US Economy and Politics – where are they headed?
Author: Lina Klesper - Legal Intern PKF Malta
Published on Malta Chamber in September 2021
The US Politics
The US political situation can still be viewed as highly polarised. The country was severely affected by the COVID-19 pandemic and is currently fighting the impact of the crisis.
In January a partial trade agreement with China was signed, which however did not end the trade and diplomatic tensions between the two countries, which were exacerbated by the spread of the COVID-19 pandemic in the US
Besides the COVID-19 pandemic, the death of George Floyd, an unarmed black man, during a police stop in Minneapolis at the end of May 2020 was the dominating topic in media and politics. Protests and riots were seen in most of the States leading to discussions about racial and social issues in the presidential debate.
In midst of the COVID-19 crisis presidential elections in November 2020 saw the victory of the Democrat Joe Biden, former vice-President during Obama’s mandates. President Joe Biden took office on 20 January 2021. With the election of Democrat Joe Biden, the Democratic Party seems to have taken the upper hand as opposed to the Republican Party ruling under the Presidency of Donald Trump for the past four years.
While the Republican Party is socially conservative and supports free-market capitalism as well as emphasising national defence, the Democratic Party is socially progressive and favours government intervention to temper the market economy. The Country still seems to face the backlash of the Presidency of Donald Trump, whose government is being accused of not handling the crisis properly. It is now up to the newly elected President Joe Biden and his administration to lead the US “reconstruction” after the devastating effects of the pandemic on the US economy and social fabric. 
Tackling the COVID-19 Crisis – The Economic Recovery Plan
So far, the US government has enacted temporary COVID-19 related trade measures to restrict exports of personal protection equipment, pharma products, hand sanitiser, food and certain other products and to liberalize imports of such products.
The US Government has also put in place an economic recovery plan to address the impact of the COVID-19 pandemic on the US economy. The US economic emergency plan is also known as the Coronavirus Aid, Relief and Economy Security Act (“CARES Act”) signed into law on March 27, 2020, including an estimated $2.3 trillion (around 11% of GDP). It includes a local business support scheme for small and medium-sized companies to assist small businesses with small business tax credit programs, an emergency capital investment program and a paycheck protection program. Assistance for American Families & Workers is also offered through economic impact payments, unemployment compensation, child tax credit and emergency rental assistance.
Assistance for State, Local, and Tribal Governments is provided by the coronavirus state and local fiscal recovery funds with $350 billion to ease the crisis and bring back jobs, a capital projects fund, homeowner assistance fund of $10 billion, an emergency rental assistance program, a state small business credit initiative and a coronavirus relief fund.
Due to the COVID-19 health crisis and resulting economic crisis many sectors of the American economy are under unprecedented strain. The US government is financially supporting American industry to support American workers in the hopes of them driving the national recovery. The American Industry is being supported by Airline and national security relief programs, a coronavirus economic relief for transportation services (CERTS) program and Payroll relief programs.
A support plan for exporters is provided by EXIM bank and the US Department of Commerce’s International Trade Administration which temporarily reduced or eliminated the costs of several of their export services to support US businesses.
The US Economy and the COVID-19 Crisis
The US is considered the world’s largest economy, ahead of China, whose GDP growth rate has turned negative in 2020 after a decade of growth (-3.5%; IMF est.) due to the COVID-19 crisis, exacerbated by rising inequalities and obsolete infrastructure.
After the first strain of containment measures in Q2 2020, the US economy bounced back strongly by an annualized rate of 33.1% not yet taking into account the second wave accompanied by new restrictions and uncertainty. However, it’s been forecasted by IMF that the GDP growth will rebound to 6.4% in 2021 and will stabilize around 3,5% in 2022 based on the assumption that the global crisis is at ease and the COVID-19 vaccines will be successful. While the budget deficit reached a record level of 11.7% in 2020, it is expected to decrease in 2020 to 6,8% after peaking in 2021 to 12.9%.
The government’s debt-to-GDP ratio as already been on an upward trend in recent years is to reach 127.1% in 2020 and following the trend to 132.8% of GDP in 2021 and 132.1% in 2022.
The US, however, can confidently rely on its financing flexibility as the issuer of the US dollar, the world's main reserve currency. President Biden’s spending plans could amount to an increase of spending of $5.4 trillion over the next decade in areas such as infrastructure, clean energy, manufacturing, education and health while raising high income and corporate taxes are ought to generate $3.4 trillion of income. Even though according to the IMF, the inflation rate decreased to 1.2% in 2020, it is forecasted to jump to 2.3% in 2021 and 2.4% the following year, depending on the performance of the labour market, which was severely impacted by the COVID-19 crisis.
The US economy is essentially based on services accounting for 77.4% of GDP and the tertiary sector employs about 79% of the country’s workforce. Around 18% of GDP is contributed by the industrial sector which noted a loss of 34.4% in Q2 2020 following the COVID-19 crisis, while the service sector only noted around one-third decrease of the industrial sector. The agricultural sector makes up only around 1% of GDP but is notwithstanding the COVID-19 crisis expected to grow 21.7 % in 2020.
