Crunch time for Biden's economic plan: "failure is not an option"

President Joe Biden pitches his infrastructure spending bill during his visit in Colorado. Photo / Leah Millis / Reuters

On his way back from a trip to the West Coast this week, United States president Joe Biden made a stop in front of solar panels and a giant windmill in the foothills of the Rocky Mountains to make the best pitch he could summon for his multitrillion dollar economic agenda.

"We've set a goal, and the goal is achievable. I promise you, I promise you," the president said on the outskirts of Denver, Colorado on Tuesday.

"It's going to create great economic growth, reduce inflation, and put people in a place where those beautiful children in the back are never going to have to worry about what we're worrying about right now."

With Congress returning fully to work next week, the Biden presidency is entering a crunch period.

The verdict on modern presidents, even those who get re-elected, often hinges around legislative achievements in their first 18 months.

For all the noise and recriminations over the summer around the chaotic withdrawal from Afghanistan and the spread of the Delta variant, the next few weeks of negotiations over the president's spending plans are a defining moment.

If the White House has its way, Biden will secure congressional approval to plough nearly US$5 trillion, combined from two pieces of legislation, into infrastructure, childcare, education, healthcare and the fight against climate change, partly funded by tax increases on the wealthy and corporations.

Politically, this would represent a huge legislative victory for Biden after a brutal summer that has led to a fall in his approval ratings.

It would also allow congressional Democrats — with help from the president — to tout the bills as tangible help for lower and middle income US families heading into the 2022 midterm elections, when they are at risk of losing their slim majorities in both the House and the Senate.

But if the bills falter, it could leave the 78-year-old president looking politically vulnerable and would undermine his pledge to both voters and the rest of the world that he can restore the potency of American government.

"The big promises he made to build a more stronger, more stable economy are riding on these investments," says John Podesta, White House chief of staff under Bill Clinton.

"It's the 'live-or-die' moment in terms of whether you get it through, and whether you get it through intact."

What gets cut?

Securing passage of the measures through Congress is far from guaranteed, however.

While one bill calling for US$1.2 trillion in physical infrastructure spending — from roads to bridges and broadband — has some Republican support, the larger, US$3.5t chunk of Biden's spending plans, including the tax increases, only has backing from Democrats, which leaves hardly any room for defections within the president's party.

In March of this year, shortly after Biden's inauguration, Democrats united around his US$1.9t fiscal stimulus deal to propel the US economy out of the winter downturn triggered by new waves of coronavirus infections.

But getting lawmakers to rally around a far larger package, including the associated tax increases, was always bound to be a much heavier lift, particularly for moderate and conservative Democrats.

The bill calling for US$1.2 trillion in physical infrastructure spending has some Republican support. Photo / Bloomberg

This week, Biden spoke to some of the main actors involved in the talks: he invited Joe Manchin, the West Virginia senator, and Kyrsten Sinema, the Arizona senator, to the White House, in a bid to win over the most sceptical moderate Democrats.

He also held a call with Nancy Pelosi, the House speaker, and Chuck Schumer, the Senate majority leader, to finesse their negotiating strategy.

"There are those who want to see the package trimmed. And there are those that want to see the package fully paid for with no kind of funny business. I think the most important dynamic is how much money can they raise, and how much investment does that cover? And if it's not US$3.5t, what gets cut?," says Podesta.

Complicating matters even further is that the US is running up against a deadline of the end of the month to keep the government funded or risk a federal shutdown, and could risk a default on its sovereign debt if it does not raise its borrowing limit soon.

"Failure is not an option for Democrats and for the president. But how this all fits together . . . is maybe the most complicated Rubik's cube you can imagine," Mark Warner, the Democratic senator from Virginia, tells the Financial Times.

Biden's Democratic predecessors learned the hard way early in their administrations how difficult it can be to achieve the sort of big legislative goals that shape a legacy — even though they had much larger majorities.

Barack Obama endured months of excruciating negotiations over his signature healthcare and Wall Street reforms before they finally passed, while Bill Clinton's efforts to reform healthcare eventually ended in failure after more than a year of haggling.

Global impact

The global ramifications of Biden's fiscal negotiations are also significant.

Adopting Biden's climate measures would signal America's commitment to reducing carbon emissions — creating additional momentum for a deal at the Glasgow COP26 summit in November.

