22VResearch
DC Policy
August 18, 2021
Pandemic, Process and Politics Point to 4Q Fiscal Stimulus Per Biden’s Plan
Bidenomics is fiscal realignment. It is designed to commit federal capital investment that immediately improves the lives of working Americans and boosts long run economic potential by spurring organic growth. As is true with all presidents, there is a regulatory reform element; President Biden’s competition policy executive order is an example. The president’s economic plan is founded on reversing decades of underinvestment in people and productive capacity. The pandemic exposed several policy and market shortcomings affecting most US communities particularly the working poor, the middle class, and people lacking access to technology. The White House and congressional allies aim to restore America’s global economic competitive posture by promoting sustainable growth that is broadly shared across the socioeconomic spectrum. Biden considers this agenda good economic policy as well as good politics.
This note offers our view of fiscal policy Congress is likely to pass before this year ends.
Outlook
Actions last week in DC bring some clarity to 2021 fiscal policy both in terms of pace and content. Washington is on track to engage the busiest year of fiscal expansion since 2001, distinguished from years in which budget process reforms outweighed the importance of tax or spending decisions (1990, 1985 and 1974). While true the path to Congress accomplishing the president’s first-year agenda is fraught with risks, we have moderate-to-high conviction the bulk of Biden’s American Families Plan, infrastructure program, FY22 appropriations priorities, and innovation investments will be enacted this year. We remain of the mind that shutdowns and especially default are exceptionally low probability outcomes.
Process
The Biden administration is working with congressional leaders to enact four meaningful fiscal policy initiatives before the legislature adjourns at the end of the year. There are a few ways to enact reconciliation, a debt limit increase, infrastructure and FY22 appropriations. Reconciliation is the only one necessary to pass as a standalone measure. No matter the result, fiscal policy over the coming four months will require plenty of bipartisan, bicameral negotiation even on measures that pass by one vote in both or either house. What follows is our sense of each item prioritized by economic, social and market relevance.
Two anticipated constraints make an endgame easier to see. A few senators of the Democratic Caucus have said that Budget Committee Chairman Bernie Sanders’s $3.5 trillion budget plan is too much, and 46 Senate Republicans said they could not vote for increasing the debt limit given the size of the Sanders spending package. We find it increasingly likely a debt limit accommodation will pass solely by Democrats and Independents in reconciliation or as part of a bipartisan continuing resolution. Nine House Democrats recently told Speaker Nancy Pelosi that they would not vote for reconciliation scheduled to be considered the week of August 23 until the House passes the Senate infrastructure bill. These developments mark the beginning of continuous negotiations required to complete Biden’s 2021 fiscal agenda, as is common in the legislative business.
Components
Reconciliation
Reconciliation, created in the 1974 Congressional Budget Act, is an expedited process enabling Congress to pass budget legislation given budget acts are merely concurrent resolutions agreed between the House of Representatives and the Senate that do not become law. The budget committees of each house may instruct the authorizing committee to report legislation achieving certain policy goals. Usually by a date certain committees must report back to their budget committee legislation pursuant to approved reconciliation instructions. The budget committees reserve some flexibility in then cobbling together a bill containing all reconciliation legislation produced by authorizing committees (of course, including the House Ways and Means and Senate Finance committees that produce tax legislation).
Chairman Sanders on August 9 sent a letter to Senate Democrats explaining the reconciliation package passed by the Senate Budget Committee’s majority to begin consideration of Biden’s forward-looking fiscal agenda (as opposed to the 1Q21 American Rescue Plan). Other than the size of the package a few other features standout:
Senate committees have until September 15 to report legislation, a date almost certain to slip since the Senate is not scheduled to return from summer break until September 13.
