Writing from my Harvard dorm room, it is amazing what difference a year makes in the Covid-19 era. A year ago when Donald Trump still occupied the White House, Boston was in a state of siege as the coronavirus swept through the city. Students were given just five days to evacuate the campus. Unhindered by the toothless response from Washington, DC, new cases in the state peaked at 8,120 a day as Trump’s presidency drew to a close.
Things could not have been more different today. Despite lingering fears about the Omnicron strain, life has returned to a semblance of normalcy as the lively chatter of students once more rings across Harvard Yard. People freely come and go throughout the city and in-person events have once more resumed, albeit with slight restrictions regarding mask-wearing, vaccinations and social distancing. Caseloads throughout the state generally average in the 1000s.
It is perhaps this decisive handling of the Covid-19 pandemic that will go down as President Joe Biden’s greatest legacy. After he acted swiftly to roll out vaccines, 69% of the US population has now received at least one dose of Covid-19 vaccine, with booster shots now gradually following in their wake. Having already implemented a mask mandate on federal property within days of commencing his presidency, Biden is now fighting a conservative challenge in the Supreme Court to pass a vaccine mandate for federal agencies with more than 100 staff members.
But the very fact that the White House requires a day in court to implement a common-sense vaccine mandate suggests that the toxic polarisation of US politics continues to be a challenge.
On the foreign policy front, the administration is still coming to grips with a more competitive geopolitical environment as well as global challenges like climate change. Despite his success in fighting Covid-19, Biden’s approval rating has fallen to 42.9% on Nov 18, with Democrats expected to lose big at impending midterm elections in 2022.
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To be sure, Americans largely approve of this administration’s Covid-19 management. “A more likely reason for the president’s sagging approval ratings is his low marks on healthcare (just 37% of respondents approve of his performance) and the economy (39%),” reports The Economist based on an Oct 14 poll.
It also cited a failure to pass healthcare reforms through congress as well as higher inflation as causes of this unpopularity. Biden will likely be blamed for rising prices despite the president’s lack of authority over the Fed’s monetary policy and structural drivers like supply bottlenecks.
But perhaps Biden’s unpopularity stems mostly from a perception of weak performance rather than how his administration has actually done. “It is all perception, and the latest is the increase in inflation and gas prices that people see/feel,” Columbia political scientist Robert Y Shapiro told New York Times columnist Thomas B Edsall in a Nov 17 op-ed. Markets, at least, are unlikely to be too unhappy — Biden presently leads all previous presidents in stock market performance as the S&P 500 delivered a 24.84% annualised return as of Nov 29.
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The spectre of inflation
In the wake of global economic disruption brought on by the pandemic, massive fiscal and monetary stimulus was relatively successful in keeping economies afloat. Yet the cost of this unprecedented stimulus has been rising inflation rates. As of November 2021, the US inflation rate stood at 6.8% — the highest level in nearly four decades, while a Pew Research Center study on 46 economies found that most (39) had experienced sharply higher rates of inflation as opposed to the pre-pandemic 3Q2021.
“For most countries in this analysis, 2021 has marked a sharp break from what had been an unusually long period of low-to-moderate inflation. In fact, during the decade leading up to the pandemic, 34 of the 46 countries in the analysis averaged changes in inflation rates of 2.6% or lower,” writes Pew senior writer/editor Drew Desilver. In 16 of the countries assessed in the study, inflation rate saw a rise of more than 2 percentage points in 3Q2021 as compared to 3Q2019.
To be sure, such figures are calculated off a low base given flat and falling inflation in 2020-2021, exacerbated by the acceleration of post-Covid economic recovery. But The Economist notes that even with its unusually large economic stimulus, inflation rates in the US appear especially high. Consumer prices, it says, have risen twice as fast in the US vis-a-vis the EU; US inflation is now the highest in the developed world.
The inflation in the US is worrying economists such as Larry Summers, a former treasury secretary who is now a Harvard don. “While an overheating economy is a relatively good problem to have compared to a pandemic or a financial crisis, it will metastasize and threaten prosperity and public trust unless clearly acknowledged and addressed,” wrote Summers in a Washington Post op-ed, though he noted that this should not be an excuse to abandon Biden’s infrastructure investment plans.
Yet Jeffery Frankel, another Harvard economist, instead attributes the inflation to structural factors. “Demand has been recovering from the pandemic-induced recession faster than supply has. That’s to be expected,” he told the Harvard Gazette, noting that temporary labour supply shortages and supply chain bottlenecks have contributed to rising prices. He calls on the Biden administration to remove Trump-era tariffs to allow firms to source for cheaper imports from abroad, which he thinks could bring down consumer prices and business costs.
