How Can Biden Save His Agenda After Manchin Played The “Grinch”?

Dec 21

In a stunning reversal, Sen. Joe Manchin (D-WV) has flatly refused to support President Biden’s Build Back Better (BBB) Plan, because he fears the $2.2 trillion of spending programs would spur inflation and increase Federal deficits. Manchin is simply wrong on the inflation issue. The Senator does have a fair point about the possible impact on Federal deficits, although his concerns are exaggerated.

What can President Biden do, at this point, to avoid a fiasco?

First, the President and his team have to confront the inflation issue head-on and convince the public that Manchin’s fears are misguided.

Time To Put the Screws on Sinema

Second, the Biden team should address Manchin’s worries about the deficit…by going after Sen. Kyrsten Sinema (D-AZ). She is the only Democratic Senator who does not favor repealing Donald Trump’s massive, unproductive $1.7 trillion of tax cuts. If Biden could convince Sinema to support increasing taxes on corporations and the top 0.1% of individual taxpayers who benefited from the Trump cuts, that would greatly reduce any impact BBB might have on deficits and the national debt.

Sinema has raked in huge amounts of campaign contributions from companies that appreciate her willingness to buck her party and keep their tax rates ultra-low. Sinema won’t change her mind easily. It’s time for Biden to have an LBJ-style talk with Sinema and threaten to support a primary challenger against her in 2024. That might lead the Senator to revise her thinking on the Trump cuts and return to her original position. After all, Sinema opposed the proposed tax cuts in 2017.

Third, Biden may have to trim further some BBB programs to win Manchin’s support. The toughest negotiations could take place over the expanded child tax credit and the provisions on fighting climate change. Those are the two most crucial components of BBB, and Biden should probably hang tough on both programs. In this article, we’ll focus on the expanded child tax credit program (family support payments.)

There’s no guarantee that Manchin would change his mind, of course, even if Sinema came around. It’s a long shot. But this course of action may be Biden’s best hope for saving his social programs…and, perhaps, his presidency.

Covid, Not Washington, Caused Inflation

President Biden and his team face two critical tasks. They must counter Republican propaganda on inflation and save as much of their social agenda as possible. The two are closely related. The Democrats must win back the public’s trust on inflation, so they can succeed in passing their spending programs…which are very popular with voters.

Unfortunately, Sen. Manchin has swallowed the Republican line on inflation. He believes that prices have jumped because of the large government Covid relief programs. However, most economists have emphasized that the main causes of inflation have been the immense dislocations that the pandemic has caused in the work force and global supply chains, not government spending.

The emergency safety net programs protected millions of desperate Americans who were out of work for many months. Biden’s Covid relief program also helped to spur a robust economic recovery, which has cut the unemployment rate. These initiatives have had an overwhelmingly positive impact on the economy. Although these measures may have triggered some inflationary pressures, the labor and supply chain issues are the main drivers.

For Republicans, “Inflation” Is the New “Socialism”

Republicans complain that generous unemployment benefits and other government support payments led to huge jumps in consumer spending and therefore higher prices. But these claims ignore a key fact: for most Americans, those government checks did not increase their income or spending power. They simply replaced lost income.

And the child tax credit has primarily helped poor Americans, who don’t have much money to spend, period.

So the government assistance payments did not greatly increase overall demand for services and goods or significantly boost inflationary pressures. The Democrats have to win the battle for public opinion on this point, so they can put more pressure on Manchin…and defend themselves against Republican attacks in the mid-term elections.

Don’t Blame the Government for Higher Gas Prices

Prices for lumber and gas did not rise because unemployed Americans, or low-income Americans, were putting extensions on their houses or roaring around in their SUVs. They used their government support payments to buy groceries or pay the rent.

Affluent Americans who work remotely often have saved a lot of money during the pandemic, because their expenses fell. Many of them went on a spending spree. But that had little to do with any government checks they received, which were modest relative to their incomes.

