On August 1, 2007, the iron bridge spanning the Mississippi River at the edge of the University of Minnesota campus suddenly collapsed. The accident killed 13 people and injured 145, making it the worst bridge collapse in the United States since 1983 that was not caused by natural or external forces.
The bridge, built in 1967, was found to be severely corroded as early as 1990 and, along with more than 70,000 other bridges, was rated as “structurally deficient” and in need of regular inspection and repair. 2001, the bridge’s longitudinal beams were found to be severely twisted and at risk of collapse. After the tragedy, the bridge was rebuilt quickly and reopened to traffic on September 18, 2008, due to its location at the heart of Minnesota’s “Twin Cities” business center.
Anyone who remembers this tragic event will understand and support President Biden’s March 31 “American Jobs Plan,” which focuses on infrastructure, including revitalizing local manufacturing, developing clean energy, addressing climate change, and providing assistance to the disabled and the disabled. climate change, to care for the disabled, the elderly and children, etc. The $2.3 trillion, eight-year plan will be financed in part by increasing corporate income tax rates.
The American Jobs Initiative is only the first half of Biden’s “Rebuilding a Better Future” plan, and the other part is the American Family Plan, which focuses on child care, health care and education, and is expected to be announced at the end of this month, with plans to raise money by raising taxes on the wealthy. The plan would raise money by raising taxes on the wealthy. Combined, the two programs would invest $3-4 trillion over 10 years.
In the eyes of those who support Biden’s plan, the New Deal, once it crosses the line of resistance, will be the “white knight” to help make America great again. But in the eyes of Republican leaders, the jobs plan is a “Trojan horse” to undermine the strength of the United States. Investors are concerned about the Biden New Deal’s measures to address funding, whether it can be passed by Congress, and whether it can avoid a debt crisis on the way to a better future, as well as the investment opportunities it will bring.
U.S. infrastructure and economic development need “white knight”
As the first generation of infrastructure maniacs, the United States built a railroad system as early as 1910. After World War II, when private cars became popular in the United States, a massive highway construction program was launched, and a developed interstate highway system covering the mainland was gradually built. The United States has the largest and most complex aviation system in the world, including nearly 20,000 airports, with more than 3,000 incorporated into the national aviation system.
U.S. federal, state and local government infrastructure investment reached a high of 4.2% of GDP in the 1930s, and was later affected by World War II and increased again by the 1960s. Unfortunately, once these two golden periods were over, there was a continuous downward trend to about 1.5% in recent years, with local governments accounting for roughly 1.4% of GDP and the federal government investing only 0.1%. The result is a lot of infrastructure equipment in disrepair. Today, most of America’s railroads, highways, airports and ports are in need of renovation and reconstruction.
The American Society of Civil Engineers issued a 2021 U.S. infrastructure rating of only C-, meaning there is a significant risk (but already better than the 2017 rating of D+). Aging facilities increase delays and maintenance costs, traffic congestion and poor airport conditions reduce economic efficiency, and there are numerous safety issues that are bottlenecks to U.S. development.
In a side-by-side comparison with G7 countries over the past 50+ years, the U.S. has grossly underspent on non-defense infrastructure. The reason for this is that over the years the U.S. has had a large national debt burden, much infrastructure investment given to the military, and a lack of incentive from the federal government because the nature of infrastructure is long lead times, large investments, and slow payoffs, which is not pleasing to an administration under the pressure of quadrennial elections.
This is in stark contrast to China, which is committed to long-term goals and whose achievements in infrastructure are backed by long-term planning and investment. Despite its late start, China’s infrastructure has developed rapidly, not only in traditional infrastructure areas such as road and bridge construction that are impressive, but also in areas such as 5G base stations, big data centers, and industrial internet, where progress has been rapid. And China has extended its domestic experience to the “Belt and Road” program, which makes the United States both envious and worried.
Biden’s infrastructure proposal will spend a total of about 1% of GDP on infrastructure projects over the next eight years, including about $670 billion for transportation and $69 billion for upgrades to buildings, drinking water, power grids and broadband networks.
These proposals to repair, build and develop infrastructure have received widespread support within the U.S. Even the U.S. Chamber of Commerce, which is likely to be affected by the tax increase, has come out to praise Biden’s decision to put infrastructure at the top of the list.