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Markets are, however, concerned. Martin Hennecke, Asia investment director at St James’ Place, says that very low yields on sovereign bonds that do not reflect high sovereign debt levels and budget deficits, is a suggestion that inflationary risks are generally underestimated even today. This could be worsened, he notes, if China switches from a net exporter of deflation to a net exporter of inflation due to a shrinking population, rising factory gate prices and a growing focus on clean growth. “In terms of what the Fed under Powell, or indeed politicians will do about it, there is an inherent conflict of interest,” Hennecke tells The Edge Singapore.
Despite growing concerns, policymakers are incentivised to downplay inflation to avoid a debt crisis arising from an increase in bond yields and interest rates. He doubts that central bankers will come through with interest rate hikes close to the historical norm due to the high debt and deficit burdens they face, though he does anticipate tougher language going forward to quell the inflation jitters.
Meanwhile, Economist Intelligence Unit (EIU) global economist Matt Sherwood does not see rising interest rates amid Fed tapering coming as a shock. “We now expect the Fed will start raising rates from the middle of 2022. The EIU has two rate hikes pencilled in for 2022, three in 2023, and three in 2024,” he remarks, arguing that this is still a relatively slow tightening of monetary policy at a relatively low level. He does not see these rate hikes having a significant effect on the US economy, though the persistence of higher inflation expectations among US consumers could force the Fed to speed up policy tightening.
Ultimately, Hennecke thinks that overconfidence in terms of market bets — particularly where leverage is employed — will prove risky in the current climate. Yet, quitting the markets altogether is imprudent as well, since higher inflation and negative real interest rates could erode purchasing power. The most prudent course of action is to diversify one’s portfolio while seeking exposure to asset classes that are able to keep pace with inflation.
Biden’s ‘new deal’?
Amid the backdrop of rising prices, the Biden administration has been active on the fiscal policy front. Having committed to increasing infrastructure investment in the US as part of, Biden achieved a significant political victory as he signed a US$1 trillion ($1.37 trillion) infrastructure bill into law with bipartisan support from congress. Nineteen Republican senators and 13 representatives supported the bill in the face of conservative criticism and even death threats.
“I truly believe that 50 years from now, folks are going to look back and say, ‘This was the moment...this year and the next couple years, when America decided to win the competition of the 21st century, to get in the game full bore,’” the President told the press on Nov 6. Nobody earning less than US$400,000 a year, he insisted, would have to pay “a single penny” more in taxes to fund this massive investment. He claims also that the bill would ease inflationary pressures by “easing costs for working families”.
The bill has inevitably offended fiscal hawks. “Now the Democrats have started the process to jam through their massive US$3.5 trillion tax-and-spend bill. Which means we’re looking at almost US$5 trillion in spending just on these two latest bills,” blasts Republican presidential hopeful Ted Cruz in a press release. “That’s a whopping near US$8 trillion — which is almost double what America spent to win World War II. This free-for-all spending is reckless, irresponsible, and unsustainable.”
Yet experts say that the economic benefits of the investment will outweigh any inflationary pressure from the bill. “Because that spending is offset by revenue increases and because it includes measures such as child care that will increase the economy’s capacity, Build Back Better will have only a negligible impact on inflation,” notes Summers in his Washington Post op-ed. Fighting inflation, he warns, should not be used as an excuse not to abandon infrastructure investment efforts.
And America’s present infrastructure needs are considerable indeed. US infrastructure is currently severely overstretched and lagging behind economic competitors — particularly China. A 2021 report by the American Society of Civil Engineers (ASCE) notes that there is a US$2.6 trillion infrastructure investment gap this decade that could see US$10 trillion in lost GDP by 2039 if unaddressed.
“Civil engineers raise safety concerns as well, warning that many bridges are structurally deficient and that antiquated drinking water and wastewater systems pose risks to public health,” warn James McBride and Anshu Siripurapu, deputy managing editor and editor/writer respectively at the Council of Foreign Relations. Tellingly, ASCE gave US infrastructure a “C–” average grade in 2021 — it’s highest in two decades and up from a “D+” in 2017.
The fresh investment could provide significant economic opportunities for the US. Morgan Stanley anticipates that the higher levels of infrastructure investment could trigger a “US infrastructure supercycle”, with demand for building materials like cement, aggregates and steel seen to outstrip production capacity and drive higher pricing. The bank’s economists expect a broad improvement in productivity arising from the package — combined with a potential boost from fiscal stimulus, the US could experience a 0.4–0.8 percentage point addition to annual growth.
A distinctive feature of Biden’s bill is its focus on sustainability, with one of its pillars being to bring down greenhouse gas emissions by supporting the US electric vehicle industry and power infrastructure. It is expected to create opportunities for green investments across the value chain while also improving US economic competitiveness. The bill allocates US$47 billion to help communities prepare for more extreme fires, floods, storms and droughts to improve US resilience against natural disasters arising from climate change.
