,The Biden administration unveiled a US$2 trillion (RM8.28 trillion) infrastructure programme that aims to modernise American infrastructure
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LATE last month, the Biden administration unveiled a US$2 trillion (RM8.28 trillion) infrastructure programme that aims to modernise American infrastructure. The American Jobs Plan has four major spending components over eight to 10 years.
First, invest US$621bil on clean energy, upgrading and repairing transport and key transit systems. Second, focus US$650bil on improving life in homes, schools with water and broadband systems. Third, spend US$400bil on caregivers to create jobs.
Finally, invest US$300bil in research, development and manufacturing, including US$50bil on semiconductor manufacturing. The underlying strategy is to deliver green lifestyle to combat climate change.
Taking together the US$1.9 trillion stimulus package and US$0.9 trillion approved under Trump, the US will commit US$4.8 trillion or 22.9% of 2020 GDP, setting the stage for Big State competition with China. To fund this, the corporate tax rate would be raised to 28% from the current 21%, which Trump slashed from 35% in his 2017 tax package. The Biden package would also plug US corporate taxation evasion through capturing offshore income at domestic tax rates.
This attention to infrastructure and jobs is long overdue. Furthermore, the world needs this large fiscal stimulus to help global recovery from the pandemic. The OECD estimates that up to 1.5% would be added to global growth from the US stimulus package.
Can the US implement such investments without inflation? Will the rest of the world fund this without higher interest rates? LSE Professor Charles Goodhart and Manoj Pradham pointed out that since the 1980s, global benign inflation was due to China becoming the world’s new source of cheap goods and services. They think that this will not last. University of Texas Professor James Galbraith warns that “China is missing from the Great Inflation Debate.” He, however, thinks that China will not rock the boat by pushing up prices.
At the end of 2020, just under three quarters of US net foreign liability to rest of the world of US$14.1 trillion is funded by East Asian surplus economies (Japan, China, Hong Kong, Singapore and Taiwan), with the balance by Europe (Germany, the Netherlands, Norway and Switzerland). As Harvard Professor Kenneth Rogoff put it, “it seems an article of faith among US policymakers and many economists that the world’s appetite for dollar debt is virtually insatiable.”
What could totally disrupt both assumptions? Worsening US-China relations! By retaining Trump tariffs on China and hardening rhetoric on China, the Biden administration thinks it can pump up the US and fight China and Russia at the same time.
Is this unipolar hubris justified?