Democrats Should Be Thanking Sinema and Manchin
(Bloomberg Opinion) -- Democratic frustration with Joe Manchin and Kyrsten Sinema has reached such a level that some left-of-center commentators are suggesting that the two senators should leave the party. The ideological divide fueling this irritation is legitimate, but at this point it makes more sense — on both policy and political grounds — for Democrats to embrace the moderation of their two wayward senators.
President Joe Biden’s approval numbers have been in decline for several months, and the growing discontent already seems to be affecting Democrats overall. The Virginia governor’s election, scheduled for next week, is a dead heat. That’s a state Biden won by 10 points last year, and where the Democrat beat the Republican by a similar margin in the 2017 governor’s race.
Political analysts offer a variety of explanations for the Democrats’ woes. But one factor above all has proved a consistent predictor of the incumbent’s party’s success or failure: the state of the economy. And supply-chain bottlenecks, rising prices and a labor shortage are more than enough to explain the party’s troubles.
In fact, Manchin has explicitly cited those three pressures as a reason to be hesitant about passing a big spending bill. He’s right — and his fellow Democrats should listen.
The White House has attempted to portray clogged ports and surging inflation as temporary side effects of the pandemic. Comparisons with other developed countries, however, show that the U.S. is an outlier on both metrics. The driver of that difference has been the size of the U.S.’s Covid relief spending, in particular the American Rescue Plan passed in March.
That’s given consumers the cash not only to sustain their spending, but also to increase it. Meanwhile, there is some evidence that flush savings accounts are what’s keeping many Americans from heading back to work.
To be clear: Given what was known at the time, passing the additional stimulus earlier this year was the right call. By the same token, given what’s known now, caution is warranted.
Treasury Secretary Janet Yellen has suggested that there is little reason to worry that the multitrillion Build Back Better bill now under consideration in Congress would stoke inflation, because the spending would be spread out over 10 years. But the House’s version of the bill uses budget tricks to reduce what would have been a $5.5 trillion bill to $3.5 trillion by funding some of its programs for only a portion of the 10-year window.
And leading Democrats have signaled that whatever package comes out of the current negotiations will be even more frontloaded. Given the current state of the economy, it’s likely that such a design would increase inflationary pressures.
Democrats had planned to offset some of this spending by increasing the corporate tax. Sinema’s refusal to raise taxes on corporations and high-income individuals enraged progressives. But her insistence is saving them from a potential blunder.
With high demand and scant labor supply, businesses need to be aggressive now about investments in enhancing productivity. Increasing taxes on corporations and pass-through businesses, which pay the individual rate, would have reduced both their capital available for investment and their incentive to deploy it innovatively.
Thanks to a few narrow victories in Georgia at the beginning of the year, Democrats have control of both the legislative and executive branches of the federal government for the first time in a decade. It’s understandable that they would want to make the most of their opportunity, as is resentment of Sinema and Manchin for standing in their way.
But the U.S. economy has changed dramatically in the last nine months — and so have the political and policy implications of the Build Back Better plan. Viewed in this context, Sinema and Manchin aren’t stifling the Democratic agenda so much as saving it from overreach. For that, Democrats should be grateful.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Karl W. Smith is a Bloomberg Opinion columnist. He was formerly vice president for federal policy at the Tax Foundation and assistant professor of economics at the University of North Carolina. He is also co-founder of the economics blog Modeled Behavior.
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