No matter the winner, more stimulus is coming
A fiscal policy win regardless of outcome has markets looking past Nov. 3.
Nothing that happens next Tuesday (or maybe weeks afterward if we get a contested election) will change two realities that are favorable for near-term growth and likely the risk asset markets—the U.S. economy almost certainly will continue to recover and more fiscal expansion is on the way.
President Trump and Vice President Biden have each expressed support for a Phase 4 (or is it Phase 5?) stimulus to counter the deep economic challenges of the coronavirus. After the election, we should see a renewed push for a package, with potentially large differences in the amount and contents of the stimulus bill contingent upon the winner of the White House and the control of Congress.
Beyond Phase 4, Biden and the Democrats are pushing policies aimed at the demand side of the economy. The former vice president proposes to spend $2.3 trillion on infrastructure over the next four years, to provide free community and public college access for students from families with incomes under $125,000, to expand the Affordable Care Act to include a public option, and to provide large clean energy subsidies and research & development incentives. All of this would be offset, somewhat, by tax increases on high-income earners and corporations, with the top corporate rate rising to 28% from 21%.
President Trump also is expected to push for big increases in infrastructure spending, the third leg of his three-pronged 2016 economic plan (the other two being tax cuts and deregulation) that he never fully addressed. But his big pitch will continue to be on the supply side, using additional tax cuts and deregulation to stimulate growth, including lowering the top capital gains rate to 15%, making portions of 2017’s tax-law changes permanent and enacting some form of a middle class tax cut.
Either approach—demand side or supply side—should boost the economy in the short run. Regardless of who wins the White House, control of the Senate is a key ingredient to consider. A Republican Senate would restrain a new President Biden’s spending and tax ideas, while a Democratic Senate would push a reelected President Trump toward a larger fiscal expansion. With the Fed all in, more fiscal stimulus on the way, a vaccine imminent and a recovery in its early stages, the risk markets see a fiscal policy win regardless of the outcomes. Of course, there are sobering longer-term concerns about runaway federal debt—Moody’s estimates the annual deficit will top $2 trillion over each of the next four years under Trump or Biden—but those are worries for another day.