Image courtesy of Market Watch
By Jack Rowing
Last week in the debate, vice presidential candidate Kamala Harris said that Joe Biden was going to repeal the Trump Tax cut. She asserted this in express terms, while noting the exception for families making less than 400,000 dollars a year. Despite this, on October 9th CNN reported that Goldman Sachs, as well as multiple other large banks, were putting on a show of support for former vice president Joe Biden. This comes off as strange given that, to many onlookers, part of Joe Biden’s presidency would include a proposed 7 billion dollar increase in corporate taxes — seemingly contradictory to their previous policy goals of deregulation and lower taxes. The Tower talked to Dr. Aguirre, an ordinary professor of economics at Catholic U and a former member of the Bush administration, as well as Dr. Gallenstein, a professor of economics at Catholic U who managed two building and research projects in sub saharan Africa.
Dr. Aguirre expressed admiration for the Trump economy and its unprecedented levels of growth, and concern over a possible Biden administration. Similarly, banks are skeptical of the benefits of a Biden administration. Dr. Aguirre pointed out that the underlying economy is still strong despite the temporary COVID-19 crisis, and that the banking sector has maintained itself with it. The Biden economic plan would include higher expenditures and less private sector productivity, which could lead to inflation and a large increase in the debt. American Banker notes that the Trump administration has deregulated both the CFPB and weakened the effectiveness of the Community Reinvestment Act, which was designed to eliminate redlining, but has only seen debatable, limited success.
However, there are multiple reasons why the big banks, and specifically Goldman Sachs, have endorsed the Biden campaign. The most obvious is that a COVID free economy would avoid another shutdown and maintain the economic recovery that is currently underway.
Jan Hatzius, Goldman Sachs’ chief economist, said that any tax increase would be offset by the stimulus package proposed by the Biden administration. S & P analysts have noted that banks might actually be boosted by a higher tax rate regardless of the stimulus package based on what is called deferred tax assets. Deferred tax assets work by allowing companies to write off losses as a portion of their income and receive the money back in later years. This essentially boils down to the concept that the higher the corporate tax rate is, the more money they would get back from the federal government. Moody’s analytics writers Mark Zandi and Bernard Yaros note that “These groups [those who fall under the purview of the tax increase] will bear some modest incidence of the higher corporate income taxes, but this will be more or less washed out by the various tax breaks in Biden’s plan.” These tax breaks will include incentives for green investment and a ‘Made in America’ tax incentive. The report expresses that the proposed tax increase only raises it from 21 to 28 percent, and not to the Obama era’s 35 percent. Dr. Gallenstein said that the perception of the number 28 percent as a tax rate would depend upon one’s own Anchor Bias. In other words, it can seem too much or too little depending on which rate the public views as the starting point. Biden’s platform includes very few radical economic ideas, and is unsurprisingly rooted in moderation.
However, it is not just taxes that Wall Street and the big banks are interested in. Recently, both Goldman Sachs and JP Morgan expanded office space and personnel in China. China represents a 47 trillion dollar market, making it the largest untapped market in the world. New laws recently allowed for foreign banks to have majority non-Chinese control. The Trump administration has made no attempt to hide its animosity for the Chinese government and previous administrations’ lack thereof. The administration’s current deal with the Chinese government has been questioned due to its lack of concrete benefit for the U.S. firms. Dr. Gallenstein said that while Trump has been more openly hostile towards China, the Obama administration found strength in its subtle, yet intentional, rivaling of China, and that he considered the backing out of the Trans Pacific Partnership (TPP) by President Trump to be a tactical economic error. However Dr. Aguirre said that trade has increased between China and the US, and under more favorable terms for the US companies as well. Banks looking to expand into China will have to compete with China’s state-backed banking systems when they arrive, which may require strong government support, to negotiate fair deals.
The Moody’s analytics report predicts that regardless of who will serve as the next President, by the time they will leave office in 2024 the debt will have shot up over 120 percent. Dr. Gallenstein discusses that while the debt is a major issue, it does not sway him to vote for another party based on the fact that while there is more discussion about the debt from Republicans, both parties have similar trends in raising it. He noted a fear that there is a paradigm shift in believing the debt to be inconsequential as the U.S. possibly begins its descent from being one of the world’s economic superpowers; there may come a day when the debt has become too large, and based on our loss of economic domination, the U.S. bonds no longer carry their same strength throughout the world.
Upon closer examination of this announcement, the position of Goldman Sachs appears to fall under the norm rather than the emergence of a new strategy. In the past 20 years of elections, Goldman Sachs has spent more money on Democratic than Republican candidates in 6 out of the last 10 election cycles. They were a major backer of Hillary Clinton’s campaign and are now backing the Biden. Other firms like JP Morgan have similar records of lobbying. It appears that the Democratic party has been both campaigning and fundraising on grassroots plans to change Wall Street with outreach programs funded by the big banks.
This raises a political issue for the Biden Campaign. As their plan reflects a more moderate stance towards the banking industry, while their party base moves farther left. A Gallup poll in 1994 found that the democratic party was about 24 percent liberal and 48 percent moderate, now the shift shows that the democratic party is 49 percent liberal and 36 percent moderate. This is not the party of Bill Clinton anymore. Joe Biden’s economic plan however seems like something created for the previous democratic party. It is unlikely that he will lose endorsements based on the fact that over 50 percent of his supporters are voting for him because he simply is not Donald Trump. His presidency will face its own share of internal opposition.
Biden’s presidency has already seen the beginnings of internal opposition with Senator Elizabeth Warren, a possible Treasury Secretary releasing multiple bills designed to make substantive changes to big banks — such as regaining public control of Fannie Mae and Freddie Mac, adding a tertiary job for the Fed, and promoting racial and income equality with its primary and secondary powers of monetary policy and regulation of big banks. The addition of a third job for the Fed was met with skepticism and disagreement from both Dr. Aguirre and Dr. Gallenstein. Dr. Gallenstein expressed that while he agrees with the goal of reducing inequalities, he worries about undermining the non-partisan and apolitical nature of the Federal Reserve.
Representative Alexandria Ocasio Cortez and other members of the democratic party launched the People’s Charter. According to Politico, this plan includes multiple programs designed to “wrangle with moderate Democrats over the scale of new government spending and programs.” How far they will go against their own party on this issue remains to be seen. It does appear that a Joe Biden presidency may determine the future of the democratic party’s economic agenda.