The trigger for the latest explosion appears to have been inflation figures released earlier this month, which once again beat consensus expectations. It’s a serious problem, and Manchin has worried since at least last summer that the White House and the Federal Reserve have brought inflation down. So you can understand why that freaked him out.
Yet just because President Joe Biden’s Build Back Better proposal was inflationary doesn’t mean this legislative package is. In fact, it’s not inflationary at all.
Build Back Better presented two fundamental problems from the perspective of macroeconomic stabilization. One was that it was highly redistributive, drawing on revenues collected from a small base of wealthy people to fund new programs for the poor and middle class. Since the rich consume a smaller share of their income than the poor, this type of top-down redistribution tends to increase consumption, stimulate the economy, and generate at least some inflationary pressure.
These programs were mostly concocted at a time when Democrats expected to inherit a depressed economy, so it’s no surprise that they were structured to be stimulus. It is also true that in ordinary times, a small inflationary pressure is not a reason to deprive oneself of halving child poverty or enrolling millions of children in preschool. But given the economic circumstances of the past 18 months, this was a questionable set of priorities.
More importantly, Building Back Better, as passed by the House, was a tax scam. Democrats were counting on permanent tax increases to pay for programs they were ending after a few years. This allowed the Congressional Budget Office to call this bill a deficit-neutral bill. But using 10 years of income to pay for five years of expenses would have dramatically increased short-term deficits and inflationary pressure.
So Manchin was right to torpedo this legislation.
The latest draft deal, by contrast, does the right thing: revert to the traditional Clinton-Obama formula of taxing the rich to reduce the deficit. Manchin, regardless of his distance from mainstream Democrats, has always supported this agenda. He supported the partial expiration of Bush’s tax cuts when he was a new senator and stood firm against Trump’s tax cuts even when he was under fierce political pressure during his run for president. re-election in 2018. Deficit reduction slows demand, making it easier for the Federal Reserve to slow inflation.
Conservatives say focusing tax hikes on the wealthy will hurt investment, but that’s their own version of an outdated idea of a non-inflationary economy. The current cycle of Fed interest rate hikes is, in effect, a direct tax on inflation. Anything Congress can do to reduce the deficit reduces the need for rate hikes and protects the investment climate.
Manchin was right to worry about inflation while others dismissed it as transitory, right to criticize Build Back Better as inflationary, and right to insist that legislation focus on inflation. But it’s an anti-inflation bill, and he knows there’s no bipartisan way to raise taxes. Killing him is counterproductive.
And when it comes to energy policy, Manchin and his colleague Ron Wyden envisioned a clever set of tax credits. The bill would subsidize carbon-free power generation in a technology-agnostic way.
This would benefit the US wind and solar sectors, while preserving room for technologies that Manchin himself prefers, such as nuclear, hydrogen and carbon capture. Environmentalists don’t like these ideas, but they were willing to swallow them for Manchin’s vote. And collectively, they give West Virginia’s energy sector a much brighter path than it faces under the status quo. Indeed, Manchin’s latest negotiating bloat doesn’t seem to take into account that a slew of power generation credits he has always backed expired last year.
Most importantly, giving Biden a strong, tech-agnostic, supply-side climate bill to sign will allow him to achieve his long-term climate goals in a way that is consistent with continued support for production. domestic fossil fuels in the short term. .
One of the reasons so many on the left were so eager to ditch Manchin last year is that they don’t like the idea. Instead, they want Biden to issue executive orders to curb fossil fuel exploration. They include ending new oil and gas leases, blocking permits for new pipelines and, above all, a shady scheme to get US financial regulators to block new fossil fuel investment.
Compared to a bundle of tax credits, this approach would be far less effective in reducing global emissions and far more destructive to the US economy. So far, the idea of striking a legislative deal with Manchin has served to keep fanatics at bay. But if Manchin pulls the plug decisively, the pressure to go at least halfway down that road may prove insurmountable. Manchin, meanwhile, may fear that if he agrees to a deal, he will lose influence over those executive actions.
Since this is the real heist, Manchin has to recognize that his leverage is effectively infinite. Biden is going to want to continue filling judicial vacancies, confirming undercabinet officials, and otherwise governing the country. Manchin will still have the ability to throw a spanner in the works if the White House goes rogue. What will cost him his influence is if he proves his critics right by being inconsistent or unable to strike a deal.
So far, Manchin has been a thorn in the side of the administration that has nonetheless improved Biden’s agenda. But unless the talks can be revived and resolved quickly, he will have betrayed the causes he fights for and put the country on a much worse path.
More from Bloomberg Opinion:
• No, Joe Manchin, taxes don’t cause inflation: Kimberly Clausing
• Manchin’s energy plan is exactly what Biden needs: Karl Smith
• Democrats should blame themselves, not Manchin: Ramesh Ponnuru
• The case of Manchin’s intransigence: publishers
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Matthew Yglesias is a columnist for Bloomberg Opinion. Co-founder and former columnist of Vox, he writes the Slow Boring blog and newsletter. He is the author, most recently, of “One Billion Americans”.
More stories like this are available at bloomberg.com/opinion