FDR Needed Two Global Crises to Reshape the Economy. Will Biden?

(Bloomberg Opinion) -- President Joe Biden’s transformative economic agenda is under threat from centrists in his own party. If his program is stymied, it won’t be the first time a Democratic rebellion has curtailed a president’s big dreams — it also happened to Franklin D. Roosevelt, after his reelection in 1936.

Like FDR, Biden came into office in the middle of a crisis and immediately launched into a flurry of activity. And like FDR, his approach focused both on combatting the threat of the moment and on transforming the U.S. economy in ways that were long overdue. The U.S. needs bold action to transition to clean energy, and it needs to curb inequality and economic insecurity in order to tamp down social unrest. It also needs industrial policy to meet the competitive threat from China — something that so far has only been pursued to a very modest degree.

Biden’s agenda would accomplish all of these things. His Covid relief bill largely continued the approach that had been taken in 2020 under Donald Trump, while adding a large child tax credit that, if made permanent, would change the U.S. welfare state into something simpler and more efficient. Biden then crafted a bipartisan infrastructure bill with many smart and forward-looking provisions, such as cleaning up lead pipes and building electric-vehicle charging stations.

But if Biden has made progress on his campaign pledge to persuade Republicans, he’s having trouble managing the same trick with some Democrats. The powerful West Virginia Senator Joe Manchin has declared that he will only support $1.5 trillion in a reconciliation bill — far less than the $3.5 trillion now being proposed. Arizona Senator Kyrsten Sinema has also stated her opposition. Various provisions of the bill are already being killed by concerted pockets of Democratic opposition, including a proposal to repeal the step-up basis for estate tax. Sinema is attempting to axe Biden’s plan to allow Medicare to negotiate down drug prices.

If centrists like Manchin and Sinema manage to block Biden’s agenda this year, it’s likely that any hope of a transformative Biden presidency will be dashed. The GOP is favored to take back at least one of Congress’ two chambers in the 2022 midterms, after which they’re unlikely to give Biden any big legislative victories. The possibility of Democrats regaining unified control would come after the urgency imparted by the Covid pandemic has passed. In other words, the U.S. could now be looking at another decade or more of gridlock and business-as-usual.

In fact, this Democratic revolt has a historical parallel with the New Deal. After his reelection in 1936, FDR failed to get much policy passed until the start of World War II. One reason was his battles with the U.S. Supreme Court, but a major factor was his clashes with his own party. Though Roosevelt won reelection, the GOP made major gains in the legislature, emboldening conservative-minded Democrats — many of them from the South. Roosevelt had planned an ambitious Third New Deal, but apart from some labor regulation and public housing, he managed little of note.

Like the pushback against FDR in his second term, the current centrist-Democrat revolt comes partly in response to the shifting winds of public opinion. Despite the near-universality of the child tax credit — one of its major selling points — a poll this summer showed that a majority don’t want to make it permanent. And though voters are generally favorable toward Biden’s plan overall, there is also support for Manchin’s heel-dragging. Similarly, voters worried that FDR’s New Deal was doing too much.

But there’s one major difference between this Democratic revolt and the one against FDR. The latter came in the President’s second term, when the New Deal had already unleashed major transformations on the American economy, including Social Security, unemployment insurance, financial regulation, labor law and rural electrification. If Biden’s agenda is halted, it will be in his first term. A Covid relief bill and a bipartisan infrastructure package, while very welcome, will not yet add up to a major transformation of the economy.

Which would be very bad news, because the status quo isn’t working. Excessive costs for health care and construction are still weighing the economy down, exacerbating the housing shortage and crippling the health insurance system. Climate change is starting to unleash its effects, and decarbonization is not proceeding quickly enough. Inequality and social unrest remain at high levels. And the U.S. doesn’t yet appear to be recovering the competitive ground it lost to China over the past 20 years. Doing nothing, and muddling along with a slightly modified version of the status quo, is simply not an option; the U.S. needs a new FDR, not another four or 10 or 20 years of the same old, same old.

Of course, there’s another important historical factor that made FDR’s policies so transformative — World War 2. Without the further economic transformation that FDR carried out in order to fight the war, his legacy would likely be more modest. Ultimately it took not one, but two world-shattering crises to force a conservative and cautious American populace to accept needed changes.

Let’s hope it doesn’t take a war this time around.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

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