The launch of major infrastructure projects will stimulate demand, boost the economy and promote employment in the short term, and will enhance overall productivity and national competitiveness in the long term. Infrastructure investment often has a multiplier effect, with theoretical calculations showing that infrastructure investment of 1% of GDP is expected to boost economic growth by 1.5% in the first year and 3% in the next four years, providing at least a million jobs, and the effect will be further amplified during a recession.
With U.S. policy rates currently near zero levels and an economic recovery in need of a boost, it is arguably the best window to build up large-scale infrastructure in the United States. Of course there are two related issues to consider, one is that the infrastructure package and other stimulus packages overlapping are likely to further increase inflationary pressures this year and next. The Biden administration believes that inflation, even if elevated as a result, will not be bad inflation and is a rise in inflation that the Fed and the U.S. government can control and even enjoy.
Another issue is the source of funding for infrastructure spending and the government deficit. Biden proposed this time to raise the corporate income tax rate from the current 21% to 28%, and to raise the global minimum tax rate for U.S. multinational corporations from 10.5% to 21%, calculated on a country-by-country basis, which would both reduce multinational corporations’ tax avoidance overseas and encourage U.S. corporations to return. U.S. Treasury Secretary Yellen said she is working with G-20 members to develop a global minimum tax rate to end “bottom-up competition” among countries.
The corporate tax increase is expected to raise more than $2 trillion in revenue over the next 15 years to pay for infrastructure spending. Another part of the plan likely to be announced at the end of the month will be paid for primarily by tax increases on the wealthy, or raising the top tax rate on individuals earning more than $400,000 from 37 percent to 39.6 percent before Trump’s tax cuts.
Of course, there will be a mismatch between long-term tax increases and short-term big infrastructure investments that could push up the deficit. While many sing the praises of the U.S. because of high federal debt and government deficits, the federal government’s interest burden as a share of GDP has actually fallen back in the current low-interest rate environment and is already lower than it was in 2007, and even far lower than it was during the 1980-2000 period of rapid U.S. economic growth.
We believe that the U.S. is more likely to be in a long-term low growth and low interest rate environment going forward, and that market concerns about U.S. debt may have a tendency to be overdone. In the Biden administration’s view, seizing the economic reconstruction after the epidemic is the “white knight” to recreate America’s greatness.
Is the Biden New Deal really a “Trojan horse”?
The Republicans questioned that Biden’s proposal is a “Trojan horse” in the name of infrastructure, because the proportion of transportation “hard infrastructure” accounts for less than 30% of the $2.3 trillion plan. In addition to this also includes 400 billion to improve the treatment of family caregivers, 300 billion to manufacturing, 174 billion to promote electric vehicles and so on. What the Republican Party can hardly accept is that these projects will help Biden and the Democratic Party to win public opinion and gain political achievements, but need to raise taxes for corporations and the rich to pay for it.
As you can see, Republican criticism has focused on the tax increase proposal and partisan interests. However, the long-term downward trend in U.S. corporate and personal tax rates since 1980, as well as quantitative easing monetary policy, have favored the wealthy and big business. after the 2018 Trump tax cuts, tax inequity has grown to the point where the wealthiest groups pay only 23% of the average tax rate, lower than all other groups, which is in great contrast to the historically wealthier groups that bear up to 70% of the average tax rate.
The most important reason behind the gradual deterioration of the gap between rich and poor in the United States over the past 40 years, which is now back to pre-World War I levels, is the change in the tax system. Academics and the media have traced the roots of this issue over the past 10 years or so, making the unfairness of the tax system a household fact in the U.S. and a central issue in the U.S. elections. In contrast to Republican opposition to tax increases, some Democratic lawmakers consider Biden’s tax increase proposal too moderate.
Taking these factors into account, we believe that the American Jobs Plan could see a repeat of the 2017 Trump tax cut package vote in Congress, which was split along partisan lines and ultimately passed. But we think a more likely outcome is that some Republican lawmakers will vote for a tax increase, otherwise the gap between rich and poor in the U.S. will deteriorate further to the point of no peace in the country. The Republicans should also realize that their alternative proposal of increasing motor fuel taxes and highway tolls would actually further increase the tax burden on poor and middle class families and could repeat the chaos of the French “Yellow Vests” movement.
