We've spent more than enough money on the pandemic to deliver a fantastic summer for most Americans. As long as the vaccines roll out at the current pace, we'll soon be walking the mall, dining out and rebooking family vacations as if nothing had ever happened. Some of us may even have a little extra cash in our pockets — either saved or as a stimulus check — to compensate for a long, lonely lockdown.
But that, it turns out, was the easy part. Now, the Biden administration is attempting to keep the U.S. economy from sinking back to its pre-pandemic, low-growth rut. Without any further government action, this year's generous fiscal support will likely turn into a stiff headwind that could easily cut the celebration short.
President Joe Biden's next spending plans are as ambitious as they come, including efforts to redress inequality and take on climate change. But even the central economic goal to support higher sustainable growth rates remains a tall order. Investors need to answer two key questions: Will the money arrive before the effect from the stimulus runs out, and will it really do enough to overcome the forces of automation and demographics that helped drive growth lower over the last decade?
The answer to the first question depends crucially on the mix of spending and tax increases that Congress and the president manage to agree on. Legislative outcomes are notoriously difficult to predict, especially with such a thinly divided Senate, but packaging an initial $2 trillion proposal around popular spending to fix roads, bridges and tunnels seems likely to succeed in some form.
Large parts of the program devoted to research and job training have drawn criticism for being far beyond the scope of traditional infrastructure, but from a macroeconomic perspective, this spending might help support demand until the more complicated hard infrastructure projects are actually shovel ready.
Of course, the higher taxes the president envisions to pay for it all will surely take a bite out of corporate earnings. The actual impact, however, will depend as much on what new deductions firms may be allowed to take even as the headline rates rise. There will likely be plenty of incentives to encourage private investment. And if ever there were a time to reclaim half the tax cuts of 2017, it's probably during a year of economic growth that may top 8%.