The strength of the U.S. economy points not only to recovery from the depths of the pandemic, but also expansion above pre-pandemic levels. Forecasts are for GDP growth above 6% for this year—the growth rate in the first quarter alone was a phenomenal 6.4%. In a widely held view, JPMorgan Chase
Even as the economy gains significant momentum, there are other forces: the Biden administration’s $2 trillion infrastructure plan, a plan to cut greenhouse gas emissions in half by the end of the decade, along with proposed corporate tax increases, from 21% to 28%, plus a minimum corporate tax.
The question is how these forces will net out for the economy over the long term. Will they cause the expansion to stall? Or could these plans and initiatives result in both greater efficiencies and new economic opportunities?
Investing in Green
President Biden has a unique opportunity to encourage businesses to buy into his climate agenda with “green” capital expenditures to create new technologies. This will not only bring industries into compliance with proposed federal mandates, but also help to further growth as the economy pivots toward net-zero emissions.
Green mandates will spur investment across the economy. For example, automotive companies must lower emissions on existing vehicles and continue to develop alternative energy vehicles. Consider Ford, which has invested in domestic battery development and manufacturing for its future fleet of electric vehicles.
Upgrades to the U.S. electric grid and the transition to cleaner energy sources would spur private investment in power generation. The transition from fossil fuels to clean energy is also helping to offset job losses in areas like coal mining with new opportunities for training and employment in wind and solar generation.
Emission reductions and combating climate change will be costly, but if all corporations are forced to bear the same costs, there will be no relative disadvantages. This holds especially true as green efforts gain ground around the globe. Japan and Canada, for example, have made new pledges to reduce emissions, although India and China have not. If there are laggards on greenhouse gas emissions control, trade policies could address these discrepancies.
Meanwhile, private investment initiatives are also seeking to promote a global green agenda, such as the newly announced partnership between Bloomberg and Goldman Sachs
The ESG Payoff
As individual companies examine their capital expenditures for the next few years, green technology may pay additional benefits, especially as environmental, social, and governance (ESG) investing continues to increase in popularity. More than $51 billion in new money poured into U.S. ESG mutual funds and ETFs in 2020—the fifth consecutive year of record growth. Net new capital last year was also more than double the $21 billion invested in ESG funds in 2019.
These funds focus on companies that meet ESG criteria. In the environment, that usually means those that are not reliant on fossil fuels; for society, that relates to promoting diversity and inclusion; for governance, that relates to independent boards.
Companies that buy into the green plan could make their stocks more attractive to ESG investors — and that could be positive for valuations. There could be other benefits as well, as highlighted in a recent McKinsey report. It linked ESG initiatives with higher revenues from new markets as well as expanding existing ones; cost reductions, especially in raw materials; lower regulatory and legal costs; and higher employee productivity.
The Biden Tax Plan
But what of the tax increases, including a higher corporate tax rate plus a separate plan that would raise capital gains taxes for individuals earning more than $1 million year? The Biden administration argues that the additional tax revenue is needed to help trim the deficit, which burgeoned over the past four years. Fortunately, none of Biden’s tax plans will be large enough to slow our economy down. But unfortunately, none of the tax measures will be sufficient to cut the deficit or pay for sweeping infrastructure upgrades.
Critics, as might be expected, decry President Biden’s tax plan. Rep. Kevin Brady of Texas, the ranking Republican on the House Ways and Means Committee, warned of “slower growth and investment in the U.S, sabotaging not only our economic recovery but also future growth.”
The economy, however, is expanding at a rate not easily derailed by an increase in tax rates. But that’s not all. Investments under the infrastructure and climate change initiatives could generate new economic activity and create more jobs.
More Growth Than Costs
In the near-term, the growth of the economy seems assured as recovery gives way to rapid expansion. Looking ahead, more opportunities for growth are likely, especially through investments in infrastructure and green technology to reduce emissions. There will be significant costs involved at a time when companies could be paying a higher tax rate. However, both agendas will likely be net positive, helping to keep the economy expanding for the longer term.