Last Thursday, Sen. Joe Manchin (D-WV) threw President Biden’s campaign for trillions of dollars in new spending into chaos.
“Some in Congress have a strange belief that there is an infinite supply of money to deal with any current or future crisis, and that spending trillions upon trillions will have no negative consequences for the future,” Manchin wrote in the Wall Street Journal. “I disagree.”
Manchin warned an “overheating economy” was imposing an “inflation tax on every middle- and working-class American.” And he called on Democrats in Congress to “hit a strategic pause” on their efforts to craft a package of spending and tax increases.
This is a problem for Biden: the Senate is split 50-50, with Vice President Kamala Harris casting the tie-breaking vote. Biden will need every single Democratic senator in order to pass the plan—including Manchin.
Manchin’s fiscal concerns have grown over the summer, as inflation spiked to levels not seen in decades. Though the Biden administration has good reason to find Manchin exasperating, Manchin’s agitation is in part a problem of their own making. In an admirable attempt to speed the recovery along faster than the 2010s recovery, Biden unleashed a torrent of cash all at once. A steadier release of that same money might have been similarly effective but quelled moderates’ fears.
Democratic policy advisors feel 2010s regret
President Biden entered office with a clear fiscal agenda: boost the recovery and return to full employment by pumping trillions of dollars into the economy. In March, Biden’s $1.9 trillion American Rescue Plan became law. It fulfilled a campaign promise of $1,400 direct payments to most Americans. And it expanded unemployment benefits and bolstered the child tax credit. It was almost entirely deficit-financed, as a breakdown from the nonpartisan Committee for a Responsible Federal Budget (CRFB) shows.
Biden wants to follow up with a budget plan that cleared its first procedural hurdle in the Senate last month. While the plan calls for as much as $3.5 trillion in spending, it could be negotiated down to a smaller number, and some of it will be “paid for.” The Senate’s blueprint would allow (though not require) up to $1.75 trillion of new borrowing, according to the CRFB.
Why so much money, and why so much deficit finance? This is best explained by a phenomenon I’ll call “2010s Regret.” It took more than a decade for employment to return to previous levels after the 2008 recession. As I’ve written previously, some economists—including several key Biden advisors—believe that could have happened faster.
A generation of economists analyzed that slow recovery and concluded that insufficient fiscal stimulus was a major culprit. After passing stimulus bills like the American Recovery and Reinvestment Act (ARRA) in 2009, Democrats pivoted to relatively deficit-neutral politics—sometimes willingly, sometimes under pressure from House Republicans. Several of these economists are now among the president's senior advisors, and they're dead set on avoiding the same mistake:
- Jared Bernstein, a member of Biden’s Council of Economic Advisors (CEA), argued that the pivot to deficit neutrality was a self-inflicted wound, warned about cutting off unemployment benefits too early, and stated that a lack of federal aid had caused states to make counterproductive layoffs.
- Heather Boushey, another CEA member, pioneered an initiative in 2019 called Recession Ready, for planning a response to the next crisis. She argued for “automatic stabilizer” measures that kick in immediately when times get tough, and then recede once support is no longer needed. Boushey further argued that “direct payments are fast and can be executed on a large scale.”
- Martha Gimbel, a senior advisor to the CEA, forcefully argued that even the late-2010s job market still had room to run on intensive margins like hours worked.
- Ernie Tedeschi, a senior policy economist at the CEA, worried in March 2020 that the fiscal response to COVID-19 would be insufficient.
This explains a great deal about the American Rescue Plan. By the time Biden entered the White House, there had already been several rounds of pandemic-related stimulus spending. But Democrats passed another big spending bill—one that pushed money out the door quickly.
The $1,400 checks hit people’s bank accounts within weeks, and Democrats wrote new provisions to make the child credit available immediately, rather than during tax filing season. They got their aid to states and extended unemployment benefits—policies that Biden’s more dovish advisors wish Obama had gotten in the early 2010s.
The inflationary moment that shook Joe Manchin
The result was that a ton of money was released into the economy at once, and this dramatically increased personal income—a contrast to the decrease in personal income seen in 2009.
The Biden administration was right to focus on avoiding the mistakes of the 2010s. We would have been miserable if incomes had fallen. But as you can imagine, the erratic personal income figure had some side effects. While Americans could in principle smooth out that spike by spending the money slowly over time, many spent it immediately.
Meanwhile, the real side of the economy, especially in service sectors, was not quite ready for the return to normal. The federal government spent enough to bring everyone back to work, but a combination of COVID-19 and policy factors prevented a return to full employment.
One problem was that the COVID-19 pandemic itself had not fully abated in mid-2021. Between consumer and worker hesitance and occasional state or local laws restricting business, some firms simply were not ready to return to normal at the time that the Biden fiscal impulse hit. Another problem was the incentives of the extended unemployment benefits, which reduced the urgency for many to return to work. Finally, there were deep problems in supply chains, especially in semiconductors, that were completely out of Biden’s control but nevertheless affected economic performance under his watch.
