When Joe Biden entered the White House many hoped that the new administration would mark a historic break not just with the madness of Trump, but with the disappointing legacy of the President’s Democratic predecessors. There was talk of Biden as the heir not to Barack Obama or Bill Clinton but to FDR, who in the 1930s instituted the New Deal and reinvigorated American liberalism. Biden’s team seemed to grasp the scale of the emergency. They understood the peril that the American Republic was in and how far it was falling behind other advanced economies. The sequence of programmes that Biden announced – the Rescue Plan, the Jobs Plan, the Families Plan – fell short of the more radical demands of the Bernie Sanders presidential campaign in 2020, but they demonstrated real ambition. Eleven months on from the inauguration, as congressional Democrats are struggling to pass the mangled wreck of Build Back Better, a once-promising piece of legislation, it is tempting to write off Biden’s agenda of investment and reform. That would be premature.
The recovery from the Covid crisis is remarkable and confirms that the expansive approach to economic policy taken by the Biden administration was the right one. Nor should one underestimate the skill and intelligence that have driven the legislation. New and innovative models of policy-making are being experimented with in real time. Biden’s domestic policy impasse is testament not so much to the abandonment of ambition as to the obstacles that any progressive politics faces in the US. The truly alarming thought is that this may well be as good as it gets. As the political clock speeds towards the midterms in November 2022, the room for manoeuvre is about to tighten painfully.
As Biden took office on 20 January 2021, his economics team clearly wanted to get off to an ambitious start. They were well aware of the decay of US infrastructure: the crumbling roads and bridges; the schools without adequate ventilation or air conditioning. They were familiar with the statistics documenting the nation’s exorbitant childcare costs and the shameful lack of leave entitlements, not just for new parents but for workers who fall sick. They had read the post-mortems on the Obama administration. They understood the need to “go big” in their first year.
The Biden administration includes recruits from both the Sanders and Elizabeth Warren camps, which called for major investment programmes during the Democratic primaries in 2020. The $1.9trn Rescue Plan was disbursed immediately. It has helped to supercharge the US’s rapid economic recovery. On top of that, Biden’s Jobs Plan promised $2trn, and the Families Plan $1.8trn over ten years. It was nowhere near enough to transform the US, but it was enough to make a start. The problem was finding the requisite majority in Congress.
The Rescue Plan was carried through the legislative process by the sheer urgency of the situation. Amid excited talk about the end of neoliberalism, what was underestimated as a motive for this radical spending package was the political emergency. What was at stake was not merely the orthodoxies of fiscal policy that the Democrats had inherited from the 1990s, or worries about inflation on the part of the former US treasurer Lawrence Summers. What was at stake was the future of American democracy. The Trump presidency, the disputed election and the riot of 6 January made clear the danger. Then there was the second wave of Covid, which caused a huge surge in mortality between mid-October 2020 and mid-March 2021. It is little wonder that, euphoric after the unexpected double win in Senate runoff races in the state of Georgia, the Democrats rallied to pass Biden’s first big piece of legislation.
In the ten months since, splits have emerged within the Democratic Party coalition. The Jobs Plan and the Families Plan reflected a blend of Biden’s blue-collar, back-to-basics philosophy with the ambition for redistribution and investment of the Sanders camp, and the climate focus of the Green New Deal. The plans were motivated by what Democratic operatives called a “theory of change”, which argued that if Biden could deliver on his vision of a more inclusive and better future they might be able to swing a solid block of public opinion his way. After all, even Obama’s flawed healthcare bill has turned out to be surprisingly popular. A suite of social justice and environmental measures, blue-collar jobs and the kind of inspired organising demonstrated in Georgia would, it was hoped, give the Democrats enough momentum for their majority to remain intact after the 2022 midterms. In the party’s most ambitious moments, the hope was to use the Covid-Trump crisis to consolidate a generational electoral bloc, as the New Deal had done in the 1930s: a coalition of voters whose very idea of modern America was indissolubly tied to the reformism of the Democratic Party.