Furthermore, unlike the Covid relief measures, the BBB programs would represent long-term investments in our country’s future. They would be implemented over ten years—a fact that Republicans and Manchin ignore—so they would have little short-term impact on consumer spending or inflation. Economists have estimated that BBB programs would increase inflation by only 0.1% to 0.2% a year.

Republicans Indulge Their Inner Scrooge

Under Biden’s expanded child tax credit program, the government has sent monthly checks of up to $300 per child to 35 million families. For struggling working-class and lower-middle class families, these annual payments of $3,000-$3,600 have been a godsend. They have made the difference between a decent life and a miserable existence wracked by poverty and anxiety. However, because the BBB bill has not been enacted, the authorization for the expanded program will lapse in a few days.

Economists have estimated that the expanded tax credit would cut children’s poverty by half, if it were permanently extended. You might think that would be the most relevant consideration. After all, why should kids go hungry?

But since it is Christmas, it’s a good time for Republicans to indulge their inner Scrooge. Republicans have suddenly rediscovered that deficits are important, and they are worried that giving money to low-income people could lead to…inflation!

Michael Strain of the American Enterprise Institute, a conservative think-tank, linked these concerns about the BBB bill explicitly in a recent opinion piece for the New York Times Powell Needs to Cool the Economy Now :

“The bill would also increase household income through more generous tax credits and deductions, encouraging consumer demand and putting more pressure on inflation. Moreover, the one-year expansion of the child credit in the current bill could be extended. If so, Build Back Better would increase the deficit by around $400 billion over the next two years.”

In other words:

“Oh my God, the price of Cheerios could soar if we give all these families more money!”

Crying Wolf About the Deficit

Manchin has said that he opposes extending these family support payments for more than a year. This is partly because, like Strain, he is worried about increasing the Federal deficit. Manchin also accuses Biden of playing accounting games by not including the full cost of the family support payments in the BBB bill.

That’s a reasonable objection, although such budget fudges are common in Washington, particularly by Republicans. The bill includes $185 billion for the family support payments, but that covers only one year. To be fair, Biden has promised to offset any extensions with new taxes. Still, it would be more accurate to include the program’s cost for 10 years, which the Congressional Budget Office estimated at $1.6 trillion.

Strain is worried that the deficit would rise by another $200 billion a year, if the child tax credits were expanded permanently.

Let’s put the deficit number in context. Thanks in large part to Donald Trump’s $1.7 trillion of tax cuts, the annual Federal deficit roughly doubled during his administration, from $500 billion in 2016 to almost $1 trillion in 2019. The Congressional Budget Office has estimated that those tax cuts presently represent about $200 billion of the annual deficit on a run-rate basis. That trend has apparently not bothered Republicans.

Giving Manchin Political Cover

If Sinema played ball, and the Democrats reversed the Trump tax cuts, they could offset the deficit increases caused by extending the family support payments. And as Paul Krugman noted in What We Lose if We Don't Build Back Better, the long-run returns on investing in children are huge. They dwarf any short-term costs.

Manchin also argues that the expanded child tax credit should not be provided to Americans who earn more than $200,000, because of his concerns about “excessive spending”. However, during his campaign, Biden promised repeatedly not to increase taxes on Americans with incomes below $400,000. Manchin’s proposal directly clashes with that promise. But if Democrats reduced or eliminated the family support payments’ impact on the deficit, by raising taxes, that might give Manchin political cover on this issue.

Putting The BBB Programs in Context

Here are some more numbers for context. Manchin and Strain are worried about inflation, right? The size of the U.S. economy is $22.7 trillion. The expanded child tax credit program would cost $185 billion a year, or less than 1% of GDP.

The nominal cost of all BBB programs would be about $2.2 trillion, but that assumes that some programs continue for only one year, which is not realistic. If we assume that all programs were extended permanently (also not realistic, probably), the total annual cost of Build Back Better programs could be roughly $450 billion or about 2% of the economy.

It’s hard to see how these amounts would affect the price of Cheerios…or of anything else, for that matter.

The Wall Street Democrat

Ryan O’Connell