Will Biden’s Infrastructure Plan Rebuild Gold?
The comments below are an edited and abridged synopsis of an article by Arkadiusz Sieron
President Biden wants to spend $600 billion on transportation infrastructure, and more than $300 billion on improving utilities infrastructure. He plans to put more than $300 billion into building and upgrading housing and schools, $400 billion to care for elderly and disabled Americans, and almost $600 billion in research and development infrastructure, manufacturing and job training.
The catch is that all spending will be financed by tax hikes. Biden proposes to raise the US corporate tax rate from the 21% set by Trump to 28%, as well as to eliminate all fossil fuel industry subsidies and loopholes. So, according to the proposal, the tax reforms will add about 0.5% of GDP in fiscal revenues.
The proposal stems from Biden’s progressive belief that government can and should be a primary driver for economic growth, which is wrong. Economic theory and empirics show that the private sector is inherently more efficient than the bureaucrats (ask anyone from a former communist country if it’s true). Such a revolution in US economic policy will weaken the allocative efficiency and hamper the long-term pace of economic growth.
The idea to raise taxes when the economy hasn’t fully recovered from the pandemic recession is controversial, at least. Higher taxes will weaken corporate America and redistribute resources from the private sector to the public sector, negatively affecting the economy . As well, Sieron doesn’t believe that the tax revenues will fully finance the plan, so the fiscal deficits will increase further, ballooning even more the already mammoth pile of federal debt.
How will Biden’s infrastructure plan affect the gold market? In the long-run, higher government spending, public debts, inflation and corporate taxes should hamper the pace of economic growth and weaken corporate America and Wall Street. Hence, the proposal could be positive for gold, at least from the fundamental point of view.