These factors all held back the recovery of the real economy, even as Biden ensured nominal spending recovered fully. Such a combination, mathematically, produces inflation. In this case, kind of a lot.
Inflation per se is not an emergency. High costs for one person are high revenues for another person. Inflation should abate as supply chains are repaired, firms return to their usual levels of efficiency, and workers return to work. The fiscal boost from the American Rescue Plan will fade. Over the longer run, money tends to “slow down” as it finds its way into the hands of savers or tax collectors. Therefore inflation is likely to be temporary as the recovery continues.
It was probably worth it to avoid another miserable, glacial recovery like the 2010s. However, you can see why such an erratic performance spooked Manchin, and how the Rescue Plan set itself up for blame.
Manchin is now warning of overheating, and applying those concerns consistently across the board. For example, he is also urging the Federal Reserve to reduce the level of monetary accommodation, in addition to asking for a fiscal pause.
Manchin’s worries limit the agenda
Many national Democrats have responded with rage: “Joe Manchin has put Biden’s presidency in mortal danger,” thundered Jonathan Chait. But even critics like Chait recognize that Manchin’s words here are sincere and important, not just perfunctory triangulation: “this is signal, not noise. And the signal Manchin is sending is worrisome. For the first time, Biden is staring at the plausible vision of a failed presidency.”
Democrats believe Biden has an opportunity for a legacy-defining achievement on par with Obama’s Affordable Care Act (ACA). Where Obama focused on one issue—health care—Biden’s agenda is spread out over multiple issue areas. Paid family leave, expansion of ACA or Medicare, universal pre-K or community college, and green energy investments are all on the table.
Manchin’s pushback puts some hard limits on these aspirations. To quantify those limits I talked to the Progressive Policy Institute’s Ben Ritz. Ritz is a member of an endangered species: Biden Democrats who aren’t furious with Manchin.
Ritz, a meticulous budgeter, immediately describes an arithmetic problem. “Centrists want it to be fully paid for, but they also have in their mind a pool of acceptable revenue offsets. That puts a ceiling at a certain amount, which is substantially less than $3.5 trillion,” he tells me.
Ritz sees the demand for full offset as reasonable in principle. But it is difficult in practice. If Manchin is no longer open to deficit financing, then any Biden programs may need offsets like tax increases. But those engender opposition, and Manchin is not an eager tax raiser, either. His op-ed does not specify any that might be acceptable.
There’s another reason it’s hard to satisfy moderates: Ritz notes that Manchin’s West Virginia, a low-income rural state, is a different constituency than the wealthy suburb represented by fellow centrist Rep. Josh Gottheimer (D-NJ). Both have limited appetites for tax increases (Gottheimer is even pushing for a tax cut that would benefit his district) but the different material interests of their constituents mean they are likely not imagining the same pool of acceptable tax increases. This makes the math even harder. While the odds are that Biden will find a way to bring them all along in the end, he will only be able to do so by substantially cutting back his ambitions.
A better approach?
So was there something Democrats could have done differently to make this situation politically easier? Probably. Ritz suggests that the American Rescue Plan could have been structured with a smooth, systematic release of funds, perhaps using the kinds of automatic stabilizer policies favored by Boushey.
A more incremental release of money, an approach also favored by the CRFB’s Marc Goldwein and Upwork’s Adam Ozimek, could have softened the inflation numbers—or at least made the Rescue Plan less culpable for those numbers. This in turn might have helped allay moderates’ concerns.
But Biden’s plan released a flood of money at once. “It was too much money to be done in that short period of time,” Ritz said. But he understands why the plan came out the way it did: “It's totally an overcorrection. We over-learned the lesson of the last fight.”
I see this as the latest step in a cycle of missed opportunities and overreactions for Democrats dating back over a decade. Pride in Robert Rubin-era fiscal restraint led to an insufficient recession response in the Obama era, which was locked in after the 2010 Republican takeover of the House. Regret at that insufficient response led to a powerful front-loaded surge of spending in 2021, which contributed to near-term inflation as the economy strained to keep up.
Now it may be Manchin’s turn to overreact. But he is missing a few things. First, he may be attempting to address supply-side problems with a demand-side solution. Production problems cause inflation, but making people poorer through spending cuts or tax increases is hardly a satisfying way to address the root cause, and will result in too little demand after those supply-side issues abate.
Furthermore, Manchin may be too focused on short-run indicators and missing the longer ones. There are a variety of forces, like demographics and technology, that tend to push interest rates downward in most economies. Biden’s current problems notwithstanding, countries tend to struggle much more with underheating than with overheating.
While this phenomenon has a lot of downsides, one upside is that countries have much larger fiscal capacity to borrow than one might expect. And in fact, markets remain willing—even eager—to give Biden those borrowing rights, even as the very near-term economy runs hot.
Biden’s next ideas are projects for the long term, where that borrowing ability lies. Biden wants to fill that space with longer-run spending, but Manchin stands in the way. This could be the next missed opportunity. If the longer-run fiscal space remains conserved throughout Biden’s presidency, it may be delivered to a Republican just in time for a tax cut.