(Bloomberg) -- President Joe Biden raised the final pillar of his economic agenda with the Senate’s passage of a breakthrough climate and tax package, sealing a legacy that risks being undermined by an inflation surge he’s blamed for sparking.
The success of the Inflation Reduction Act will give Democrats a rallying cry for midterm elections and joins three other key bills as a foundation of what might be called Bidenomics: a combined $3 trillion push to reshape the US economy toward working families and domestic manufacturing, boost competition against China and avert the kind of stunted recovery Biden saw as vice president.
While the results in the later bills are more modest than the big structural changes and spending plans Biden had sought -- the most recent is a fraction of his Build Back Better proposal -- they’re still greater than what seemed possible over much of the past year as potential deals were repeatedly scuttled, at times by senators from his own party.
The risk now is that inflation, partly blamed on Biden’s first big steps in the outsized $1.9 trillion Covid-aid package, will end up confining him to a one-term presidency.
“This could be read as the best supply-side economics program since Eisenhower built the interstate highway system,” said Alan Blinder, a former Fed vice chairman and adviser in Bill Clinton’s White House, referring to the post-World War II road-building boom credited with feeding decades of growth. But as for a political payoff: “It’s a stretch unless and until inflation starts coming down,” he said.
The Inflation Reduction Act, expected to win final passage with a House vote Friday, comes on the heels of a bill offering subsidies to the semiconductor industry, which Congress approved with bipartisan votes last month. A bipartisan long-term infrastructure package was enacted in November. The American Rescue Plan passed in March 2021.
Treasury Secretary Janet Yellen termed the administration’s vision as “modern supply side economics,” evoking the supply side theory most often associated with President Ronald Reagan.
But Biden described it as aimed at building the economy from “the bottom up and the middle out,” speaking to the sweeping reinvigoration of social investments in families aimed at reducing inequality.
Unlike the Republican supply-side agenda of cutting taxes to boost productivity, Bidenomics offers government investments and incentives for domestic output, along with social support to bring more people into the labor market -- while reducing environmental damage.
“They’re all working to build connectivity tissue between overall economic growth and prosperity for working families,” Jared Bernstein, a White House economist and longtime Biden aide, said of the economic legislation. “If you’re helping to bake the pie, you ought to get a fair slice.”
Job one after taking office was fighting the pandemic and its economic fallout with a more powerful response than Biden and then-President Barack Obama oversaw more than a decade before. The $787 billion package approved in 2009 is now regarded by many as having done too little to pull the US out of the Great Recession.
The kind of scarring endured in the 2010s has indeed been avoided. Unemployment has plunged from nearly 15% in April 2020 to 3.5% now, matching a half-century low. Wages also surged back; the lowest-earning quarter of the wage scale has even roughly kept pace with inflation.
But the biggest surge in the cost of living in four decades has meant most households have endured a decline in purchasing power -- leaving them without what Biden says he was trying to give: “breathing room.”
Economists estimate the cash handouts in the March 2021 pandemic-relief bill caused between one-half and three percentage points of the current inflation readings of 9.1% -- among the highest in the Group of Seven and the worst since the stagflation misery a generation ago. The White House argues the impact was less than that.
The irony is that those cash handouts were a necessary political ingredient for achieving the rest of the economic legislation. Back in January 2021, control of the Senate hinged on a pair Senate runoff elections in Georgia, where stimulus checks were a core issue.
Democrats won on an explicit pledge to send more money to households enduring a grueling pandemic. That gave them the congressional control that likely enabled passage of the other three bills.
While economists attribute most of the inflation jump to pandemic-related global supply-chain issues and the impact on fuel and food prices from Russia’s invasion of Ukraine, Americans have effectively blamed Biden.
The latest bill is “really positive” but inflation is still running too hot, former Treasury Secretary Larry Summers said Friday, as it neared passage. “If we don’t act on it and act strongly on it, and that means raising real interest rates significantly, then we’re just setting the stage for stagflation,” Summers told Bloomberg Television’s “Wall Street Week.”
The president’s approval rating fell to 38% in Gallup’s July tracking, its lowest yet, and it may worsen if the Federal Reserve’s aggressive rate hikes tip a slowing economy into a job-killing recession.
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“US households and businesses are feeling the pain from the rising cost of living, falling equity markets and an uncertain outlook for the housing market,” said James Knightley, chief international economist at ING Financial Markets. “I doubt, for most people, the accomplishments will be felt in time to be rewarded in the voting booths.”
The other three packages -- Infrastructure Investment and Jobs; CHIPS and Science; and the Inflation Reduction Act -- aim to refine key pieces of industrial policy that are as much about economic security as growth.
Whether it’s accelerating the transition to clean energy or shoring up critical supply chains, the agenda amounts to a necessary shift, said Julia Coronado, co-founder of MacroPolicy Perspectives and a former Fed economist.
“The market isn’t going to magically fix these problems,” she said. “Policy needs to set a road map and then let the private sector do its work in figuring out the most profitable way to get there.”
Brian Deese, Biden’s top economic adviser, said, “The economic logic behind the infrastructure bill, the chips bill and the reconciliation bill we are working to get done really is around investing in long-term drivers of productive growth, in long-term drivers of American manufacturing and industrial strength.”
Conservative economists remain skeptical. Douglas Holtz-Eakin, a former director of the Congressional Budget Office and founder of the American Action Forum, dismissed the chips act -- which won support from a number of Republicans in both chambers -- as largely unnecessary government intervention, and feared the pharmaceutical provisions in IRA will blunt private investment in research.
Yet Holtz-Eakin gave high marks to the infrastructure bill. “It’s probably as good as you’re going to get if you do bipartisan work,” he said. “It represents a very solid contribution to supply and GDP.”
Whether it offers a solid contribution to Democratic fortunes in the November election remains to be seen.
The White House touts falling gas prices and help with health-care costs in the forthcoming package, along with a surprisingly strong job market, as reason for optimism.
As for the outcome, Biden batted away concerns that he has come up short with the latest bill. “It required many compromises,” he said in a statement Sunday. “Doing important things almost always does.”
(Updates with Summers comment in 18th paragraph. An earlier version of this story corrected a G-7 inflation comparison.)
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