Key Take-away and Doing My Best to State the Obvious: For the economy and D.C., a $1.9 trillion spending plan on infrastructure, climate change and housing risks over-heating both the economy and the political environment. Here’s how this can play out. (Bigger implications below)
Yesterday, President Biden indicated he was open to compromise over his $2.3 trillion infrastructure plan. Biden stated he believed his plan was best but would welcome alternative Republican input on how it was to be financed. He did mention, however, that the offer to compromise was not met during the $1.9 trillion stimulus plan as Republicans only offered a $600 billion plan and would not alter the offer.
Within Biden’s own party, there are questions over the size and scope of the plan starting with W.V. Senator Joe Manchin and Arizona Senator Kyrsten Sinema. Both Sinema and Manchin are not up for re-election in 2022 and won’t have to worry about a primary challenge.
Manchin said the increase in the corporate tax rate from 21% to 28% went too far but would accept a 25% tax rate as “fair.” The question we have to ask is 3% the difference between a “fair” deal or no deal at all? Remember, Manchin initially came out against the $1.9 trillion stimulus plan saying it was too big, before caving in and agreeing to about every part of the deal. (Side note, this is why everyone should take Manchin’s comments about not changing the filibuster with a massive grain of salt.) Manchin did state there are six or seven other Democrats who “feel very strongly about this.” Although, none have come forward to support his claim.
Unlike Manchin, Sen. Sinema keeps a lower profile and has not made any comments on the plan to date. However, she did give an interview with the WSJ on the filibuster and her desire not to change the rules. It’s telling what the somewhat taciturn, non-media-hound-like-Machin said. “When you have a place that’s broken and not working, and many would say that’s the Senate today, I don’t think the solution is to erode the rules,” she said in an interview after two constituent events in Phoenix. “I think the solution is for senators to change their behavior and begin to work together, which is what the country wants us to do.”
Stated plainly, it appears she’s wise enough to know Democrats won’t always be in the majority and should Dems change the rules, Republicans will be able to utilize the new procedures when they return to power.
For Biden and infrastructure, he’ll have to decide how to negotiate with Manchin and the Republicans to get a deal done. A favorable ruling by the Senate parliamentarian on how many reconciliations can be done won’t provide the on-ramp Majority Leader Schumer wants on this bill or others. Remember, Minority Leader McConnell has already warned Democrats on how Republicans can slow and essentially stop senate business from being done. He called it a “nuclear winter.”
I think the best path forward is compromise. The infrastructure plan is the best chance for Biden to prove he can use all his political capital from the election and the political connections from years in the Senate to bring about a deal. It will not be $1.9 trillion, and it will not contain a 28% corporate tax. It likely will be smaller with less spending, less climate change reach and less housing reach.
The most likely outcome? Biden will pursue his plan with Manchin and others going along. For the markets, this means continued upward pressure on interest rates toward the end of the year as the deal gets finalized when the $1.9 trillion stimulus money begins to flow heavily. Stocks will continue their upward path as will real estate prices, pushing the Fed in the fall to begin tapering on monthly purchases of securities as the first step towards raising interest rates.
There is tremendous, over-the-top stimulus in the pipeline from Congress and the Fed with more on the way for an economy that will grow 6.0%+ without a new infrastructure spend. Expect more volatility, more insane speculation, more explosions like Archegos to happen. Yes, roaring 20s and yes, Teapot Dome.