The problem is that not everyone in the Democratic Party is committed to this kind of transformational politics. From Senator Joe Manchin’s point of view in West Virginia, the Green New Deal is tantamount to a political suicide note. Speaking for the liberal-ish bourgeoisie of Arizona, Senator Kyrsten Sinema has insisted that only people earning more than $10m per annum should pay more tax. Contrary to Biden’s emphasis on change, the so-called centrists’ theory of political survival depends on enforcing the status quo. They are a minority in the party, but they have leverage over the Biden administration and the majority leaders Chuck Schumer and Steny Hoyer because of the dogged opposition of the Republicans and the narrowness of the Democratic majority in Congress. Every vote counts.
The Biden team, too, contributed to boxing itself in. Whereas phase one of the Biden programme, the Rescue Plan, was deficit funded, more conservative voices in the administration, notably Janet Yellen at the Treasury, insisted that the Jobs and Families plans be paid for with taxation. That decision, eagerly supported by the House of Representatives speaker, Nancy Pelosi, has sealed the deadlock. Progressives could live with “pay fors” so long as taxation was levied on the US’s wealthy elite. Something has to be done about extreme inequality. But when the more ambitious tax plans fell victim to the veto of the centrists, the effect was to incrementally lower the ceiling for the spending bills.
Parts of the $2trn Jobs Plan were included in the $1.2trn Bipartisan Infrastructure Law, of which only $550bn was really new money. Among its more derisory provisions were $7.5bn for electric vehicle (EV) charging stations – barely enough, a rough calculation suggests, to build over ten years what China is installing every month.
The more controversial elements of the Jobs Plan, notably the measures pertaining to climate, were bundled together with the welfare-orientated Families Plan and rebadged as part of the Build Back Better Act. This was passed by the Democratic majority in the House and is now in limbo in the Senate, at the mercy of Joe Manchin. Any ambition to introduce progressive, redistributive taxation has been shelved. In the draft of Build Back Better passed by the House, the second largest item, totalling $275bn, is tax relief for state and local taxation that disproportionately benefits wealthy homeowners.
The political battles have been attritional and humbling for the Biden presidency. They stand in stark contrast to what the US is capable of if the political forces align. In December the Senate passed a National Defence Authorization Act worth $768bn for the Pentagon alone, $25bn more than the Biden administration had asked for. Over the next ten years it will be surprising if national security spending does not top $8trn, rivalling Sanders’ most ambitious visions for a Green New Deal. Every year half of the federal government’s discretionary spending goes on the Pentagon – a percentage that is even higher if other defence and security agencies are added in.
What is Biden left with? Pieces of his innovative families agenda have survived. Making the child tax credit refundable, so that even those paying little or no tax receive it, creates something akin to a European-style child benefit. At least for the next six years there will be federal funding to back early-childhood education and childcare, helping to pay some of the most expensive childcare costs anywhere in the world. It is conceivable that over time, programmes such as Social Security could become cornerstones of the American social contract. Obamacare, for all its many flaws, turned out to be virtually impossible to repeal. To pass the gatekeepers in Congress, reform engages in a wager on the political process. Can greater spending attract sufficient support to survive future attack?
What remains of Biden’s climate agenda is a gamble, too. The original Biden climate vision was small by comparison with the $10trn in spending envisioned by the Green New Deal. Administration officials argued that they would rely on regulation and private investment to achieve the target of a 50-52 per cent reduction in greenhouse gas emissions by 2030. The main item of proposed regulation, punitive fees on heavily polluting power stations, was cut at the insistence of Manchin, who represents the coal-producing state of West Virginia. The congressional staffers and activists regrouped. If, despite their defeats and concessions, the Biden team went to the Cop26 climate conference in a relatively confident mood, it was due to the application of a new type of intelligence to the policy-making process.
