Episode 8: What to expect from Joe Biden’s Presidency

Transcript: Season 1, Episode 8: What to expect from Joe Biden’s Presidency?

Caitlin Dean: Welcome to Living Beyond Borders. The podcast from Citi Private Bank and GZERO Media that examines the risks and opportunities in our rapidly changing world, from global politics to economics and what it all means for you.

I'm Caitlin Dean, head of the Financial and Professional Services Practice at Eurasia Group. Election night 2020 turned into election week as the count of mail-in votes and the razor thin margins in some states kept the nation in suspense until Saturday, November 7th.

News Tape: After four long tense days we’ve reached a historic moment in this election.

News Tape: Joseph Robinette Biden Jr. has won the Presidency

News Tape: Biden ended up winning back all so called Blue States that President Trump took in 2016.

Caitlin Dean: In the end, Joe Biden delivered for the Democrats winning 279 electoral votes as of this taping, an historic 76 and a half million in the popular vote edging out President Trump by nearly five million.

But there's been no concession yet from the President, and legal challenges still loom as of today. So the big question now is, what happens next for the markets, Main Street, and the world? Joining me now are Jon Lieber, Managing Director for the United States at Eurasia Group. Hi John.

Jon Lieber: Hi, Caitlin. Great to be here.

Caitlin Dean: And Candi Wolff, Managing Director and Head of Global Government Affairs at Citi. Great to have you with us, Candi.

Candi Wolff: Thanks, Caitlin. Glad to be here. Hi, John.

Caitlin Dean: Candi, So heading into election day, it was clear that Wall Street was prepared for a Biden victory. What were the indications that pointed in that direction?

Candi Wolff: Well, Caitlin, national polling was showing Biden leading Trump by anywhere from eight to 10 points after the first debate, the battle ground polling was showing Biden leading Trump by an average of four points in the battleground states. President Trump's approval was holding in the mid-40s and reelection usually requires upper-40s to 50%. And the House and Senate polling suggested a blue wave, so there were certainly some questions and some skepticism about the validity of the polls, whether or not there was a shy Trump voter and how off the polls could be. But the numbers seemed so big that Biden could sustain a large polling error, which is seemingly what happened. So Wall Street was pretty confident of a Biden victory.

Caitlin Dean: And John, Eurasia Group had named U.S. election instability as the top risk of 2020 all the way back in January before the pandemic. So explain the nature of that risk and how much of the prediction came true.

Jon Lieber: So the nature of this risk was that you have high degrees of polarization in the U.S. and the two parties are growing apart from one another both ideologically, and I think in many ways more importantly, geographically. So Republican voters tend to live in rural areas. Democratic voters tend to live in cities, and the battleground is the area in between. And because of that polarization, you just have a very divided electorate. You had the potential for foreign interference in an election, you've got the potential for lots of fake news misinformation on social media, and all the ingredients are there for one candidate or the other to de-legitimized the outcome of the election.

And that's what we've seen play out. Now, of course, the coronavirus pandemic has been a huge part of that. The shift in mail voting led to accusations very early on this year that the fix was in either because you'd have all these fake ballots that were being dropped in the mail, according to accusations made by President Trump, or because President Trump's political appointee at the postal service was going to slow down ballot delivery and rig the election for the President.

And now after the election, you're seeing that the losing side, President Trump, is claiming that there was fraud and that's the reason he lost. And you're seeing Democrats still casting doubt on the postal service and how well they handled the pandemic election. Because of this, you've got you're undermining faith in the outcome and you're going to have some subset of voters in the United States who are convinced that this election is illegitimate and that Biden's presidency, when he takes office in January, is going to be an illegitimate presidency.

Caitlin Dean: And those disputes on the part of the Republicans still aren't over yet as of this taping. Does it seem that President Trump has any credible pathway in the courts?

Jon Lieber: Not as far as I can tell. The President's claiming pretty widespread accusations of fraud in Michigan and Pennsylvania, but the accusations of fraud are about standard things like Republican poll observers weren't allowed to be close enough to the desk when they were counting. And the real challenge for him is even if they could find fraud, Biden's margins in these key states are so large, tens of thousands of votes, and even in Georgia, where there's a recount going on right now, in the last 20 years, there's never been a race overturned when the margin is as big as it is in Georgia, and that's 0.3%. So it just looks like he's fighting a really uphill battle right now, and that in many ways, the accusations of fraud are almost more about positioning him for his post-presidency than they are about overturning the actual outcomes of the election.