We believe that after the bipartisan bargaining process, most legislators should realize that the Biden New Deal is a “white knight” for U.S. development, not a “Trojan horse”. In the short term, such a package is needed to drive faster economic recovery after the epidemic; in the long term, the plan does touch on some of the pain points of U.S. development. Strong investment in infrastructure in the twentieth century laid the foundation for U.S. economic growth, but since the twenty-first century the United States has been outpaced by other countries, particularly China, in a number of areas. If the United States does not take advantage of the low interest rate environment to catch up, it may have missed the best opportunity to lay the groundwork for long-term decline.
This time, Biden mentioned China six times in his infrastructure bill announcement. Externally, he hopes China will see that the U.S. is in full economic competition with China through this ambitious program; internally, he can both pressure China to win the support of some Republican lawmakers, and refer to the Chinese experience to emphasize the need for capital spending. For example, the second largest use of funds in the U.S. jobs package ($580 billion) was given to science and technology research and development and talent development to grasp core technologies and future technological initiatives, which was widely supported, as was infrastructure spending.
On the surface, Biden has continued his assertiveness toward China since taking office, but there are still some fundamental differences from the Trump-era approach. A very important consideration for Biden’s increased competition with China was also to promote domestic economic programs and get broader support. The Biden era was more of a benign rules-based competition between China and the United States, very different from the rule-breaking vicious cycle of the Trump era.
“The American Jobs Initiative and Industry Investment Opportunities
From a sectoral perspective, the Biden plan invests more than $1.1 trillion in traditional infrastructure such as transportation and construction, benefiting industrial, construction and raw materials companies. However, the benefits of this sector have been digested by the market before.
In terms of new infrastructure related to information technology and new energy, favorable to sectors such as 5G, semiconductors and electric vehicles. The program plans to invest $100 billion to expand high-speed broadband networks across the U.S., benefiting communications hardware and network equipment vendors such as Cisco and Ericsson. 5G’s full rollout will also benefit handset makers such as Apple.
The program plans to invest $50 billion in the production and development of semiconductors. Considering that the first half of this year is the most shortage of semiconductors for a period of time, a number of global automakers were forced to cut production due to chip problems, the investment in this area is even more relevant. Qualcomm (Qualcomm), Sijiaxun (Skyworks) and Corvo (Qorvo) are the main gainers. Of course, favorable policies do not directly equal the attractiveness of the stock, but also need to be analyzed individually.
The Biden administration also plans to invest $174 billion to promote electric vehicles, including the installation of 500,000 charging devices by 2030, changing the status quo of the U.S. electric vehicle market to just one-third that of China. This will benefit EV charging equipment and component providers, such as ChargePoint, the U.S. EV charging facility operator, whose shares rose significantly after the infrastructure plan was announced.
In addition to promoting electric vehicles, Biden’s green policies are reflected in all aspects of the program. Implementing these environmental reduction and low-carbon policies in the U.S. is no easy task, and the large traditional energy lobby considers Biden’s goal of 100 percent carbon-free power generation by 2035 too aggressive. Regardless of the specific implementation afterwards, the Biden administration’s initiatives on clean energy and climate change response look set to be the strongest of any administration, which constitutes a beneficial general environment for ESG investment as a whole.
In terms of business size, small businesses typically perform better when capital expenditures increase, and tax increases mean greater challenges for many large businesses. Data analysis found that raising corporate taxes to 28% would likely lower average earnings per share for S&P 500 constituents by 8-9 percentage points in 2022.
The sentiment in the U.S. stock market is mixed on the Biden-based proposal, torn between whether it should welcome another wave of massive fiscal stimulus, or whether it should beware of the inflation risks and monetary tightening it brings, or whether it should worry about the impact of tax increases. All three sentiments are present at the moment, except that the optimistic outlook from the fiscal stimulus is dominating, supported by multiple rounds of stimulus and rapid vaccination, as U.S. stocks continue to reach new highs, and is the main reason for driving the dollar index to a five-month high. However, the market has always been difficult to escape the negative impact of elevated inflation, especially tax increases, in addition to which investors need to pay close attention to corporate earnings performance and expectations fall short.