Still, it remains to be seen how resilient the bill will be in the long run if the Republicans return to power. Despite GOP legislators throwing their weight behind the bill, Eyck Freymann, director at macroeconomic and geopolitical advisory firm Greenmantle, sees this incidence of bipartisanship as a one-off, noting that many Republicans have already begun distancing themselves from the bill. Biden’s climate policies are also at risk as well, with Freymann warning that a Republican administration would likely try to undo all of these and revert to Trump-era policies.
Foreign policy roller-coaster
One particular blot in Biden’s copybook will likely be the administration’s botched withdrawal of US troops from Afghanistan. To be sure, many experts argue that withdrawal was a sound move to put an end to Washington’s costly two-decadelong “Forever War” against the Taliban. But the chaotic pullout coupled with the US-backed Afghan government’s swift capitulation to Taliban forces — previously accused of harbouring al-Qaeda leader Osama bin Laden — has seen the Biden administration face the full force of negative public opinion.
“Regime change in Afghanistan will not immediately generate new global terrorism threats from either group, but is likely to contribute to an evolving terrorism threat over the next few years,” says Jonathan Wood, a director at political risk firm Control Risks. He notes that US Defense Secretary Lloyd Austin warned in June that a transnational terrorism threat would re-emerge in two years, a process accelerated by the collapse of Afghan government and security forces. But Freymann doubts that the botched Afghan withdrawal will be as consequential to the US as the headlines suggest. “I don’t believe the US withdrawal from Afghanistan has reflected US credibility. There is no evidence that this has had any effect on US businesses,” he told The Edge Singapore If anything, he implied that the return of the Taliban would be more of a geopolitical problem for US rivals China and Russia, which they must handle in consultation with Iran and Pakistan.
More consequential for businesses are US-China ties. While the new administration’s relationship with Beijing began on a rocky note at a frosty Alaska Summit, a recent virtual summit between Chinese President Xi Jinping and Biden yielded more conciliatory language. Even if no structural changes are yet forthcoming, Freymann sees the resumption in bilateral talks as encouraging; he calls for more of such dialogues to take place military-to-military to deter an accidental military provocation in hotspots like the Taiwan Straits.
Unfortunately, there has been little in the way of trade liberalisation initiatives by the White House so far. “Biden has also changed his rhetoric about trade policy, but he seems intent on keeping the Trump tariffs and has hinted that he may use tariffs as a way to pressure China in the future. It’s not clear the administration agrees internally about this,” Freymann notes. Bipartisan support for tariffs on China, says Sherwood, is likely to constrain Biden’s ability to roll back tariffs without looking “weak on China” in the run-up to mid-term elections.
Still, Sherwood notes that trade remains perhaps the one area in the US-China rivalry where progress can be made, given that both states have suffered economically from the hostilities. The US-China Business Council found that the US has already lost 245,000 jobs from the trade war; 145,000 of these could be recovered by 2025 if both sides gradually roll back tariffs. Ironically, China has been less badly affected by the Trade War, with seven in 10 of its population experiencing zero or minimal direct exposure to the tariffs, though those most directly affected saw a 2.52% contraction in GDP/capita and a 1.62% fall in manufacturing employment.
Hennecke of St James’ Place hopes that the US will seek to rejoin the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), given the ironic China’s application for membership to the US-initiated deal believed to be originally designed to shut out China. By being a member of both the CPTPP and the ASEAN-led Regional Comprehensive Economic Partnership (RCEP) agreements, Beijing would likely become the leading economic power in Asia given the US is not party to either agreement. Rejoining CPTPP could be sold as an attempt to contest Beijing’s influence in Asia.
“Should China succeed in joining CPTPP, this will foreclose the US rejoining the agreement. The US then having to negotiate with China to join the CPTPP is an irony that would be too much to bear,” says Joshua Meltzer, senior fellow at the Brookings Institution. Beijing joining CPTPP, he warns, will undercut the effectiveness of US trade policy as a tool of achieving its regional strategic goals. Faced with a choice between perpetuating protectionism and competing economically with China, it remains to be seen which of these the US will prioritise.
For now, the Biden administration will have to navigate a tricky midterm election where the Democrats will face fierce headwinds. “Basically, that would stop Biden’s legislative agenda in its tracks. The Republicans would play a game of opposing everything that he would try to push through. So you probably get to a couple years of gridlock,” notes Sherwood. He expects Biden to do very little if Democrats lose both house and senate, with both parties focusing instead on preparing for the 2024 elections where Biden himself will be up for re-election.
Still, it is perhaps too early to say if the results will mean that we will see Trump or one of his allies occupy the White House in 2024. “Presidents’ parties traditionally lose in midterm elections, and there is no reason to believe that 2022 will be different. Yet presidents also tend to be re-elected, even after losing control of Congress in the midterms. Biden can take solace in that,” says Freymann. In the meantime, one will expect Biden and the Democrats to speed up their policymaking timetable to pass as much of their agenda as possible before time runs out.
Photo: Bloomberg