Caitlin Dean: And Candi, meanwhile, president-elect Biden is moving forward with his transition plans. So explain how that works and what we can expect.

Candi Wolff: So Caitlin, the formal transition process began over the summer. Congress passed a law after the 2000 election, which started to pave the way for a smoother transition process, and it allows the civil servants and some of the politicals in an administration to begin working on briefing books to hand over to transition teams that being set up by the Biden administration. But the official post-election transition process requires the General Services Administration to act to allow federally appropriated funds and government office space and the actual physical meeting of the different groups to occur. And as we've seen, this has been delayed as a consequence of the election, as John was just noting, the efforts by the Trump campaign to ask for recounts into alleged fraud allegations. So it's slowed the formal process of the transition teams actually engaging with the different staff on the ground.

Candi Wolff: However, it doesn't mean that there's not transition efforts that are clearly being undertaken. And as we've seen, the Biden transition, which is chaired by Ted Kaufman, who's a former Senator from Delaware and the former chief of staff to Senator Biden, has been moving forward. They announced their agency review teams. We used to call them landing teams, but they're called agency review teams. And they're beginning of the process of pulling together information. They're focused on personnel, who's going to fill out these cabinet positions? They're focused on executive orders, and they're focused on regulations that they may want to take a look at inside the agencies. The transition's also beginning to announce White House officials. We saw the announcement of Ron Klain as the chief of staff, and we expect that other positions will follow fairly soon.

Candi Wolff: So there's a lot that's a beginning because it's necessary, and I think the biggest focus of any transition, and I saw this firsthand when I was on the 2000 transition, which is you really need to focus on personnel. Right after inauguration, you want to get your personnel, particularly the senior cabinet positions, in place. You want to be able to have confirmation hearings that can begin in early January, so that on January 20th, you can get some of your key positions, whether it's defense or Secretary of State or Treasury in those positions. We have seen, however, that, that process can be slower. And I believe in the Trump administration, it took almost two weeks before there was a Treasury Secretary. The Biden transition team is going to be faster and they've been focused for a period of time here on the personnel and on the transition so we would expect to see names sooner than certainly was the case under the Trump administration.

Caitlin Dean: It's impossible to talk about 2020 without discussing the COVID-19 pandemic. So, I'd like to hear from both of you, what differences in approach you think we'll see from a Biden administration when it comes to the response to the pandemic, both here within the U.S. and globally?

Candi Wolff: I think we're expecting to see, and as some Biden folks have said, and the president elect himself has said that they'll see more multi-lateral engagement. Expect to rejoin the WHO. We expect to see COVAX membership. Whether or not there's some sort of mask mandate, I'm skeptical of how you would enforce some type of federal mask mandate, but certainly you can lead by example and highlight the importance of the use of masks. And I also think there's obviously going to be a lot of focus around the vaccine, distribution of the vaccine and really from a public service perspective, convincing people of the safety and the efficacy of the use of the vaccine. And so the naming of Ron Klein as the chief of staff and the person who ultimately ran the Ebola campaign and the fact that they've set up the COVID task force so quickly, I think it's a testament to how Biden is going to try to really come up with action items and push out a message in a more coordinated manner than I think we've seen previously.

Candi Wolff: And just in case there are some people listening who aren't sure what COVAX is, it's a global effort to ensure equitable distribution of a vaccine once one does come out. Jon, let's hear from you too on that same question. What differences in approach you think we'll see on the pandemic from a Biden administration?

Jon Lieber: Like a lot of things with the Biden administration, the difference of approach is going to be mostly stylistic. Like Candi said, it's unclear how President Biden can enforce a mask mandate. It seems like they could probably do it in federal buildings. The CDC has indicated they might be able to do it on public transportation, but who's taking public transportation right now? So I don't think that's that meaningful. But what you're going to see instead is more browbeating of governors, a change in messaging to be much more cautious. That's going to put the health officials up front and center in how they're talking about it. It's going to sideline the political folks and the economic folks on Biden's team. And it's going to be just a much more cautious approach urging Americans to stay at home and be truly afraid of this disease. Now the good news, I think, for Biden is that with the possible vaccine announcements that we've seen recently, maybe he doesn't have to drag this out that long before life can return normal and he can pivot and focus on something else.

