by Gary Alexander

February 2, 2021

The first cut at 2020 growth is in, and it looks like the U.S. economy (GDP) shrank by 3.5% in 2020, its worst showing since 1946 – the year after World War II brought armament production to a sudden halt.

The good news is that all the bad news came in one quarter (the second). The third quarter erupted into 33.4% annual growth and the fourth quarter grew at a 4% rate for an annualized +19% second half spurt.

In nominal dollars, last quarter’s GDP was $21.48 trillion (AR), just 1.2% below $21.75 trillion at end-2019 – and America has done far better than Europe or our neighbors, according to the latest IMF data:

 Euro-Nation  2020 GDP Decline  The Americas  2020 GDP Decline
  Germany   -5.4%   The United States   -3.4%
  France   -9.0%   Brazil   -4.4%
  Italy   -9.2%   Canada   -5.5%
  United Kingdom  -10.0%   Mexico   -8.5%
  Spain  -11.1%   Latin America, Caribbean   -7.4%
 Source: International Monetary Fund, World Economic Outlook, January 2021, Year-end 2020 estimates.

So, the U.S. did better than just about all of our competitors – except China, where the pandemic began.

What about 2021? The International Monetary Fund (IMF) forecasts that U.S. GDP will expand 5.1% in 2021, while the more conservative World Bank predicts 4% growth but warned that growth could limp along at 1.6% if there are delays in rolling out vaccines. Private forecasters split the difference at about 4.3%. Christine Lagarde, president of the ECB (European Central Bank), sees a similar 3.9% U.S. growth rate for 2021, giving credit to Biden for having a “united front” in Congress to pass his spending plans.

There’s the rub. Will Biden’s plans support 4% growth – or less, or more? In the last two weeks, I looked at the likelihood for stock market growth under Biden (January 20) and policies to close the wealth and income gap (January 26). This week, I’ll handicap his leading proposals for their likely impact on growth.

Raising Business Tax Rates

President Trump cut the business tax rate 40%, from 35% (among the highest in the world) to a more competitive 21%. Biden promised to raise business tax rates, in part to appeal to his left-wing caucus, but any significant hike in business taxes could slice corporate profits down by a similar amount, and then push earnings and stock profits lower. This would also hurt struggling businesses during a pandemic.

A decent compromise would be to wait for sustainable growth to return – when the pandemic risk is much lower – and then raise corporate taxes just enough to fulfill your campaign promise, but not enough to materially hurt businesses. Democrats know they will be vulnerable in the 2022 election if they stunt growth and hurt the stock market, so Andy Laperriere of Cornerstone Macro thinks the Democrats would be smart to raise the corporate rate from 21% to just 25% this year, then await the electorate’s verdict in 2022 before further action. Justin Lahart of The Wall Street Journal agrees, warning that higher rates and taxes could rattle the financial markets. “Before that happens, though, there could be an easing of Covid-19 concerns and a government-supported bounce in growth that makes investors even more ebullient.”

Re-regulating Businesses

The same principle applies to reversing deregulation under Trump. Some regulation is necessary, of course, but pointless accumulation of micro-regulations for political purposes slows down growth and causes businesses to fail. Under Biden’s “Modernizing Regulatory Review,” signed by the new president on January 20, a normal cost-benefit analysis is now off the table in favor of new and trendy but clearly unmeasurable metrics, such as “social welfare, racial justice… human dignity, equity.” Translation: Don’t worry about whether food costs might rise, or farmers might go bankrupt; just start regulating again.

A $15 National Minimum Wage

This idea is often sold on the basis of saying that $10 an hour is not enough to live on in a major coastal city, but that’s not where most of us live, nor who most of our workers are. Many families have three or more wage earners, not all of them worth $15 an hour, and none is the sole breadwinner. Most teenagers or unskilled laborers are not worth $15 (plus benefits) to employers, so they won’t be hired in the first place.

While $15 is a decent pay rate in rich coastal cities, it is a small fortune for an entry-level job in many rural, southern or Midwestern regions of America. If $15 forces these first-time wage earners out of the job market, you’ll see lower growth. You’ll also deprive them of the experience necessary to earn more.

The current minimum wage is $7.25, so a leap to $15 is a 107% pay raise – in a time of low inflation. The minimum wage for tipped workers is $2.13, so a leap to $15 is over 600% higher. Tipped workers oppose this $15 law. Why not a trial run to $10 first, to see the impact, before making this grand political leap?

New Stimulus Checks

Sending out $1,400 or $2,000 checks or debit cards to nearly everyone is bad policy for growth. Stimulus checks have been tried five times since the 1970s and they have always failed to stimulate growth. After all, these checks do not target those in need – as they should. This “helicopter money” is sent to employed people and those earning up to twice the median income. Free money is even sent to some millionaires.

First of all, most of those people do not need checks and shouldn’t get them. If they are employed or in relatively comfortable circumstances, they will save or invest that money, not spend it to “stimulate” the economy. Such gestures merely inflate the annual deficit with no direct connection to economic growth.

Savings Benefited from Stimulus Checks Bar Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

According to the New York Fed Survey of Consumer Spending,” Americans used over 70% of their first stimulus payment ($600 per person, as part of last March’s Cares Act) for savings (36.4%) or for paying down debt (34.5%). That is thrifty behavior but hardly a stimulus. The U.S. savings rate was 12.9% as of November 30, 2020, compared with 7.5% at the same point in 2019. Perhaps later on – after the pandemic winds down, most likely – this nest egg of savings will be spent more freely, but not in the short-term.

Rejoining the Paris Accord, and Green Legislation

Which would you rather live in – a nation that signs a “clean air agreement” and then pollutes your lungs at home, or in a cleaner, greener nation that doesn’t sign such an agreement but lives up to its mandates?

China (and other Asian economies) went the first route – sign and pollute – while Trump did the opposite. Between them, China and India have the world’s 20 most polluted cities, while the U.S. has reduced its carbon emissions 21% since 2005. The pandemic has reduced most of our carbon footprints – except for those scolds and regulators, with their private jets and multiple homes. By signing the Paris Accord, we must start paying the bills for nations that pretend they are complying but keep on burning their dirty coal.

Carbon Dioxide Concentration Increases Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

China and India are becoming more polluted, while the U.S. and Europe aren’t (Source: Climate Change)

Biden’s Green legislation could unleash several more Solyndra-like scandals of federally supported start-ups that have no economic merit. Already we see several “bubble” stocks on the board based on Biden’s promises. Previous energy revolutions were profit-driven, and the next generation can also pay for itself.

Draft the policies that work best, Mr. President, not those that sound good but are “too good to be true.”

All content above represents the opinion of Gary Alexander of Navellier & Associates, Inc.

Please see important disclosures below.

About The Author

Gary Alexander

Gary Alexander has been Senior Writer at Navellier since 2009.  He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks.  For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.

Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s.  He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division.  Before that, he covered the economics beat for news magazines. All content of “Growth Mail” represents the opinion of Gary Alexander

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