As they negotiated, the political operatives pushing Build Back Better performed a new kind of balancing act. Modelling teams working for a cluster of consultancies – Rhodium, Energy Innovation and the Princeton Net Zero project – have continuously scored the various tax and spending proposals in terms of their likely impact on CO2 emissions. As Manchin struck out the punitive provisions intended to curb coal-burning, the modellers scaled up subsidy schemes and tax-incentives that should yield the same effect.
The haggling may be old school, but the modelling exercises are radically new. The green stimuli advanced after the 2008 crisis by the US, EU, China and South Korea were makeshift exercises, designed to push in the right direction, but without precise targets for emissions reductions. The EU’s Fit for 55 programme, which aims to reduce greenhouse emissions by 55 percent by 2030, is based on extensive climate modelling, but it is a blueprint rather than a worked-out policy package. What we have seen in Washington in 2021 is the blow-by-blow negotiation of fiscal measures on the basis of their likely impact on CO2 emission ten years from now. This is a historic first.
If the Keynesian revolution is dated to the early 1940s, when budgetary policy was for the first time integrated into a model of the economy with GDP as its basic metric, then 2021 may be the equivalent moment for climate policy. It is inspiring to imagine that new ideas inform policy when governments are in a position of strength, shaping grand plans for ambitious political and economic transformation. But progressive thinking has to work on the defensive, too. In Biden’s first year climate modelling has proven its worth in helping to fight a rearguard action.
Like any economic forecasting, these modelling exercises are speculative. They depend on assumptions about how rapidly consumers will respond to incentives to switch to EV, for instance. But the models suggest that despite the damage done to its agenda in Congress, the Biden administration may still be on track to meet its climate targets for 2030. That matters. In terms of CO2 tonnage to be cut by 2030, the US’s new climate commitments accounted for more than half of all global announcements between September 2020 and November 2021.
Build Back Better is worth fighting for. But Manchin’s delaying action has not only robbed the administration of momentum, it also means that the bill has to be pushed through the Senate against the backdrop of an inflationary surge.
This ought to be irrelevant. The Build Back Better bill is not a stimulus package; it is a long-term investment and welfare programme. Most of its costs are covered by new taxation, but not all are. The most recent impact assessments by the Congressional Budget Office (CBO) calculated that if passed, it would raise the deficit by $367bn over ten years, with most of that coming in the near future while growth is close to full capacity, known as running the economy hot. Given the size of the US economy the net effect is slight, but at a time when editorials on both sides of the Atlantic are clamouring for action against inflation, it sends the wrong message. Manchin and the fiscal hawks have received further ammunition from a CBO estimate requested by Republicans that costed not the actual Build Back Better bill, but a hypothetical scenario in which its provisions become permanent. That would raise the deficit, the CBO said, by $3trn over a decade.
For the Biden administration this is a significant test. In 1993, faced with rumours of inflation and resistance to large-scale spending, the Clinton administration abandoned its stimulus plans. This, so far, has not been the case for Biden. White House spokespeople insist that investment will reduce the cost of living, at least in the long-run. The current inflation is a sign of the vigour of US recovery. To combat price increases the administration promises to crack down on price-gouging along the supply chain, from petrol to meat.
Perhaps surprisingly their position has received tacit support from no lesser authority than the Federal Reserve. It is beyond its chairman Jerome Powell’s remit to speak directly on fiscal policy, but his emphasis on the labour market recovery and his willingness, until recently, to describe inflation as transitory, has left the door open for the administration’s investment programme. Again, this marks a sharp contrast with the 1990s, when there were evident tensions between the Fed, led by Alan Greenspan, and the Clinton administration.