Meanwhile, US pledges on the creation of a new international corporate tax regime at the OECD are contingent on those provisions in the deal being approved by Congress.

More broadly, US officials have said it would be crucial for the Biden administration to massively ramp up its domestic investments, at least initially, to more effectively project its power around the world and prove that democratic systems can be functional.

"You've got to reset the table in terms of strengthening institutions, but most importantly, strengthening the idea that the government can do good things to help people's live," says Warner.

Josh Lipsky, director of the GeoEconomics Center at the Atlantic Council, a think-tank, says within the next few weeks the US could either see Biden "fail to advance the core of his domestic agenda", coupled with a debt ceiling crisis, or clinch an increase in the borrowing limit together with "a major compromise" on both physical and human infrastructure, that would have it spending more on "rebuilding" than any other country.

"Those are two very different scenarios for the world to see coming into October. And both are up in the air right now," says Lipsky.

Slowing growth

The uncertainty and division over the fate of the Biden administration's spending plans coincide with a turning point in America's rebound from of the pandemic.

The ultra-strong expansion recorded in early 2021 has already given way to more moderate growth, and a sudden slowdown in job creation, as a result of the alarming spread of the more contagious Delta coronavirus variant.

Economists have moved quickly in recent weeks to slash their forecasts for the year as a result, solidifying the view that the pace of the US economy's recovery is now past its peak.

"The bumper sticker would say, we're past the V," says Michael Gapen, chief US economist at Barclays, referring to the shape of the recovery since the shocking collapse last year.

"We've had the big contraction and we've had the big rebound. We are entering something that looks like a traditional recovery phase where growth rates should be decelerating."

Even so, the Federal Reserve is also preparing to ease its policy support, beginning with a scaling back of the US$120b-a-month asset purchase programme that was put in place last year to shore up financial markets and bolster the recovery.

"This has been a government-supported recovery to an extent that we have never seen historically, but what we are seeing now is a handoff from the government-supported economy to an economy that needs to stand on its own two feet," says Nela Richardson, chief economist at ADP Research Institute.

The inflation outlook has also become more complicated, with early signs that some of the sharp price jumps reported for sectors most sensitive to pandemic-related disruptions — including used cars and travel-related expenses — are fading, although they are potentially being replaced by more persistent price pressures elsewhere.

"We are seeing transitory inflation turn into transitory deflation for some categories, yet for other categories it looks like there is a broadening out of inflation somewhat," says Michelle Meyer, head of US economics at Bank of America Merrill Lynch.

Benefits for all

Many Republicans see Biden's spending plans as pure folly at this stage in the recovery, arguing that the investments are unnecessary, the tax increases will be damaging, and the result will be some form of stagflation.

"They're eager to jam through yet another massive, multi-trillion-dollar reckless taxing and spending spree — an effort to move our country to the left forever," Mitch McConnell, minority leader, said on the Senate floor this week. "It's the last thing American families can afford."

But Democrats and the White House brush away any concerns that this part of their economic agenda will be inflationary, since the spending is spread out over 10 years and will be mostly paid for by increases in government revenue, unlike the deficit-financed immediate stimulus.

Joe Biden also called Nancy Pelosi, the House speaker, to finesse their negotiation strategy. Photo / Samuel Corum / Bloomberg

Over the long term, they expect it to boost America's growth potential, by finally addressing chronic under-investment in critical public goods, and making the tax code less tilted in favour of the wealthy, thereby reducing entrenched income and racial inequalities.

Jay Campbell, a Democratic pollster at Hart Research, says that even if the final bill is watered down and reduced in size to accommodate centrist Democrats, it will still be a politically beneficial result for the party.

"It's going to impact people's lives in many different ways, in ways that will be ultimately helpful to them — and Democrats will have something to point to as a real accomplishment of the first two years of unified party government," he says.

After returning to Washington from Colorado, seeing Republicans continuing to assail the package and Democrats still squabbling, Biden delivered a new speech from the White House, which seemed designed to rally his own troops to pull together and plough ahead in the final stretch of the legislative process.

"This is an opportunity to be the nation we know we can be — a nation where all of us, not just those at the top are getting a share of the benefits of a growing economy in the years ahead," Biden said.

"Let's not squander this moment trying to preserve an economy that hasn't worked too well for Americans for a long time."