Bad News On The Horizon, I Fear

An economy can only make so much butter at the same time as so many guns. Taken to an extreme, you end up with cows making howitzers   PJ O’Rourke

Congress is coming back to Washington next week to continue the Kabuki theater that they actually accomplish anything. And on the list is a floor vote that House Speaker Nancy Pelosi is expected to call to advance the Build Back Better bill to the Senate for approval. But it is appearing more and more that the bill is in deep shit. And this time, you can’t just blame Joe Manchin, at least not directly.

I fully expect that Pelosi will honor her promise, and that the half a dozen or so moderate House Democrats will buy into the budget scoring that shows that the bill will pay for itself over time. And when it gets to the Senate, I fully expect that the Senate Democrats will negotiate in good faith and try to return a product that the House can sign off on and vote into law. But there’s a problem.

The problem is timing. The Democrats had the chance to strike when the iron was hot, and thanks largely to the intransigence of Judas Joe Manchin and Grand Canyon Barbie, Arizona Senator Kyrsten Sinema, they blew it. The Climate was right, Biden was popular, the bill was wildly popular, and the Democrats pissed it all away.

The problem is that the paradigm has changed. In the last couple of weeks, the dread work inflation has reared its ugly head. Mostly it is due to Covid related slowdowns of critical infrastructure that has led to an incredible break in the supply chain, ships bearing goods taking weeks instead of days to be offloaded at ports. And then there is a shortage of more than 100,000 truck drivers to get the containers from the docks to their destinations. As a result, goods are in short supply, and prices are going up.

But now, in the last couple of weeks, a new factor has popped in as inflation has risen. Between the Democratic led Covid relief packages that were signed by Trump, as well as the Covid and unemployment relief bills signed by Biden, more than $3.5 trillion into the economy in just over a year. And economists are saying that this has violated the law of supply and demand.

If there is more milk on the shelves than there are people to drink it, obviously the price has to come down to move it off of the shelves. If there isn’t enough beef to go around, obviously the price will go up in order to purchase it. The same thing holds true with dollars. There is a balance line there. And in the last year, the federal government has dumped more than $3 trillion in new currency into the economy. And if there’s too much money in the pool, it doesn’t buy as much anymore.

And even if the CBO score shows that the bill is completely paid for, and even if it will lower inflation, it won’t do so for 2-3 years. And in the meantime, it is dropping $1.75 trillion more new federal dollars into the financial system. Senator Joe Manchin has been publicly complaining for months now about the severe risk of rising inflation due to the sudden influx of all of these new dollars into the economy, and now he has multiple reputable economists backing up his concerns.

There is one mitigating factor that the administration can use to try to balance the scales. For months now, the Federal Reserve Board has been dumping billions of dollars into the stock market, buying stocks to provide additional liquidity to the markets. This is absolutely nonsensical in an atmosphere where there is so much cheap money sloshing around. If the Fed not only stops pumping billions more into the stock market, but also starts selling off some of its long positions in stock it bought, and pocketing the profit, it can at least start tipping the balance back again.

From where I’m sitting, there are two ways that this can go. First, the Build Back Better Act dies in congress, simply because it is too toxic to pass it amidst the fears of rampant inflation. This would be a serious blow to the Biden agenda going into the 2022 midterms, but at least it wouldn’t make things worse by increasing inflation.

The second option is that the Democratic Senate actually locks in, makes tweaks to the House’s bill, and sends it back to the House for passage for Biden to sign into law. This would give Biden a huge victory on the signature item if his first term agenda. But then it would be up to the Democrats to sell and ensure that the benefits that everyday American felt from the implementation of that act were enough to make them forget about the inflation. As Washington Congresswoman Pramila Jayapal put it, Hell, if my child care is covered, I can afford to spend a little more on milk and gas. It’s a matter of balance and optics.

This is the problem with a big tent party. Shit takes too long because everybody wants to stick their two cents worth in. In the summer, Biden was riding high on popularity, and both infrastructure bills were wildly popular. But Manchin and Sinema had to fritter that opportunity away, and now, either option left is fraught with peril. Personally, I think the Senate will pare the House bill down a little, pass it, and the House will pass it for Biden’s signature. This is just too important. And then we’ll see what kind of a salesman Biden really is. Don’t touch that dial.

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