Caitlin Dean: Now, in addition to the pandemic, for a majority of voters, the economy was a top concern. So Candi, what is the state of the U.S. economy as 2020 is drawing to a close?

Candi Wolff: So Caitlin, Citi's economists and economists at the private bank describe the economy as divided in half by COVID. The social close industries, those like hospitality and leisure remain deeply depressed by COVID. On the other side, we've actually seen some strengthening in industries like housing and technology. So overall the rebound from the lockdown from the second quarter on has been much stronger and sustained than expected, but there's much more room to recover. Our economists expect the U.S. to be on track to reach pre-COVID GDP by second quarter '21. But one of the caveats to the benefit that we're certainly seeing in growth in the U.S. and frankly in China, is that with respect to the E.U. and Japan and LATAM, the recovery is much longer and expected to be much later and may go well into 2022 or beyond, which will have implications for trade and for the global economy.

Candi Wolff: So I think the positive sign is that in the U.S., we're on a trajectory for a recovery, second quarter 2021, but other countries are going to be much slower.

Caitlin Dean: Yeah. And of course, to some extent that depends on the course that the virus takes and how we respond to it.

Candi Wolff: Well, exactly. And I might just add that it really is predicated on the fact that there will be a vaccine and that it can be widely distributed because at some point you have to see the consumer discretionary services spending go up. Right? And when will people be comfortable to travel and have entertainment and really focus on those leisure industries that have taken the hit?

Caitlin Dean: And Jon, there's been a lot of discussion about how the election impacts potential government stimulus packages in the near term, and the tension that'll exist between the White House and Congress. So can you break that down for us, those dynamics?

Jon Lieber: Yeah. What's really interesting so far is that the election now being more than a week behind us, doesn't seem to have altered the dynamic on Capitol Hill much at all. The Democrats gave a press conference this week, and basically indicated they're sticking by their earlier position, which is a two and a half to three and a half trillion dollar stimulus they want to pass with over a trillion dollars in aid for state and local governments. The Republicans, Mitch McConnell, the Senate leader, came out this week and said that he supports doing something, what he called a little more targeted. And the Senate Republicans had earlier in the year put forward a bill that was about 500 or 600 billion dollars, which was designed to be really narrowly focused on things that were directly related to the coronavirus.

Jon Lieber: Trump's been, President Trump has been missing in action since the election on the stimulus negotiations. He's busy litigating the outcome and hasn't really indicated a desire to jump in and break the impasse. And that leaves it up potentially to president elect Biden to broker a deal that would provide a little bit additional stimulus to get us through, to get the U.S. economy through December, January, and February. But I think as of right now that doesn't look particularly likely. The two sides are extremely far apart. You may end up in a situation where you see some small extension of one piece of the existing stimulus, like unemployment insurance extended through the beginning of next year. And then maybe under President Biden, the sides can come together. Once we know the outcome of these races in Georgia, that could decide the Senate majority, the sides can get back together and decide what they want to do to address any weaknesses in the economy.

Caitlin Dean: The T word has also been a concern. So what do you both see as potential consequences for taxes?

Candi Wolff: Well, Jon would be excellent to speak to this, but it really does depend on the outcome of the two Georgia races. So if there's a Senate GOP majority, we'd expect to see no T words, no tax increases. And while we might see the House and the Biden administration proposing tax increases as way to offset spending proposals and try to pressure Senate Republicans, it's incredibly unlikely that Senate Republicans are going to increase corporate taxes or individual taxes after voting in 2017 to cut those taxes. It's a different question, I think, if it's a 50/50 Senate, where in that case, it would be Democrat control of the Senate, and they may then try to use a budget reconciliation process to move tax changes. That process allows for only 51 votes to pass tax increases. It's still a struggle. You still need to get 51 votes in order to pass a budget to then allow for budget reconciliation instructions, but it's possible to have some form of tax increases if it is a 50/50 Senate.

