Biden’s $1.9 Trillion Win on Covid Aid Hobbles Rest of Agenda

(Bloomberg) -- There's little doubt President Joe Biden had it right when he called the $1.9 trillion pandemic relief package that Democrats rammed through Congress a year ago one of the most consequential in U.S. history.

The trouble is that he didn't envisage some of the consequences.

The “American Rescue Plan,” including one final round of stimulus checks among its welter of transfer payments to families and local authorities, was designed as a short-term bridge to an even bigger $4 trillion long-term economic program -- one designed to revamp and rebuild the economy and society.

Instead, economists and former officials say, it contributed to a sustained pace of high inflation that's sent Biden's approval ratings skidding and left key moderate Democrats with limited appetite to embrace his remaining economic agenda. When Biden delivers his State of the Union speech on Tuesday, that political reality is set to confront any new push for investing in “human infrastructure” such as expanded support for children and health -- the centerpiece of his “Build Back Better” program.

“Inflation did accelerate and people did link it back to the ARP and those policies, and connected the dots and said they did not want additional support for the economy,” said Mark Zandi, chief economist at Moody's Analytics. Zandi himself ascribes the elevated level of inflation to the effects of the delta and omicron waves, which slowed the return of virus-wary Americans to the labor force.

The Russia-Ukraine conflict now threatens to send inflation rates even higher, putting greater burdens on Americans' energy bills. 

West Virginia Democrat Joe Manchin, whose support is vital in the 50-50 Senate and who withdrew his backing for the social-spending bill in December, said earlier this month, “My main concern is still the inflation -- the high cost everybody in my state and around the country I hear from -- and also the geopolitical unrest that we have with Ukraine, all that's going to be a big cost sometime sooner or later.”

He also made clear that all spending tied to “social issues” such as child care should be addressed via legislative committees -- a slower process that could make it harder for Democratic leaders to move forward with Biden's proposals.

White House aides are trying to salvage what they can, and earlier this month were considering reworking their plan to emphasize debt reduction, a person familiar with the administration's discussions said. Manchin has backed tax increases that would fund the Build Back Better bill -- though fellow moderate Kyrsten Sinema of Arizona has opposed boosting tax rates.

The downsizing of Bidenomics doesn't come as a surprise to former Treasury Secretary and veteran Democratic policy maker Lawrence Summers. The Harvard University professor warned early on that Biden's short-term stimulus package would fuel inflation and eventually undercut support for the president's longer-term strategy to transform the economy.

Summers's argument, at its heart, rested on the basic law of supply and demand. He contended that the relief package, with its $1,400 checks for millions of Americans -- at a $410 billion cost -- and its extended unemployment benefits for those out of work, would boost demand beyond the economy's ability to meet it. The inevitable result: higher prices.

The relief program was “a serious error,” said Summers, a paid contributor to Bloomberg Television. “It both set the stage for the inflation and politics that we have today and it eliminated the chance to make fundamental investments in our country given the political context.”

Income Slides in Real Terms

Adam Posen, president of the Peterson Institute for International Economics and a longtime observer of U.S. economic policy, said of Build Back Better, “Manchin and Sinema and others may have blocked it anyway.”

“But this increased the excuses for not passing the much more constructive, much more important long-term program,” Posen said of the ARP and its inflationary impact. “There was never a decent economic justification for that batch of checks.”

Biden supporters reject the idea his rescue plan was a mistake, and point to its role in fueling a powerful economic rebound. Thanks in part to the stimulus, gross domestic product grew last year by 5.7%, the fastest pace since 1984. Unemployment plunged, reaching 4% in January from 6.4% at the start of Biden's presidency.

“Looking back, I don't think it was too large,” Brian Deese, director of the White House's National Economic Council, said when asked to assess the pandemic relief program at a Feb. 9 Council on Foreign Relations webcast. “It achieved the goal of driving a very strong, inclusive recovery that is delivering an extraordinary amount of economic good for the country.”

Republican Resistance

Treasury Secretary Janet Yellen said earlier this month that the pandemic relief program probably contributed “a little bit” to inflation, but Covid-induced supply chain constraints were the bigger culprit. Regardless, “you have to decide what's the biggest risk that you face and address it effectively, and I think the American Rescue Plan was sized to do that,” she said.

Republicans have seized on rocketing prices to lambast Biden's pandemic relief program and his overall stewardship of the economy, leaving little scope for bipartisan compromises on fiscal legislation. Five months into the fiscal year, the federal government is still operating on stopgap budgeting, with the two parties unable yet to agree on any of the 12 appropriations bills.

“Joe Biden wanted to put his fingerprints on a package and so that was the American Rescue Plan,” said Senator Kevin Cramer, a North Dakota Republican. “They used budget reconciliation to jam it down our throats with no consideration for the likelihood that it was going to put kerosene on the fires of inflation.”

Reconciliation refers to the fast-track process that lawmakers can use, subject to qualifications, to pass a fiscal package, bypassing the 60-vote rule to break a filibuster.

Poor Polling

Polls suggest the Republican attacks have a receptive audience among voters. A 54% majority of Americans say the economy has worsened since Biden took office, compared with 17% who say it's improved, according to a Washington Post-ABC News poll conducted Feb. 20-24. Some 56% of Americans said Biden's first year in office was a failure, an NPR/PBS NewsHour/Marist poll showed in February.

“People aren't thinking about the counterfactual -- if we didn't have such a vigorous response from the federal government,” what would have happened, said Ioana Marinescu, an associate professor at the University of Pennsylvania and an economist with the National Bureau of Economic Research. “Policies during Covid completely cushioned many people's incomes,” she said. But, “inflation cannot be completely devoid of politics.”

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