All of us are depleting metaphors useful to describe the regular policy uncertainty that envelops post-summer Washington. We’ll borrow from a normal escalator ride to convey the sense that it is less deadening to the senses than an elevator ride in which one can see only tight boundaries (except for glass-enclosed transporters which for some provide a different level of anxiety). Escalators provide a clearer view on both ascent and descent in most cases.
Fourth quarters on Capitol Hill usually end with a bang, as will this one. Often, the more significant tasks are completed later in December; less often the bang is failure. This year looks normal and seems trending toward achievement but only after more weeks of likely transitory uncertainty enlivens 4Q21 fiscal policy. Everything resembles quite common behavior for this time of year: (1) the growing intensity of Democrats’ intra-party squabbles; (2) the Senate minority party’s exercise of limited power; and (3) President Biden’s decision to delay infrastructure while reconciliation comes closer to fruition.
We see a healthy if noisy process showing progress. True of most negotiations, ranges of likely outcomes narrow as the days pass. Pending infrastructure legislation was set aside by President Biden as he asked Democrats to focus more on reconciliation. That intervention cannot be surprising and likely was welcomed, if not invited by House Democrats’ leaders.
Any way one cuts it, the reconciliation plan is the core of Bidenomics. Infrastructure is part of the president’s economic agenda, but so too is reshoring of US manufacturing capacity, cleaner energy, worker training and mobility, and support for innovation. None are as expensive and comprehensive as reconciliation’s fiscal realignment intended to boost productivity, improve the lot of working families and the middle class, while modifying the tax code to have high-income earners and businesses finance it.
We continue to believe the votes exist to send infrastructure to the president which cannot yet be said of reconciliation. We also think that the bid-ask spread of $1.5 and $2.1 trillion is trifling in the scheme of things of all things fiscal, indicating factors other than money determine that bill’s fate. These factors include bicameral trust among Democrats, the resolution of tax provisions such as stepped-up basis and state and local tax deduction details, and President Biden’s ability to help Democrats conclude stimulus negotiations. The relatively easy end to FY21 ($35 billion of supplemental spending) and the start to FY22 (at least until December 3) should reassure escalator riders and watchers that abnormal drama isn’t yet getting a bid.
Reconciliation and the debt ceiling debacle will remain the scarier parts of the ride until resolved. The tightness of the spread portends a successful resolution. However, the potential for inflexibility between a few senators and the House leaves plenty of space for surprises but only if one of those senators decides to bring down the entire package. Only one senator among the 48 Senate Democrats and two Independents hasn’t yet indicated support for reconciliation.
We’re dubious that any one of those senators intends to scuttle the president’s economic agenda unless Senator Sinema thinks doing so helps her run as a Democrat or Republican in 2024, is good for Arizona and the country, or she intends to walk away from politics before re-election. While plausible, it’s a stretch to presume she’s doing anything but searching for a path to appease voters and funders – an exercise most elected officials engage in every day.
Ironically, adjusting the debt ceiling is the least legislatively complicated but most immediately consequential item of the 4Q21 “Fiscal Five”. This section of the escalator continues to have broken steps, faulty guardrails, and frequent unannounced malfunctions. Any transit rider is familiar with the spectacle of escalators under repair while buses and trains are operational. Frustration and delays are routine.
Last week, Secretary Yellen surprisingly brought more uncertainty to the process by telling the House Financial Services Committee that there might be some wiggle room in the October 18 default date established by her in a letter to Congress earlier last week. It’s possible this will become of interest but even if it is a departure from Treasury practice, it does not alter the fact that Congress will need to modify the debt ceiling to avoid US default this month. We do not yet detect risk of default happening. Default angst obviously overshadows all else.
Unlike elevator rides, one can usually see what’s ahead while on an escalator whether it’s going up or down. Friday brought some clarity to the Biden administration’s economic agenda as the president became a stronger factor in private House deliberations. The bid-ask spread on stimulus has been $1.5 – $2.1 trillion for two months and this was acknowledged on Thursday. Enactment of appropriations legislation isolated the debt ceiling matter as the only one of five fiscal pieces shrouded in thick uncertainty. We expect that to change this week. With plenty of angst still attached, we continue to see this escalator ride ending well for proponents of Bidenomics