Jon Lieber: I completely agree with that. I mean, I spent, I worked for Leader McConnell from 2010 to 2014, and I don't think a day went by during that time period when we weren't fighting tax increases, tooth and claw. So I think that's probably going to be my expectation for... If the Republicans continue to control the majority in the Senate, it'll be very difficult to get any tax increases done. During the Obama years, you saw two tax increases took place. The first was the Affordable Care Act where taxes were increased in order to pay for new spending. And then with the expiration of the Bush tax cuts in 2010, and then again in 2012, some of the upper income tax increases were... tax cuts... were allowed to expire, which was an effective tax increase. And there are a number of tax cuts that were passed in the 2017 Trump Tax Reform Bill that do start to expire over the next five years or so leading up to a massive expiration of all the middle-class cuts in 2026. And I think the Republicans' goal is going to be to try to extend as much of that as they can as early as they can. And that may set up some negotiation where high income tax increases come on the table. But I would bet against that for the next two years at least.

Caitlin Dean: Candi, how are big corporations and the financial sector viewing the road ahead? What are the expectations for the regulatory environment for example?

Candi Wolff: So I think in light of what we see as a divided government, we expect to see the administration as had prior administrations facing a divided Congress, focusing on those things that they can control; executive orders, regulations and ultimately foreign policy and trade. Areas that are in the control of the executive branch. So we would expect to see increase regulation in a variety of places. And ultimately the types of regulations that are enacted will depend on the personnel from cabinet level on down. And it will take some time for a Biden administration to fill those positions.

Candi Wolff: So we're really not anticipating major regulatory changes for a year or so, just given the amount of time it will take. The other expectation is that much of the regulatory focus will be on climate and also on ESG issues, including diversity and inclusion.

Caitlin Dean: And do you have any thoughts for investors who have clearly seen a lot of volatility this year?

Candi Wolff: Well, I think on the positive side, executive branch decision-making will be more regular order and it will bring about a return to normalcy in the operation of the US government. Having worked in an administration, there is a process by which policy issues can get resolved and addressed. There'd be meetings of cabinet officials at various levels to determine the policy. The policy process will present recommendations to the president. And the positive impact of a more normal regular order should be underestimated. I think investors will be less surprised by announcements and won't have to follow Twitter quite as much in order to keep up.

Caitlin Dean: Now, healthcare was also a huge issue for many voters with access and affordability being the top concerns. Donald Trump never presented a clear alternative to Obamacare or the Affordable Care Act. Jon, what do you see as the next steps now for healthcare policy in the US?

Jon Lieber: A lot of that depends on the outlook in the Senate. If the Republicans continue to hold on and you get divided government next year, I don't see a lot of room for compromise around healthcare. Joe Biden had proposed fairly aggressive expansions in terms of coverage in his campaign platform. I think what would likely come out of the congressional process, at the end of the day he would be lucky to lower the eligibility for Medicare, expanding eligibility for Medicaid and deepening the subsidies that are available through the Affordable Care Act exchanges financed by a tax increase.

But to get all that, he really needs a democratic Senate. It would be possible to do that through the reconciliation process that Candi talked about earlier. But again, you really need these Georgia Senate races to go their way to unlock even the potential path towards getting there. There's a lot they could do through regulations to try to expand access, crackdown on maybe price increases by the pharmaceutical companies. Potentially look at indexing drug prices globally. But I think it's going to be a much more limited version than what you get in a divided government.

Caitlin Dean: Now we spoke a bit earlier about just how divided the country is. What does that look like in terms of actually being able to govern?

Candi Wolff: Well, governance is hard, no matter the makeup of the Congress and it's always easier to oppose than propose. But with a divided Congress, a narrow margin in the House and potential Senate GOP control, ambitious legislative plans will get significantly scaled back. But I guess on the more positive side, Biden's more of a legislator than he is an executive. He's an institutionalist. He has relationships in the Senate that no prior president since Lyndon Jonson has had. And those types of relationships may help to bridge some of the gaps and help to govern around areas where there is an ability to reach some sort of compromise.

But ultimately, how much can get done will depend on the factions within the parties. Will the wings of the parties oppose deals or be willing to compromise? Will ideologues want purity and threaten primaries? Will hyper-activism undermine governance? Those are all questions that have yet to be determined. But I do think that there's at least some building blocks in place for the ability to attempt to find some areas of agreement between a Biden administration and a Congress.

