table of Contents:
- COVID
- Stimulus
- Taxes
- Staffing Economic Posts
- Infrastructure
- Climate Change
- Labor
- International Trade
- Take-Aways
First, it’s worth noting that US Presidents don’t always fulfill campaign promises and their proposed policies are rarely passed in Congress without major challenges or revisions. Even when policies are enacted, their effects on the economy are often delayed, sometimes even after the term in office.
Another limiting factor is the retention of the Senate by the GOP. This will dramatically reduce the scope and funding approved for the Biden/Harris administration’s proposed legislation. As recent presidents have done, Biden could seek to enact policy change via executive orders, but such order will be more limited in scope. With these caveats, here is a short review of the Biden administration’s stated objectives, expected legislation to be approved, and the resulting economic impacts.
COVID
The impact of COVID-19 will continue to drive the economic activity in 2021-2. If Biden encourages states to re-implement lockdowns, the negative economic impact will push many enterprises that have already been severely weakened in 2020, to the brink. This opens up the possibility for stronger/well-capitalized companies to capture additional market share as their distressed competitors cease operations. Potential policies that tie travel to medical tests/vaccines will also have near-term effects on general business activity.
STIMULUS
The Biden administration is expected to push for another “stimulus” bill, but it’s debatable as to who will really experience positive economic effects, according to Forbes’ Bill Conerly.
The expected focus of a potential stimulus package may favor landlords of lower-cost housing/apartments, banks specializing in consumer loans and businesses serving the unemployed. With a divided Congress, the size and scope of any stimulus passed will likely be smaller and narrower than what has previously been proposed by the Biden/Harris campaign.
TAXES
The Tax Cuts and Jobs Act of 2017 reduced top corporate tax rates from 35% to 21%, and by late 2019, businesses had repatriated $1 trillion in capital. Biden is proposing to raise corporate tax rates to 26%, while Kamala Harris had previously indicated a desire to roll these tax rates back to 35%. According to John C. Goodman in Forbes, “virtually every reputable economic modeling group predicts that higher corporate taxes are a burden for every income group…”
The Congressional Budget Office and most private modelers estimate that while 75% of the corporate tax burden will fall on owners of capital invested in the businesses (i.e. stockholders or owners of the business), 25% of the burden will fall on employees. Biden also wants to increase the top individual income tax rate, but has pledged not to increase taxes on incomes of $400,000 or less.
STAFFING ECONOMIC POSTS
Racial disparity is a significant focus for the Biden/Harris administration, as they continue to assemble their staff. The unusual aspect is where the policy is to be enacted. Mehrsa Baradaran, author of The Color of Money, addressing the racial wealth gap, has been chosen to prepare the Treasury Department, Federal Reserve, banking and securities regulators for the Biden transition. She is being supported by 500 racial equality experts who will focus on race as they craft the administration’s economic policy.
INFRASTRUCTURE
Biden has proposed $7.3 trillion of spending on his infrastructure spending plan, “Build Back Better” , which includes $400 billion for infrastructure and “clean energy research and innovation”. Expected results would spur continued development of electric vehicles and mass transit projects. Typically, both Democratic and Republican parties support legislation that provides money to state and local governments for infrastructure spending.
CLIMATE CHANGE
Biden has a goal to make power-generation a net-zero emission industry by 2035. He wants the U.S. economy to reach net-zero emissions by 2050, in line with the stated goals of the United Nations. While a Republican Senate may block any potential legislation related to such goals, there is still a high likelihood for more significant EPA standards and regulation as compared to the Trump administration.
LABOR
Biden labor policies will be more union-friendly than as compared to policies enacted by the Trump administration. There are rumblings that the Biden administration will seek to repeal the Taft-Hartley Act’s permission for Right-to-Work laws. A push to raise the national minimum wage is likely, and Biden has advocated for $15/hr, although it is unlikely to pass into law. Businesses may face increased challenges in recruiting and retaining employees, as COVID stimulus checks and extended unemployment benefits potentially disincentivize some employees from seeking new jobs.
INTERNATIONAL TRADE
Biden may continue to move in the same direction as Trump, but perhaps in a more diplomatic fashion, and somewhat at a slower pace. In recent statements, Biden has said the U.S. should join with allies to “confront China’s abusive behaviors and human rights violations”. Trump was likely less predictable on trade than Biden will be, and predictability tends to have a positive impact on overall business activity and trade.
TAKE-AWAYS
Brad McMillan, Chief Investment Officer for Commonwealth Financial Network wrote, “With no Blue Wave, we are likely to see the Senate remain very closely divided, which will constrain the policy options…[and] that probably rules out any substantial activity on taxes…”. While those on the left may not get the economic changes they desired, those on the right won’t see the radical changes they feared.
Nonetheless, analysts seem to agree that political winds will be blowing in the direction of increased tax burden and stronger regulation on businesses. One example would be the energy sector, which is likely to face headwinds from more stringent environmental regulation as compared to the Trump administration. However, many other sectors could face potential headwinds resulting from minimum wage increases, regulatory pressure, stronger labor unions, and other policy changes.
Julian Emanuel, Chief Equity and Derivatives Strategist at BTIG, warns that when comparing data since 1928, the type of political division that we are experiencing has historically resulted in an average negative impact of -3.2%/yr in the stock market.
We hope this brief review helps crystalize some of the potential impacts that a Biden administration will have on your business. It appears that the Biden administration’s policies, a divided Congress and COVID-19 could result in volatility and uneven economic impacts across various industry sectors. Some companies will see robust growth amid favorable policy changes, while others will see negative impacts amid stronger regulatory pressure. If our team at DGP Capital can assist as you navigate these and other 2021 challenges, please don’t hesitate to contact us today.