President Biden delivered a speech in Pittsburgh, Pennsylvania on March 31, in which he outlined his economic stimulus package centered on an infrastructure investment plan, one that would amount to a $2 trillion investment (approximately 220 trillion yen) over the course of eight years. This came hot on the heels of the $1.9 trillion (approximately 210 trillion yen) Covid-19 relief package passed by Congress in February.

One economic stimulus package after another

However, this new infrastructure investment plan is not a Covid-19 relief measure, but is rather a “post-Covid” stimulus package, so to speak. It is being heralded as a measure that will help transform the country’s economic structure from more of a long-term perspective.
This infrastructure investment plan involves significant measures against global warming, which was among the campaign promises made by President Biden during last year’s race. It also reinforces the impression that the US has returned to its international cooperation policy, and is a most welcome development. For instance, the plan calls for $174 billion to be spent on installing 500,000 EV (electric vehicle) charging stations across the country by 2030, with another $100 billion to be invested in the electricity and energy sector to promote decarbonization, as well as technological development assistance to lithium-ion batteries.
Incidentally, although President Biden had pledged during the campaign to enact a $2 billion infrastructure investment plan over four years, in fact, this revised version entails an investment figure of only approximately $2 trillion to be spread out over eight years, with the scale of the per-year expenditure now slightly smaller. This change might be the result of the Biden Administration’s considerations about financial resource issues. In addition, the extension of the four-year plan into an eight-year one might be intended to raise enthusiasm for the possibility of a democratic administration—or the Biden Administration itself—that last eight years.

A strong awareness of the need to counter China

What was unexpected about this infrastructure investment plan is how seriously it takes the need to counter China. President Biden stated that the plan would put the US “in a position to win the global competition with China.” That effort is represented in the plan by $50 billion towards subsidies for semiconductor production, and $180 billion going towards R&D in quantum computers and biotechnology, for example.
The US has a long tradition and philosophy, in terms of its economic policies, which states that the government should avoid interfering in the economic activities of private citizens as much as possible. However, with this new infrastructure investment plan, it seems that the US government would be significantly overturning that tradition so as to counter China, and making an earnest move toward leading the way in enhancing economic and corporate competitiveness. I believe this to be quite a revolutionary development.
At the same time, China is arguably developing its own countermeasure with its “Chinese Manufacturing 2025” strategy, which aims to make China a manufacturing powerhouse and involves in-country manufacturing of things like semiconductors. The former Trump Administration, fearing that the US would be overtaken by China in 5G (next-gen communication standard) and other cutting-edge technologies, seemed to be more inclined to impose sanctions on Chinese companies such as Huawei. By contrast, the Biden Administration’s policy seems more about providing further government support to US businesses in order to counter China, and if so, I believe that to be the correct option.
Under these circumstances, US economic policy—which is regarded as market-based—would take a step closer to the economic policies of China, which are often called “state capitalism” with a distinctly state-led approach.

Fiscal resources have not been reliably secured

Meanwhile, the fiscal resources needed for this massive infrastructure investment plan are a major concern. It has been explained that these infrastructure investments will be funded through higher taxes, including a higher corporate tax rate. In actuality, the Biden Administration’s plan is to raise the federal corporate tax rate from its current 21% to 28%, while also imposing a 21% tax rate on the overseas revenue of multinational corporations.
However, in order to obtain enough additional tax revenues to match eight years’ worth of additional spending, these tax hike measures would need to be maintained for 15 years. This eight-year infrastructure investment will not have a neutral effect on the country’s finances; rather, it will ultimately worsen the US’ fiscal balance. There is no guarantee that these tax hike measures will last for 15 years. Supposing that a Republican administration were to be in office four years or eight years from now, it is fully conceivable that the corporate tax rate would once again be lowered.
Given the above, regardless of what was initially described about this infrastructure investment plan, it cannot be said that the fiscal resources needed to fund it have been reliably secured.

Consideration must be given to the financial markets

If the financial markets perceive that the implementation of this infrastructure investment plan could lead fiscal conditions to deteriorate further, that will very likely invite additional increases to long-term interest rates, and have adverse effects on the economy with stock price adjustments and other ramifications. In this sense, the infrastructure investment plan touted by the Biden Administration is a mix of aspects that can be praised and ones that cannot.
That said, this post-Covid economic measure is merely the first round, as it were, with plans for a second round of economic measures focused on healthcare reform, childcare support, poverty reduction, and other issues to be announced sometime this month. That next round is expected to be paid for by higher taxes on wealthy individuals, among other things. The combined scale of these two economic packages could swell to as much as $4 trillion.
However, the Republican party will likely oppose these tax increases vehemently. It is also possible that the ultra-left-wing contingent of the Democratic party will demand that this economic package be revised to include even higher taxes. There is still no telling how much revision will ultimately be made before the economic package gets passed by Congress. Depending on how Congressional deliberations play out going forward, the financial markets’ expectations could swing significantly between stronger business confidence—brought on by the economic measures—and the damage done by fiscal deterioration.

“Big government” trend accelerating

It is unclear whether the combination of this massive growth in spending and large-scale tax increase can be smoothly digested by the financial markets. If long-term interest rates are raised further on account of the risk of economic overheating or fears of fiscal deterioration, that could dash hopes of any positive economic effects from the measures, and could even intensify the downward trend in stock prices. And if capital gains taxes are hiked up, it would deal a direct blow to the stock market.
Moreover, if worsening financial conditions lead to lower confidence in the dollar, and produce deleterious effects on the inflow of capital from overseas, that could well cause stock and bond prices as well as the dollar’s value to plunge in a “triple depreciation”, doing serious harm to the US economy.
Given the current instability in the financial markets, and the fact that the pandemic situation remains severe, the newly minted Biden Administration’s decision to rapidly hammer out a post-Covid policy at this time that would accelerate the trend towards “big government” would seem to be somewhat hasty.
To obtain stable economic growth, it is absolutely essential to have stable financial markets. I think what the Biden Administration needs to do is to propose and implement its economic policies carefully, in a way that shows fuller consideration for the stability of financial markets.