Debt Subject to Limit
The so-called debt ceiling has a 100-year history marked by Congress and the Executive attempting to control fiscal largess. It was formally begun as a feature of fiscal decisions in 1939. Since then, Congress has asserted itself more firmly in working with Treasury Departments to control Executive authority to create federal debt. The term is a bit of a misnomer, certainly for the last four decades, the artifice has not been much of a constraint on federal debt accumulation. For the past decade Congress has moved under both parties to merely deem the Treasury able to borrow until a date certain.
The debt limit is used as leverage in partisan fiscal negotiations. Often the minority attempts to use the process as an electoral weapon against the majority. We are unaware of a member losing general election race over a debt limit vote. Some spending or taxing decisions can be made into persuasive campaign ads to help challengers beat incumbents but the matter of debt subject to limit has not proven an effective political spear or shield. Our sense is this dynamic would change should Washington ever fail to pay an official bill, i.e., default.
This is a matter watched closely by markets for obvious reasons given the dollar’s reserve currency status and global pricing of fixed income products to the ‘risk-free’ debt the US Treasury issues and manages. Moreover, thousands of legal bills daily created by the US government are owed to American entrepreneurs and companies in every census tract of the country. These realities bolster our doubt we will soon see a US government default.
FY22 Appropriations
Congress and the White House have not agreed to a topline number for FY22 appropriations. Discretionary spending caps agreed in the 2011 Budget Control Act end with the close of FY21. The House nonetheless has passed nine of its 12 bills, the other three await floor consideration. The Senate Appropriations Committee has passed three bills, but none have been considered on the floor. Despite this steady progress it seems a continuing resolution of weeks or months to keep the government funded will be needed, especially because reconciliation and infrastructure will consume the bulk of leaders’ time in the coming six weeks.
We believe it is unlikely the White House and Congress would again agree to discretionary spending cap rules. The current majority is more likely to see the floor voting and presidential veto processes as all the constraint required to make fiscal laws. That is not to say the FY22 appropriations process will not be subject to animated negotiation over intra- and inter-party disagreements. For this and other reasons it is possible the FY22 spending process will be used to craft a debt limit agreement.
Infrastructure
Negotiation and vote count uncertainties aside, we have a strong conviction that a version of the Senate bill is highly likely to be enacted this year. While some House Democrats will portray the bill as a pawn in talks with Biden and Senate Majority Leader Chuck Schumer, it is not much of a chit. This amount of spending provides plenty of options to appease even the most difficult Democrat holdout. It is possible a handful of House Republicans will find reason to support this bill. We believe the House majority will continue to insist that reconciliation be passed before it passes a version of Biden’s infrastructure initiative.
Earlier this month, the Congressional Budget Office reported that increases in physical infrastructure spending would boost private sector productivity and contribute to economic growth for decades. The agency’s model shows differing growth depending on whether the spending is offset by savings in other parts of the federal budget or financed by debt. No surprise that the deficit-neutral option yields higher benefits for a longer duration.
The Senate infrastructure bill and the American Rescue Plan enacted in the first quarter of this year provide general and targeted money for US infrastructure spending. As shown in the accompanying chart federal outlays for everything from highways to waterways peaked in 2002 when measured in 2017 dollars. The last significant ramp up in spending began 45 years ago, lasting only five years.
Total Federal Spending for Infrastructure, 1956–2017 (2017 dollars) |
Source: Congressional Budget Office
Concluding Thoughts
What we have learned about essential workers, critical infrastructure, governance, and growth is that underinvestment creates vulnerabilities to unanticipated shocks. The pandemic and recession fueled 2Q20-1Q21 stimulus. The pandemic and a slim Democratic majority likely will be sufficient to conclude outstanding fiscal legislation this year.
We continue to hold moderately high conviction that “fiscalamity” is unlikely. Worst case outcomes of shutdown(s) or default are not a real possibility because the practical necessity and political rationale are not present. The 2011-2015 threats of fiscalamity came during a period of deeply divided government, a time of no other urgent national or global challenges, and when austerity was popular. None of those conditions exist in the current context. Bad stuff can happen but the 2021 environment cuts against that outcome as an effective political strategy.
