It’s crunch time for Biden’s agenda
No one said governing would be easy. After the 2020 elections, most investors thought President Biden would have to settle for a pared down legislative agenda because Democrats controlled both houses of Congress by the narrowest of margins. Instead, Biden bought the progressives’ argument to be big and bold after successfully enacting a $1.9 trillion COVID-19 relief package. But it has proved far more difficult for Democrats to agree on the $3.5 trillion reconciliation bill passed by the House of Representatives.
The logjam has left people wondering whether the Democrats can govern effectively. Faced with waning public support for Biden’s agenda, they are coalescing around a truncated bill that is roughly one half the size of the House bill. But many of the spending and financing components are unresolved.
From an investor perspective, one positive is that Democrats are being forced to prioritize spending from their long wish list of programs. But some skeptics claim the concessions are “phony.” The editorial board of the Wall Street Journal, for example, contends “Biden is bowing to the left by keeping new entitlements and disguising their cost.”
Specifically, the latest plan calls for three programs in the House bill to be scrapped — free community college tuition, paid family work leave and the Clean Electricity Performance Program (CEPP). The cost of other big-ticket items such as the child tax credit (CTC) and Medicare expansion is lowered by limiting the applicable time period while provisions permit them to be extended when they sunset.
Cornerstone Macro estimates that the 10-year cost of the package would meet or exceed $4 trillion if none of its provisions were sunset. In my view, this calculation overstates the price tag considerably, because it presumes Democrats will retain control of Congress and extend major provisions for the next 10 years. It also understates the tough choices progressives are being forced to consider to gain approval from Sens. Joe Manchin (D-W.Va.) and Kyrsten Sinema (D-Ariz.).
One of the most significant changes is in Biden’s climate agenda. The CEPP is a $150 billion program that was designed to replace coal and gas-fired power plants with wind, solar and nuclear energy, which was dropped as a concession to Manchin. The New York Times called it the “muscle” behind Biden’s ambitious climate agenda.
According to the Wall Street Journal, Biden’s team is working on a revamped strategy that will reallocate CEPP money to a new program that achieves meaningful emissions reduction. The bill reportedly will devote about $500 billion to subsidize green energy, with about $300 billion in the form of tax credits. It will also entail increased regulation from the Environmental Protection Agency (EPA) for companies to control methane emissions. But the bill is unlikely to include a carbon tax that is considered by many economists to be the most efficient way of tackling climate change and a source of revenue.
Health care is another major area up for grabs, as new health spending in the House bill exceeds $1 trillion. The most expensive item is the expansion of Medicare benefits to include dental/vision/hearing that totals $370 billion that is supported by Sen. Bernie Sanders (I-Vt.). But with the Medicare trust fund for hospital insurance projected to run out in 2026, adding massive new benefits is a big concern for Manchin and other moderates.
Another major goal of the progressives is to cut drug prices for consumers. They envision it would save the federal government more than $500 billion over 10 years. But a CBO report concludes it would also lower expected returns on drugs by 15-25 percent and “could result in between 21 and 59 fewer drugs brought to market over the next three decades.”
So, what it the likely economic impact of a truncated bill? Not surprisingly, the answer varies depending on which research organization you read.
The Economic Policy Institute, a left-leaning think tank, contends that cutting the reconciliation bill to Manchin’s preferred $1.5 trillion would result in nearly two million fewer jobs per year than the Biden administration’s Build Back Better (BBB) plan.
By comparison, the Tax Foundation, a conservative think tank, estimates that the original House bill would reduce economic output by nearly 1 percent over 10 years and eliminate about 300,000 jobs due to the added tax burden involved and lessened incentives for people to work. An analysis based on the Penn Wharton budget model also concludes that the original bill would lower GDP by more than 1 percent for each of the next three decades.
My advice for investors is to look past the political rhetoric on both sides and focus on the costs and benefits of the individual programs. That said, the task is formidable because the reconciliation bill is extremely complex: It attempts to tackle health care reform, climate change and education programs and enlarge the social safety net at the same time. Each of these normally would be stand-alone pieces of legislation. It is hardly surprising, therefore, that Democrats are struggling to obtain a consensus about what the bill should contain and how it should be funded.
Finally, one concern investors had with Biden’s original agenda was that it would add materially to the budget deficit in future years. There is now less risk of that happening. Morgan Stanley estimates that the pared down bill will cumulatively add about $750 billion to the deficit over 10 years, or $75 billion annually. This compares with the $5 trillion – $6 trillion in federal funding for COVID-19 relief over the past two years.
In the end, a truncated bill would be a less ambitious social program than what progressives envisaged and more in line with what investors have been expecting. Meanwhile, passage of the $1 trillion bipartisan infrastructure bill that will help alleviate supply chain disruptions and climate change hangs in the balance. One can only wonder if progressives believe that no loaf is better than half a loaf.
Nicholas Sargen, Ph.D., is an economic consultant and is affiliated with the University of Virginia’s Darden School of Business. He is the author of “Investing in the Trump Era; How Economic Policies Impact Financial Markets.”
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