The Next 100 Days
As President Biden completed his first 100 days in office, I took the opportunity to talk to many folks in policymaking, business, and investing circles to take stock of what’s been achieved and what the priorities should be for the next 100 days.
In an article appearing in The Street, Rachel Ziemba and I dissected the fiscal and infrastructure proposals in Biden’s US congressional address. And in a Chief’s Forum sponsored by the Washington Times, I discussed the opportunities and challenges that lie ahead in a livestream with former Whitehouse Chiefs of Staff and C-suite execs from across the economy.
For supporters of sustainable development, the general policy direction of President Biden’s first 100 days has been a refreshing tonic. Averting climate change, fighting inequality, supporting working families, and racial equity are finally centre stage in the American political dialog.
But in the next 100 days, attention will shift further from financial life-support and rhetoric towards how to Build Back Better over the medium-term. For myself, I will be scrutinizing the wave of new policy proposals against the blueprint for social and economic prosperity I laid out in my award-winning book, Powering Prosperity. Central to my argument is that the role of government is to build inclusive institutions, to aim a public-private capital multiplier at sustainable development, and to empower local communities.
This is not an endorsement for a “federal tax and spend” approach. Instead, it advocates a catalytic role for government to incentivize the private sector to invest in key areas such as clean infrastructure, new industries, and social equity. This requires a mixture of direct spending on critical infrastructure and social services, as well as the ample use of both regulatory measures and targeted incentives to draw the private sector into building new markets.
With these guiding principles in mind, how can we unpack Biden’s speech to the US Congress last week? In short, it is a $2.3Tr federal fiscal redistribution aimed at rebuilding America’s middle and working classes through a Keynesian jolt to sustainable industry and infrastructure.
Biden’s tax proposals drew parallels with FDR’s 1935 depression era fiscal reforms: raising top income and capital gains tax rates on the very wealthy making over $1 million per year, increasing inheritance taxes on rich estates, and cutting tax loopholes to ensure that large profitable companies pay a baseline amount of tax.
Although this is a bitter pill to corporations and very wealthy individuals—it is simply a correction. As Ray Dalio points out, after 30-40 years of systemic decline, taxes for the top 0.01% are lower than any time since the 1920s. And according to the Washington Center for Equitable Growth, the wealth inequality gap has also widened to the levels of the “roaring twenties.” The covid relief bills, while providing a lifeline and transfer, did little to change this unequal distribution – nor to invest in productivity enhancing growth.
To take advantage of a narrow and potentially short-lived congressional majority, Biden has made these taxation and government spending reforms an immediate priority. If successful, Biden’s plan will amass a war chest to rebuild America’s middle and working classes by spending on housing, care services, workforce development and basic infrastructure. But government programs alone—even on a mammoth scale—cannot deliver the generational “commitment” to greater sustainability and inclusion unless private capital pours in to back it up.
Bold steps are needed to reset the cost of capital to encourage private investment into decarbonizing the economy, rebuilding underserved minority communities, or making care services more affordable. So far, Biden has shied away from such commitments:
First, the President has shied away from any legislation on carbon pricing despite the recommendations of his Treasury Secretary Janet Yellen. Biden and the Democrats cite the risk of a higher carbon price adversely affecting lower income households. However, as noted by Greg Ip in the WSJ, Canada has addressed this problem by rebating revenues collected from its carbon tax policy to the general population. Failure to introduce carbon pricing also makes it harder to strike global deals and deal with carbon-related trade issues. These include the risks of imported emissions in goods from countries like China. It could also leave the US exposed to other rules such as the planned EU carbon border tax adjustment, which intends to impose a tariff on higher-emissions products.
Second, in many of Biden’s infrastructure proposals, at the focus seems to be on direct government spending and implementation, with a smaller amount used on tax credits and incentives to spring the private sector into action.
Some measures such as the Clean Electricity Standard that will require all electrical power production to be from renewable source by 2035, or the grants and incentives for building a national network of half a million new electric vehicle chargers by 2030 will steer American energy and mobility companies to find profitable ways to decarbonize the economy. But it is unclear whether a large chunk of the infrastructure plan—particularly the modernization of public buildings and upgrades in transportation—are anything more than a vast government procurement exercise.
Take the Biden administration’s proposal to steer $30 billion in farm aid money from the USDA’s Commodity Credit Corporation to pay farmers to implement regenerative farming practices and capture carbon in their soil. Will this spent on direct grants to pay farmers to adopt regenerative practices? Or will the funds be used to incubate agricultural carbon credit markets to enable the private sector to drive this shift?
Similarly, the welcome $100 billion planned investment in broadband connectivity, which will focus on providing service to rural Americans and other areas where “last mile” connections are weak. The plan aims to prioritize funding towards broadband networks managed by local governments and non-profits to help reduce the high tariffs received by large cable companies, but provides few details on how this will be achieved. Current uneconomical subsidy plans (such as those reliant on the Universal Service Fund) seem set to be eliminated, but the new solutions are still to be negotiated.
Third, Biden has so far been quiet on measures to advance the sustainable investing framework to give investors greater assurance that their capital is delivering the intended sustainability outcomes and that risks involved in non-compliant investments are better priced. Examples include standardized carbon and related disclosures or a comprehensive set of guidelines like the updated EU taxonomy on sustainable investment. These measures are not as impactful without carbon pricing regulations, but they can help to tilt capital flows to sustainable practices.
Climate change is already having material impacts on insurance portfolios, real estate and many other sectors. A standardized framework to disclose and monitor these exposures, such as the recent endorsements by Janet Yellen of a TCFD based system would help all investors, not just the largest institutions—make informed decisions about allocating their investments and monitoring them.
These decisions may be made by other agencies, including the SEC, but support from the highest levels might speed this process along.
In the first 100 days Biden has delivered his agenda, provided needed financial lifelines and begun to coordinate abroad but the next 100 days will determine how it will be implemented and if the shift towards Build Back Better is possible.