Goldman: Biden stimulus on track

Goldman with the note:

Sen. Joe Manchin (D-W. Va.) has attracted substantial attention with an op-edin the Wall Street Journal regarding his views on upcoming fiscal legislation. In it, he calls for a “strategic pause” on consideration of the $3.5 trillion/10 years budget reconciliation legislation, which Democratic leaders hope to assemble in committees over the next two weeks and to pass in the House before the end of September. He cites uncertainty regarding the economy, public health, and foreign policy among the reasons to slow the process, and clearly indicates discomfort with a $3.5trillion price tag.

While the op-ed has led to media coverage highlighting the risk Sen. Manchin’s position poses to the Biden administration’s agenda, it does not change our own views on fiscal policy this year, for three reasons. First, Manchin has not said he objects to passing a large fiscal package through the reconciliation process with only Democratic votes. Instead, he objects to the “rush”to pass the legislation using that process, and to the size of the package. Slowing down the bill works in favor of centrist Democrats like Manchin, who sits on committees that will write only a small part of the bill (less than 10% of the $3.5 trillion). Since amending the bill on the Senate floor would be difficult, the best way for centrists to influence the bill is to slow the process down so they can weigh in on the details before the bill is written.

Second, few expected the fiscal package to total $3.5 trillion by the time it reached PresidentBiden’s desk. Our own view has been that the eventual bill would total around $2.5 trillion over ten years (the separate $500bn infrastructure package would take the total to around $3 trillion)with around $1.5 trillion over ten years in tax increases to partly offset the cost. The bill won’t shrink unless centrist Democratsforce it to, and this op-ed is part of that process, in our view.I ndeed, Sen. Sinema (D-Ariz.) has also already publicly objected to $3.5 trillion in new spending, so even before Sen. Manchin’s op-ed, it was clear there was not sufficient support among Senate Democrats for a $3.5 trillion bill.

Third, there are policies that Democratic centrists will want to support that likely depend on passing reconciliation legislation. For example, the expanded child tax credit enacted in Marchexpires at year-end, after which most households with children would stop receiving monthly payments unless Congress acts. It is difficult to imagine Congress adjourning for the year without addressing that issue, and doing so will probably require reconciliation legislation. Sen.Manchin was also a leading supporter of the bipartisan infrastructure legislation in the House, which seems unlikely to pass when it comes up for a vote in late September if there are serious concerns about the fate of the reconciliation legislation in the Senate.

That said, there are some risks to the upcoming fiscal legislation. The most important in our view is the debt limit, which Congress will probably need to raise by October. Democrats might attach a debt limit suspension to spending legislation keeping the government operating past the end of the federal fiscal year on Sep. 30. If Republicans object, a government shutdown could ensue unless another solution can be found. A high-profile debate over the debt limit could affect political support for spending increases and could become a new source of uncertainty regarding the fate of the fiscal package, though it seems unlikely to derail the fiscal package entirely.

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