Biden risks stirring the global inflation beast
Our earlier, counterintuitive political risk prediction about the nature of the Biden presidency has already come to pass. Despite his decades of foreign policy expertise, the president will instead make his historical mark in the domestic realm, where he is aiming to be one of the three — along with Lyndon Johnson and Franklin Roosevelt — most consequential Democratic presidents of the modern era.
The primary reason for Biden’s go-for-broke strategy has always been structural and political. By nature of the weak blue wave that was the outcome of the 2020 elections — leaving the Democrats in charge of both houses of Congress (by the slimmest of margins) and the presidency — the US political configuration has ideally suited the incoming president.
He has control everywhere but, in practice, only two years (until the 2022 midterm elections) to push through his highly ambitious agenda. Paradoxically, it is the Democrats’ very precarious hold on congressional power (a slim nine-seat majority in the House and a tied Senate) that has engendered party discipline, as losing anyone on practically any vote spells almost certain defeat. This ever-present reality has served to keep both restive progressive and moderate Democrats in line.
The results have so far been politically impressive. Biden secured passage of the first of his three huge spending bills, the $1.9 trillion COVID-19 Stimulus Package, which sought to prime the pump following the precipitous economic downturn brought on by the pandemic.
However, in passing his massive bill, the White House failed to pick up any Republican support. This meant that, in the Senate, he was forced to use the parliamentary process of reconciliation to pass the measure. Reconciliation allows (according to the Senate parliamentarian) specific revenue bills to be passed twice a fiscal year with a 50-vote majority (rather than the usual 60) to shut off debate. Forced to adopt this tactic, the White House knows it can only use reconciliation once more this fiscal year.
The problem is that, to secure his legacy as the most domestically substantial president since Ronald Reagan, Biden has two major pieces of legislation to move and only one more reconciliation process allowed. His efforts to make history, then, rest on the successful passage of the COVID-19 Stimulus Package (already enacted), the looming $1.2 trillion infrastructure bill, and a further $3 to $5 trillion grab bag bill of long-standing Democratic priorities.
Knowing that the last of these — the darling of left-wing House and Senate progressives — stands absolutely no chance of gaining Republican support, the Biden administration has gone all out to make the infrastructure bill bipartisan, so as to ultimately secure the passage of all three major pieces of legislation. By significantly whittling down the price tag (Biden initially wanted the infrastructure bill to cost $2.1 trillion, while the bipartisan iteration has it at $1.2 trillion over eight years), the White House has enticed Republicans on board.
The infrastructure bill will pay for massive transport projects in the US, a major expansion of high-speed broadband into rural areas, and a complete overhaul of America’s creaking water system. What it does not do is provide complementary funding for the massive project — deficit spending will be the primary means to pay the bill.
The grab bag bill remains a work in progress. Although its precise terms are still being worked out, it will involve spending on green energy, a monthly child allowance, guaranteed paid leave, universal preschool for three and four-year-olds, and two years of free community college. Taken together, these provisions would remake America into just another social democratic country, akin to sclerotic Europe, with overly generous benefits, chronically high rates of government debt, and low rates of systemic growth.
For all these policy quibbles, look for Biden to continue to surprise politically and to pass versions of all three of his signature bills. With bipartisan support, the infrastructure bill looks highly likely to pass. As for the grab bag bill, from the Democratic Party’s right, moderate Sen. Joe Manchin of West Virginia stated this week that he could accept a package of $1.5 to $2 trillion; from the progressive left, Sen. Bernie Sanders of Vermont wants a whopping $6 trillion. But these are just opening bids. Look for Biden, a Senate veteran of nearly five decades, to craft a compromise both wings of the party can live with.
As anyone who reads Shakespeare knows, the greatest human tragedy can involve being given everything you want.
Dr. John C. Hulsman
But as anyone who reads Shakespeare knows, the greatest human tragedy can involve being given everything you want. The historical case of Johnson is instructive. Another master of the Senate, he succeeded in passing his “Great Society” domestic program, only to have Vietnam, urban riots and an unsteady handling of the economy quickly undo him. Biden may well get all he wants domestically. But in adding an unimaginable $6 to $8 trillion from the three bills into the federal budget, the ultimate outcome of all this ambition may be to pour gasoline on an already raging fire and wake the sleeping beast of inflation, which has been dormant since Paul Volcker’s heroic days with the Fed in the 1980s.
Biden may achieve all he dreams of politically, but inflation could, in short order, turn this dream into a global nightmare.
- Dr. John C. Hulsman is the president and managing partner of John C. Hulsman Enterprises, a prominent global political risk consulting firm. He is also senior columnist for City AM, the newspaper of the City of London. He can be contacted via chartwellspeakers.com.