The US as the world’s largest importer and second-largest exporter of goods as well as the largest importer and exporter of commercial services have suffered a drop of 12.6% for exports and 12.3% for imports in 2020 due to the COVID-19 crisis. However, for 2021 a raise of around 7% for exports and imports is expected by the IMF.
Even though the US trade balance is structurally negative and the trade deficit has further widened in recent years, the overall trade deficit actually decreased in 2019 as well as the goods deficit one year earlier.
Unemployment and Homelessness in the COVID-19 Crisis
The unemployment rate raised drastically from 3.7% in 2019 to an estimated 8.1% in 2020 and is however forecasted to trend down to 5.8% in this year and to 4.2% in 2022. Even though American citizens have one of the highest GDP (PPP) per capita worldwide, current public health policies tend to worsen income inequalities constituting the backlash of Trump’s Presidency under whose administration the number of people without health insurance edged up. Also while the number of people in poverty dropped by 4.2 million in 2019, the monthly poverty rate increased from 15% to 16.7% from February to September 2020 due to the COVID-19 crisis.
Before the pandemic rates of homelessness were at the highest in the United States in 20 Years and the newest report that 580,466 people were counted as homeless entailing a 2,2% increase over 2020 and chronic homelessness increased by 15% whereby racial inequity remains a persistent theme. Putting those findings of a long overburdened homelessness system in context with the effects of the COVID-19 pandemic, which forced economic disruption and housing crises on households nationwide is foreshadowing an even more downward spiralling trend. The COVID-19 crisis has left millions of people in the US behind on their rent payments. A pandemic tenant protection scheme previously protected them from eviction but has now been overturned by the Supreme Court leading to more than three million people now being at risk of losing their homes in the coming weeks.
However, the pandemic has more than ever shed light on the situation of the homeless leading to funding and political campaign promises by President Biden to reimburse funding to house people raising hope that the impact of COVID-19 on homelessness could change for the better.
The US and China’s race to become the world’s biggest economy
In 2019 the main supplier of the US for imports was China making up 18.4% of Imports. Historically, the US pursues the strategy of trade promoting economic growth, social stability, democracy and better international relations. However, during President Trump’s Presidency tariffs on steel and aluminium imports as well as other protectionist measures primarily towards China were imposed leaving trade relations between the US and China intense. With the trade deal signed in early 2020, several tariffs were decreased or eliminated on Chinese goods whereas China’s expected to purchase more American farm, energy and manufactured goods as well as addressing intellectual property practices criticised by Trump. Trade tensions with China persist despite the partial trade agreement signed in January 2020. However, under Joe Biden’s political programme, the trade tensions against China could take on a milder tone and also trade threats against Europe are set to fade drawing an optimistic picture for the US economy.
It is speculated that China will soon overtake the US to become the world’s biggest economy. However, the unexpectedly fast US recovery of the COVID-19 crisis shows the strength and potential of the US economy under the Presidency of Joe Biden. There are serious doubts about China’s official GDP data leaving an even bigger gap to the US China’s politics and growth reports raise doubt about a pre-destined development to take over as a world leader in terms of economy. Both nations rely on expanding the workforce, upgrading the capital stock and innovation on technology to win the race. Biden’s infrastructure and family plans show just that and support the US strategy to continued growth. But the outcome of China’s and the US’s race depends on multiple factors: One has to consider the pension ages, reform failures, international isolation, financial crisis, workforces, ageing population, technology, debt risks and productivity. The COVID-19 crisis just showed how uncertain the outcome of the race and the take-over remains and also raises the question if it will happen at all.
Macroeconomic Shock and Outlook
Even though the COVID-19 crisis led to a macroeconomic meltdown and heavy job losses in the US driving unemployment rates to levels comparable to those of the Great Depression, the US is not headed towards a new great depression or debt crisis as policy and politics are not pointing towards a path of a structural regime break. In general, price stability and hence the inflation or deflation are the parameters to be watched to detect depression or debt crisis.
The direction where the US is headed politically and economically depends widely on how Biden’s administration and politics will handle the outcome of the still ongoing COVID-19 crisis as well as the backlash of former President Trump’s presidency. Of interest are especially the trade relationship with China and the success of Biden’s investment plans. An important figure to keep track of is the US inflation rate as an indicator of the wellbeing of the US economy. This rate will depend on the labour market which is moreover dependent on whether the economic recovery plan will succeed to recover and reconstruct the US economy. Its success most likely determines how strong the US will emerge from the global COVID-19 crisis in regards to economy, politics and social fabric.
Author: Lina Klesper - Legal Intern PKF Malta
Published on Malta Chamber in September 2021
Get in touch: email@example.com
 https://www.nordeatrade.com/en/explore-new-market/united-states/political-context last accessed 30.08.2021.
 US International Trade Centre, COVID-19 Temporary Trade Measures ttps://www.macmap.org/covid19.
 https://home.treasury.gov/policy-issues/coronavirus; https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19#T.
 Source: IMF – World Economic Outlook Database, April 2021; https://www.nordeatrade.com/en/explore-new-market/united-states/economical-context.