Scenario Three Treble Damages

Senator Joe Manchin’s decision to announce the end of President Biden’s fiscal agenda doesn’t matter to markets as much as it implies the demise of Build Back Better.

We previously published a three-scenario outlook for BBB. The first scenario was our core view that it would be enacted this year. The second scenario pushed enactment into 1Q22 with risks of failure. The third and was that it would never become law. Last week, our core view became scenario three. We find it easier to imagine Senator Machin changing his party registration and caucusing with Senate Republicans as their 51st vote. Whether his name has an I or R behind it is immaterial.

Failure of BBB will have significant ramifications:

• Expiration of childcare tax credits and other 2020-21 income support programs would ramp up pressure on working families, who currently are finding it easier to make rent and pay other bills swelling from inflation with which most wages haven’t kept pace. A White House surprised by Manchin’s statement on Fox News must wonder, along with many Democrats, what they achieved by accommodating Manchin the past six months. This reality further complicates attempts to change Senate rules to force a vote on voting rights legislation.
• Proponents of new green/clean energy programs in BBB, investors included, will need another vehicle but more crucially will need one able to attract 60 votes, probably not to include Manchin. Biden’s economic agenda represented the largest potential one-year investment in renewable energy policy we can recall. Eleven months isn’t a long time legislatively or electorally and disappointments in either category reinforce frustrations for the other.
• Presuming his position holds, Manchin killing BBB will strike House Democrats as backing out on a deal. They had been assured that enactment of infrastructure legislation in October guaranteed a vote on the broader bill. Whether House Democrats blame party leaders, Biden, or Manchin, failure of the Senate Democrats to pass BBB will bust bicameral party trust. This lack of confidence among Democrats can only hurt their ability to work together to minimize midterm election losses that history portends.

Legislation important to most voters will be difficult to enact next year. The minority party feels no pressure to pursue an agenda other than allowing Democrats to flail. Congressional Democrats have less reason to take cues from the president. The administration now turns to agenda items for which they don’t need Congress.

Nonbank regulation, competition policy, and geopolitics will run through the White House but that’s not a great legislative outlook likely to recreate the 2018 and 2020 electoral excitement which disproportionately benefited Democrats. Markets’ interest in these topics is large and growing but not as much to voters more attuned to household economics and the pandemic.

From an economic perspective, even if 2022 real growth exceeds three percent, hyper-inflation will remain a psychological if not real drag on many Americans. Assuming steady but not immediate improvements in supply chain and pandemic sentiment, voters’ mindsets at the end of December 2021 are not on a trajectory favorable for Biden’s party in November 2022.