Jon Lieber: I think one thing you're going to hear frequently out of potential Senate Majority Leader McConnell next year is that divided government is the time to get big things done. And this is something, this is a constant refrain of his during the Obama administration. The reasoning being that when you have divided government, neither side carries the blame when you're doing things like entitlement reform. Now that didn't amount to much in the Obama years. And in fact, it ended up being a source of volatility.

Because you saw Republicans use deadlines around funding, the government and deadlines for the debt limit to try to force President Obama to accept policies that he didn't want to take. And you may see some return to that next year if the Republicans decide to go down that path. But I think a lot of them have learned the lesson that that probably does more harm than good. And so ultimately you probably end up with something that looks a lot more like the gridlock that markets seem to be expecting right now.

Caitlin Dean: And obviously we may see differences in approach to foreign policy from the Biden administration as well. One major area I wanted to ask you both about is China. So Jon, will Joe Biden's approach to China be all that different from what we've seen from President Trump over the past four years?

Jon Lieber: I think the direction of travel is largely the same. I mean, Trump was, yes, a cause of a departure in kind of a 30-year consensus around US and China relations, but he also was a symptom of broader changes in the US electorate that was growing more skeptical of China and a shifting consensus amongst Washington policymakers who moved away from seeing China as a potential strategic opportunity and more as a strategic threat. And this is happening in both parties.

And I don't think that a Biden presidency is going to really reverse that trend. And what I'd expect to see is them to take a more diplomatic approach to try to approach China from a more multilateral perspective. This is what President Obama was trying to do when he was trying to make sure the US was a part of the Trans-Pacific Partnership, which Trump pulled the US out of on day one. I don't think Biden goes back to the TPP, but I do think that he tries to align European, Middle Eastern, Latin American allies and Asian allies in kind of anti-China Bloc. And so the difference is going to be not in the as I said, direction of travel, but in the speed and intensity with which they get there.

Caitlin Dean: Candi, what are your thoughts on the road ahead for the US and China?

Candi Wolff: I concur with Jon. The tone may be different, but the trajectory looks to be the same. I'd probably just add a couple of additional comments. One, I think the Biden administration's going to have a lot of focus around human rights concerns, whether it's respect to Hong Kong, potentially Tibet, but really an enhanced focus around human rights and how those tensions may play into the continued tensions with China around AI and 5G and technology issues.

Candi Wolff: I think the other point as Jon noted, there's really has been a consensus within Washington, Democrats and Republicans of concerns around China's economic model and the interaction of the economic model with national security. And I think there, you're going to continue to have Democrats in Congress and Republicans in Congress working together on legislation. That's going to push and keep pressure, I think, on the Biden administration to take particular actions, especially in the technology area. So given these pressures, given the relationships and the tensions, the tone as Jon noted will be different. The approach in terms of multilateral will be helpful, but the trajectory still looks to be the same.

Caitlin Dean: Jon, what other geopolitical areas are you watching? For example, do you see the US re-entering the Paris climate agreement?

Jon Lieber: I think that's a slam dunk for Biden. He probably does it on day one. This is something he's running on. The reality is the Paris climate agreement sets up commitments for the US to try to hit in terms of carbon emissions, but it doesn't give the path towards getting there. So entering the Paris climate accord is the easy part and enacting the Paris climate accord is going to be the hard part, particularly in a divided government where the Republicans just are much more concerned about energy affordability and jobs in the oil and gas industry than they are about taking immediate action to do something about climate change.

So that's definitely an area that Biden is going to look into. Elsewhere, geopolitically, I think you see a big shift in policy towards the middle East. I think that the Iranians have been on the outs of the Trump administration and that changes now with the Biden administration, who's going to be eager to pursue some kind of agreement to get them to stop enriching uranium. And the approach towards Europe is going to change a lot too, where under Trump, you had constant threats of withdrawing from NATO and then threats of new tariffs on European auto imports, neither of which ever materialized, but the threats go away under Biden.

And I think one of the first thing Biden's going to do is reach out to leaders there if he hasn't already and reaffirm the US's commitment to the Transatlantic Alliance.

Candi Wolff: Caitlin, I would concur with Jon on that if I might add that, and Jon, I think the foreign leaders have already reached out, particularly in Europe to Biden to congratulate him. And if there's any strength, as Jon said, in terms of where a Biden foreign policy will head, he's an Atlanta cist, and there will be a lot of emphasis around working with Europe to address a number of issues and engage with China on climate.

