The Latest News - Recap Of The State Of The Union Address
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The latest in financial news: President Biden had given his State of the Union address this week and we wanted to cover some major parts from his address. While there are multiple topics that President Biden referred to in his speech, we want to focus on three main parts: Global conflicts, Economic Improvement, and the Government deficit. You can watch the actual address here if you would like.
Global Conflict
Throughout his address, President Biden addressed various international conflicts, shedding light on the ongoing war in Ukraine and the necessary equipment needed to defend against Russian aggression. He also touched upon the conflict between Israel and Hamas in the Gaza Strip, highlighting the resulting humanitarian crisis. Additionally, the President emphasized the competitive landscape between the United States and China, positioning the US as the primary contender in this global rivalry. The conflict in Ukraine, which began with Russia's invasion in February 2022, continues to fluctuate, with both sides gaining and losing territory in successive months. Notably, Ukraine has received substantial military support from the US and NATO, including the provision of the Patriot air defense system. However, the ongoing conflict has taken a toll on Ukrainian infrastructure, businesses, and agricultural sectors, impacting the country's economic stability and thus requiring more aid. Regarding the conflict in the Gaza Strip, tensions between Israel and Hamas have escalated rapidly, raising concerns among nations in the Middle East and beyond about the potential for a wider conflict. Calls for peaceful negotiations have been made by various stakeholders to prevent further bloodshed in both Ukraine and Israel. President Biden also addressed the escalating tensions with China, particularly concerning its territorial ambitions in the Indo-Pacific region, notably with Taiwan. This has prompted military exercises by various countries, including the US, aimed at deterring Chinese aggression.
In response to these global conflicts, the Senate passed a bill in February 2024, allocating $95 billion in support to Ukraine, Israel, Taiwan, and other Indo-Pacific countries. This package, currently awaiting a vote in the House, aims to bolster Ukraine's defense capabilities, enhance Israel's air defense systems, support partners in the Indo-Pacific region to counter Chinese aggression, and provide humanitarian aid.
Economic Improvements
In his recent address, President Biden highlighted the robust growth of the economy over the past year, underscored by the creation of millions of new jobs and the attainment of the lowest unemployment levels in half a century. He pointed to the announcement of 46,000 public projects aimed at enhancing infrastructure, along with the surge in semiconductor manufacturing, which has emerged as a significant source of employment across the US. Moreover, the President noted a noteworthy decline in inflation from 9% to 3%, signaling the Federal Reserve's prudent approach towards achieving a soft landing, aiming to curtail inflation without triggering a recession.
Let's delve deeper into these assertions to verify their accuracy. Regarding unemployment, the figures align with the President's remarks, with the current US unemployment rate hovering around 3.9%, notably close to its previous lows of around 4%. As for the infrastructure bill referenced by President Biden, it pertains to H.R.3684 (Infrastructure Investment and Jobs Act), which was enacted into law on November 15, 2021. This comprehensive legislation addresses a spectrum of infrastructure enhancements encompassing transportation, energy, fuel/biofuels, water, communication, and cybersecurity, signifying a concerted effort toward bolstering national infrastructure and fostering job creation. The data reveals a tangible decrease in the US inflation rate, plummeting from its peak of 9.1% in June 2022 to a current rate of 3.1% as of January 2024. This decline is widely attributed to the Federal Reserve's strategic decision to raise interest rates, prompting reduced borrowing among individuals and businesses. Typically, such rate hikes coincide with a downturn in equity markets; however, the markets have performed well during election years. So we may not know how the markets will react after the presidential election.
Government Deficit
A pivotal point in President Biden's address concerns the US government deficit and tax policies, which carry significant implications for Americans and the nation's future. Notably, President Biden highlighted Medicare's success in curbing the exorbitant medication costs levied by Big Pharma. He emphasized his administration's commitment to reducing medication expenses for all Americans, not just those under Medicare coverage. Furthermore, President Biden asserted that his administration had managed to slash the federal deficit by over $1 trillion and aims to further reduce it by an additional $3 trillion through increased taxation on affluent individuals and large corporations. He proposed that augmenting taxes on wealthy individuals and corporations would bolster government revenue.
Before delving further, let's clarify the distinction between the federal deficit and the national debt, which can often be misconstrued. The federal deficit mirrors an individual's budget - if expenditure surpasses income, a deficit ensues, reflecting overspending on foreign aid, domestic projects, etc., vis-à-vis tax revenues and bond sales. This deficit accumulates over time, culminating in the national debt. The latest Fiscal Data from the Treasury Department indicates that the US last witnessed a surplus in 2001.
However, President Biden's assertion of a $1 trillion reduction in the deficit is somewhat misleading. While it may appear to be a comparison with the 2022 deficit, data reveals that the 2021 deficit stood at $2.77 trillion, followed by $1.38 trillion in 2022 and $1.7 trillion in 2023. This would show that the federal deficit increased from last year. If President Biden’s assertion to reduce the federal deficit by $3 trillion would effectively place the government in a surplus. Nonetheless, achieving such ambitious deficit reduction through increased taxation on affluent individuals and corporations poses practical challenges given the complexities of the current tax code. Although President Biden's proposal may sound promising in theory, the intricacies of the tax code, including provisions for tax credits, add layers of complexity. Tax credits incentivize certain behaviors or investments, such as the production and sale of electric cars or carbon dioxide reduction, aligning with governmental agendas. Businesses can partake or invest in different things to help increase their tax credits thus reducing their taxable profits. Consequently, while increasing taxes may ostensibly boost revenue, tax credits may simultaneously offset these increments. Thus, despite the rhetoric, the feasibility of achieving such deficit reduction remains difficult in practice.
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* Investing can be unpredictable and volatile. Investors should always do proper due diligence to determine if assets are right for them. We are not licensed tax or financial professionals.
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