Volume 92 No. 4 - April 2021
In our February edition of The Investment Letter, we wrote about the pandemic’s vast costs. We spoke about how those costs pushed Congress to act, creating and releasing multiple stimulus packages that dwarfed all past economic recovery efforts. At that point, we had two:
· The $2.2 trillion CARES package passed in March 2020
· The $900 billion relief package passed in December
Soon after, President Biden added a third:
· The $1.9 trillion American Rescue Plan Act signed into law on March 11
Now, President Biden’s $3 trillion Build Back Better infrastructure plan already waits in the wings. Just how big are these big economic packages? For comparison, in Fiscal Year 2019, the federal government spent $4.45 trillion in total.
President Biden, not yet three months in office, has already surpassed that figure with these first two bills.
As we said in February, stimulus packages create “sugar highs.” They create a short-term euphoria that’s not sustainable in the long-term—like trying to get through the day on a box of candy bars.
What This Newest Stimulus Package Brings
From this newest relief package—the American Rescue Plan Act—we get three things:
· The sugar high from the earlier pandemic relief packages continues
· Economic stimulus funds, in the form of direct payments and expanded benefits
· Well-intended funds, and pork—like all stimulus bills
This stimulus package, the first from President Biden, includes another round of stimulus checks for those who qualify, extended unemployment assistance, aid to states and municipalities, nutrition assistance, housing aid, and tax credits for families and workers. The stimulus package also provides funding to K-12 schools to bring students back to classrooms, money for vaccines and testing efforts, and financial support for small businesses, as well as the standard pork that allows the House and Senate members political cover for otherwise unpopular votes.
In the end, the stimulus package pumps some $1.9 trillion into the US economy.
Positive Impacts … at a Cost
President Biden’s COVID stimulus package will have a positive impact on the US economy at a time that society still reels from the COVID-19 pandemic physically, mentally, and financially. The markets have already been rising in anticipation of the plan being passed.
We will have costs too. The sugar-high from the stimulus package will last us through the vaccination efforts and see us into the rebuilding and reopening of society. However, the day of reckoning will come. We will see the costs become clear—in terms of higher inflation, higher taxes, and fewer government services.
When government injects three stimulus packages exceeding 23% of the 2020 US GDP into the economy, you have more dollars competing for a lower amount of goods. In an equation of simple supply and demand, when the supply of goods goes down and demand rises or stays even, prices rise. Inflation results.
Inflation has already emerged in some sectors, like fuel and other commodities. Between February and mid-March, gas prices surged 14%, according to recent AAA data. This data also displayed that prices are expected to keep rising, amid decreasing supply.
The Fed has long targeted the 2% level for US inflation. This year, they will get it, and more, after maintaining low stable inflation for more than a decade.
Government induced inflation is a tax on all.
We expect taxes to rise later this year—in the form of higher federal taxes for higher-income individuals. Tax hikes could also target capital gains and stepped-up cost basis treatment. When he was campaigning, President Biden pledged to raise the taxes of America’s wealthiest, especially amidst news that they gained substantial wealth during the COVID-19 pandemic and allow the tax plan to “reduce inequalities” in America. He reiterated his plan to increase taxes on those earning more than $400,000 a year in late March.
Beyond funding the stimulus packages, higher taxes will offset the cuts passed in 2017 and enable Biden to pursue his social goals around infrastructure, climate change, and assistance with childcare and healthcare.
Fewer Government Services
We expect government services to decrease as the pandemic winds down. That will likely come in the form of means-testing. Increased taxes could be applied to benefits destined for higher-income individuals.
All This Spending, Who’s to Blame?
It’s easy to grab the quickest, most convenient answer and blame a President currently in office. The problem goes deeper than that, however. Democrat or Republican, large government spending packages are nothing new.
We can look back forty years to see how this current cycle of government spending began. When President Reagan became the fortieth president in 1981, he set about cutting taxes and increasing spending on defense. Critics called him irresponsible. His Vice President George H. W. Bush succeeded him as No. 41 and did much the same, despite his now-famous, and soon-after-broken, No New Taxes promise.
President Clinton faced political opposition from the Republicans, which kept him from increasing spending during the 1990s. He still increased taxes and built a surplus during his administration. Entering the 21st century, President George W. Bush spent largely on the War on Terror while also cutting taxes to confront the 2001 Recession. Later in his term, he began the bank bailout as the Great Recession unfolded. President Obama followed and directed heavy spending at addressing the Great Recession first and installing Obamacare after.
Regardless of party, all five of our last five presidents rank among the ten presidents who left office with the biggest increases in national debt as a percentage, according to a recently updated analysis published by The Balance. While FDR and Woodrow Wilson top the list, the next entries are presidents of recent memory: Ronald Regan (+186%), George W. Bush (+101%), Barack Obama (+74%), and George H. W. Bush (+54%). President Trump comes in at No. 10 with a 33% increase. Should President Biden be successful, he will join this list.
Like its predecessors, this stimulus package will take time to be processed by the economy. The last two have not even been fully spent yet. We expect that, though the day of reckoning will come, the benefits of these pandemic relief packages will last beyond the near-term. Enjoy the sugar high while it lasts, for the near-term there is a strong wind to the back of the markets.
Investment Counsel Inc. is a registered investment adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.