THE PACE IS GLACIAL IN WASHINGTON: The infrastructure package that finally passed on Friday night won’t begin to have an impact on the macro economy until spring.
BUT JOE BIDEN GETS A VICTORY LAP this week as he signs into law a sweeping infrastructure bill that will spend at least $1 trillion, with prospects improving for an expensive social spending bill by winter.
IT WILL BE EVEN MORE DIFFICULT to pass the social spending measure, which faces two major obstacles: first, all 50 Democrats in the Senate need to support it, which isn’t certain; and second, there has to be agreement on several controversial provisions that Sen. Joe Manchin opposes.
SO HERE ARE OUR ODDS ON THE SOCIAL SPENDING BILL:
- Passage of a huge social spending bill — with lots of new taxes — costing at least $2 trillion, 20% chance. Manchin won’t allow anything that big.
- Passage of a scaled-back bill, perhaps costing $1.5 trillion or less, with with key provisions omitted and tax hikes reduced, 50% chance.
- A total breakdown over tax and spending proposals, with nothing passing in calendar 2021, 30%. Can’t rule out this scenario.
THE INFRASTRUCTURE BILL that passed on Friday night had some GOP support; even Mitch McConnell voted for it this summer, as did 13 House Republicans on Friday. But a social spending bill will have no GOP support in either house.
AND THERE ARE MAJOR DIFFERENCES among Democrats over a wide range of issues — paid parental leave, the state and local tax deduction, expanded Medicare benefits, prescription drug negotiations, etc. These issues could take weeks to resolve — bumping into other issues like extending the debt ceiling.
COMPLICATING THIS DEBATE will be two wild cards: an official scoring by the Congressional Budget Office, which may project higher deficits than proponents claim; and a ruling from the Senate parliamentarian, which may scuttle immigration reform in the social spending bill.
THE MARKET IMPLICATIONS: As we wrote on Friday morning, this may be a win-win for the markets, as the prospect of higher taxes is delayed and the simulative impact of huge new construction projects begin to boost the economy by summer.
A PERSISTENT WORRY: As we have asked for the past few months, where will the new workers come from? Where will American Airlines and Amazon get the thousands of workers they are seeking? The infrastructure bill will require hundreds of thousands of new workers in the next couple of years.
THIS WILL REQUIRE higher wages (most of the infrastructure jobs will be controlled by the unions), and more immigration to fill the demand for workers on highways, airport renovations, broadband, ports, the power grid, etc. But immigration reform is not imminent; it’s an issue that defies any easy political solution.
THE RISK, QUITE CLEARLY, is that the economy could over-heat, with the Fed still adding new bonds to its portfolio until summer, and federal spending rising as the infrastructure bill begins to kick in. If a huge new social spending bill passes this winter, the labor shortage will become even more acute.
THANKFULLY, RELATIVELY LOW INTEREST RATES can accommodate higher deficits for another couple of years, but the most pressing issue will be the need for more workers. The bond market rallied — yields fell — after Friday’s strong jobs report, but eventually the bond market will have to factor in the likelihood that soaring fiscal stimulus may cause the economy to over-heat.
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