Caitlin Dean: And we're still in early days after the most polarized US election of our lifetimes. So Candi, what are your key takeaways about where America is right now and how as a nation we can move forward?

Candi Wolff: Well, I think where the nation is, is polarized. And this election affirm that polarization. It can be read to say that the voters want governing. They didn't want to extremes. They voted for divided government.

Well, Biden won the election. Republicans picked up seats in the house, potentially, held onto the Senate and picked up state legislatures. If that isn't a divided government, I don't know what one is. But at the same time, as Jon said, big solutions can come from divided government. If there's a willingness to work to achieve those solutions and President-elect Biden is a transitional figure. He knows that it's not going to be a revolution.

So as a transitional figure, is he willing to engage and to bring the democratic party and the Republican party together to try to address and reach consensus at least on some of the big policy issues? Can we find consensus on infrastructure? Can we find consensus on racial injustice? Are there some areas where there are ideas in both parties and they can be brought together? And I think, where the country's headed is that the debates going to be played on the 40-yard line and not on the 25-yard line. And we have to see if it's possible to actually have the game played in the 40-yard lines and therefore, achieve results going forward.

Caitlin Dean: It might be hard for some of us to imagine what finding those common areas might look like. So, especially with all of the pretty harshly divided rhetoric. So Jon, where do you see some opportunities for common ground in Washington next year?

Jon Lieber: I think Candi pointed to one, which is infrastructure. They'll have to pass a highway bill at the end of the year into the fiscal year. So something has to be done by September 30th and those kinds of deadlines, it can really become action-forcing events. There's already some bipartisan agreement around increasing the amount of money the US spends on highway infrastructure over the next five years. They don't have any way to pay for it yet, so they'll have to figure that out and there are going to be big bipartisan gaps. That amount of money is not going to blow anyone away, but it will be a modest increase and will look like nice bi-partisan accomplishment.

China is one we've already mentioned. President Biden or President-elect Biden ran on this build back better agenda. And so I think there is room to rally around some kind of domestic investment program. The Republican party is starting to see itself or at least some in the party are starting to see itself as a more populist working-class party. And that's a departure from their old, boardroom and country club image.

So, as a result of that, I think you may see some grounds for cooperation. I don't know if it's going to go anywhere, but you may see some grounds for cooperation around domestic investments, infrastructure, just redirecting money to middle America in the middle-class.

Candi Wolff: And what do you each see as some of the key challenges the administration will face and what they might want to tackle first?

Jon Lieber: The biggest challenge is obviously the coronavirus. Biden's going to be inheriting a country in the midst of its worse coronavirus outbreaks numbers on a daily basis yet. And that's likely to be the case, at least through December and probably into January. Maybe it dies down, but there's going to be this economic overhang, this unemployment overhang into 2021 that he's going to have to deal with. And I think that ends up displacing a lot of the agenda that he ran on, which was expanding access to healthcare, expanding access to education, doing something big on climate change.

All of that becomes second fiddle to try to restart and rebuild the economy. So that's going to be the number one challenge. The economy was in very good shape going into the coronavirus outbreak. And if those fundamentals still exist, then maybe you start to see it come growing back with the vaccine, but probably, it's going to need continued significant federal support through the first half of 2021, at least.

Candi Wolff: Yeah. The focus of the Biden administration, particularly in the first hundred days is COVID, there's not much else that can take up their attention and they need to move forward with plans for how to manage it, to address the economic issues. And as Jon said, additional COVID relief and stimulus funding is needed. Certainly, our economists take a look at the numbers and are predicting an increase in to Q 21, but that's really predicated on both the vaccine and getting sufficient stimulus into the economy.

So it's hard to imagine that a Biden administration could focus on much else at this point.

Caitlin Dean: Candi Wolff, Jon Lieber, thank you both for sharing your insights with us today.

Candi Wolff: Thank you, Caitlin.

Jon Lieber: Thanks so much.

Candi Wolff:That's it for this episode of Living Beyond Borders. Stay with us through the remainder of 2020, as we look at the biggest issues impacting your world and your money. Next time, sustainability, and what it means for investors, companies, and all of us. I'm Caitlin Dean. Thanks for listening.