Despite protests from an array of influential pundits, ranging from Lawrence Summers to the Financial Times’s Martin Wolf, the Fed, like the European Central Bank and the Bank of England, has been slow to respond to the surge in inflation. Its decision in August 2020 to adopt average inflation targeting has turned out to be truly consequential. If the Fed’s aim is to achieve an average of 2 per cent, it must tolerate over- as well as under-shooting. In October, with recovery proceeding at pace, inflation topped 6 per cent. In testimony before Congress following his renomination for a second term as Fed chair on 22 November, Powell bowed to pressure and pointedly emphasised how seriously the Fed is taking the inflation issue. On 15 December the Fed announced its intention to bring forward its exit from the current regime of bond-buying and monetary stimulus. It is now confidently expected to raise interest rates in 2022. This is a pronounced taper, but it is a long way from smothering the recovery. The Fed is certainly not leading the charge.
Even more remarkably, it is not just the team in the White House and the Fed that have adopted this relaxed stance. Business lobbies have helped to significantly weaken the Biden legislation, notably with regard to taxation, but the Biden administration has not faced anything remotely like a general capitalist counterattack. The bond markets that once bullied Clinton have been complacent. Rather than rallying around the battle-cry of inflation, the bond vigilantes have so far stayed quiet. Though there have been twitches in interest rates, real yields – interest rates adjusted for inflation – have fallen to unprecedented lows. The markets give no sign of believing that spending at the level proposed by the White House could cause any destabilisation of macroeconomic conditions. The stock market continues to hum along.
The administration promised a better balance of power for workers. Neither the $15 minimum wage called for by the Democratic Party left, nor legislation to favour trade unions have come to pass, but running the economy hot helps workers too. Prices may be going up, but so too are wages. The Fed has waited to see a solid recovery in labour markets before announcing its tightening of monetary policy. In the so-called Great Resignation, quit rates of workers in lower paid jobs have reached all-time highs.
Though the legislative accomplishments of the past year may be disappointing, and though the demand for budget balance has hobbled the administration’s ambition, there has been no return to the belt-tightening of 1990s, Clintonian economics. And it shows. Estimates for overall economic growth in the last quarter of 2021 run to as high as 8 per cent on an annualised basis. But will it be enough?
History will judge Biden’s legislative achievements in 2021 by three criteria. His White House met the crisis of early 2021 with decisive action. It may do something to rebalance American society towards struggling families, to improve infrastructure and to reduce America’s greenhouse gas emissions. But its agenda also needs to pay off in political terms. Though their eyes may have been set on the far horizon, what the Democrats desperately need is political momentum to carry them into a brutal electoral battle with the Republicans in the 2022 midterms.
In light of the anti-democratic drift of the GOP, the stakes in 2022 are extremely high. It is hard to exaggerate the havoc that might be wrought by a Republican-controlled House on top of a deeply conservative Senate, a Supreme Court stacked with reactionary judges, and state legislatures and governors across the country dedicated to rolling back the Democratic win and consolidating Republican power – the only option they appear to consider legitimate.
Earlier in the year the momentum was with the Democrats. Dogged opposition reduced the Republicans to irrelevance. Now, with his domestic agenda on the rack, Biden’s approval has taken a severe hit. The shambolic mishandling of the Afghanistan withdrawal in August dented the administration’s claim to competence. And it is not just the President who is in trouble. According to polling, Republican candidates hold their largest lead for 40 years in midterm vote preference. Though Obama was in the White House for eight years, he had no more than half a term to legislate. The same fate awaits Biden. And it shows in the calculations being made on Capitol Hill.
As critics remark, the Build Back Better legislation is based almost entirely on giveaways. As far as climate policy is concerned, for instance, it is all carrots and no sticks. It offers handouts for power plants that go green, or consumers who buy EV, but imposes no penalties for polluting coal-burning plants. This is frustrating for those who want more urgent reform. It is not the most effective way to legislate, and it is expensive. But it has one signal virtue: legislative giveaways are hard for your opponents to repeal.
The Democrats have not yet conceded defeat, but they know their hold over the legislative agenda is threatened. Even now, they are preparing for the rearguard action to come.
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