Written by Bradley Pasekoff
With the elections of Democrats Jon Ossoff and Raphael Warnock in the Georgia runoff elections on January 5, the Senate was back to a 50/50 split – including Independents who caucus with the Democrats – for the first time since 2003. This, in combination with Joe Biden’s victory in November’s Presidential Election, gave the Democratic Party control over both the legislative and executive branches of government, something they have not had since 2011. This provides Democrats their best opportunity to pass their preferred legislative and the ability to drastically impact the economy for the foreseeable future.
Since last March, when the COVID-19 pandemic forced many businesses to close or significantly alter their typical practices, one of the main questions was how to ensure the economy did not dip into a prolonged recession. It was decided that stimulus checks would be distributed to each household. However, the debate turned to the size of these stimulus checks. With the Democrats controlling the House of Representatives and the Republicans having the Senate and Presidency, neither side was able to completely enforce their entire plan, and compromises needed to be made. As such, the $1,200 checks that were sent across the country were less than the $1,500 House Democrats pressed for. However, this time around there will be less obstacles in the Democrats’ way to passing another round of these stimulus checks. While the number of people who are eligible to receive the checks has been significantly reduced, Democrats were successful in obtaining $1,400 per household, providing a significant amount of money to those who need it the most. The Senate vote was tight, at 50-49, proving how important gaining the extra seats in January was to passing legislation move favorable for the Democrats.
Beyond passing COVID relief packages, having the majority in Washington provides some other benefits for Democrats. For one, it is likely that corporate tax rates will increase under President Biden, albeit still remaining lower than they were in 2016 under President Obama, when the rate reached 39%. Biden has made it clear he intends to raise the rate from 21% to 28%, and estimates show this tax hike would raise around $740 billion in revenue over the next 10 years. This would clearly provide more funds for the various government agencies in need of them, however it would also pose somewhat of a challenge to companies, as they would need to account for an extra 7% of their revenue flowing back to the government.
Additionally, this could result in some sectors of the stock market seeing either reduced gains or some level of losses. During President Trump’s term in office, almost every area of the market saw above average annual gains, with the Dow Jones Industrial Average experiencing an 11.77% annualized return, the S&P 500 gaining 13.73% annually, and the Nasdaq Composite increasing 24.17%. These are exceptional rates, especially considering the effect COVID-19 had on the markets, as it was not until late 2020 that the market in general returned to pre-COVID levels. However, these annual gains could begin to fall, assuming Biden implements his desired corporate tax rate. History shows that higher tax rates tend to correspond with lower market gains, and this is a possibility in this instance as well. However, one thing that may deter this trend would be the implementation of the next round of stimulus checks. At $1,500 to the Americans in need of them the most, this should allow the economy to continue to climb back to normal levels of economic activity. Additionally, assuming the general public continues to invest at the same rate as they have been since the summer, there is no reason to fear that people will put their stimulus checks away in savings accounts rather than invested somewhere in the market. From early indications, this seems to be the case, as the major stock indexes have all posted modest increases since Biden took office on January 20.
All in all, how much will this end up impacting the economy? To make a prediction, we need to look at Biden’s history in Washington, including his time as Vice President from 2009 – 2017. One of the key issues presented to Biden as he entered office in 2009 was dealing with the Great Recession and its aftermath. Biden was tasked with putting together a plan to prevent the economy from falling into a worse state, and he was largely successful in doing so. Some of the ways this was done included expanding unemployment support, promoting infrastructure projects, and investing more in environmentally-friendly causes. It is likely Biden could push to implement some or all of these measure in an attempt to reboot the economy and stimulate different sectors that may still be lagging, with the hopes of seeing similar results as 2009.
While it is still too early to tell how the economy will recover under Biden’s leadership, early signs seem to point in the correct direction. Whether through additional stimulus packages, changes to the tax system, or a change in economic priorities, only time will tell how the economy is able to recover from this latest recession and return to a period of growth.
Appendix
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