Date: 11/02/2021
Author: Mr. X
Senator Joe Manchin (D-WV) has once again thrown a bomb into stimulus and spending bill discussions at the Capitol. He called for an immediate House vote on a bipartisan infrastructure bill without taking up a separate spending bill backed by his own party. “Holding this bill hostage is not going to work in getting my support for the reconciliation bill,” he said.
Senator Manchin’s popularity has declined, even in his own West Virginia. He is probably the most hated figure within the Democratic Party – unless you count Arizona’s Krysten Sinema. Yet Senator Manchin is also the most powerful figure within the Democrats, probably even more than Joe Biden. Senator Manchin won re-election in 2018, meaning he does not need to worry about any challenges until the 2024 election cycle. He also rather narrowly won in 2018 over a Republican challenger who was enthusiastically backed by then-President Donald Trump.
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If Manchin is ever pressured significantly by progressives, he could simply switch parties. It’s what West Virginia Governor Jim Justice did after he saw Donald Trump win West Virginia by more than 42 points in 2016. The onetime Democrat then went on to easily win re-election in the gubernatorial race in 2020. Progressives have no real leverage over Senator Manchin. Senator Manchin, in contrast, has tremendous power over the Democrats right now.
It seems like it was in another lifetime that the bipartisan agreement on infrastructure was announced. Even August, when the Senate passed a $1 trillion infrastructure bill, appears ancient. That bill was passed with the support of Republican Minority Leader Mitch McConnell and over the opposition of former president Donald Trump. President Joe Biden looked like he was on the brink of a victory.
Progressives disrupted this plan by demanding a separate spending bill that could be forced through Congress through a procedure known as “reconciliation.” This would prevent Republicans in the Senate from blocking it via a filibuster. Republicans who had just agreed to an infrastructure bill cried foul, but elections have consequences. Democrats control the White House and both branches of Congress, as close to a mandate as you are going to get in American politics.
Progressives also argue that Democrats will be crushed in 2022 unless they fully commit to massive spending on social services. According to a USA Today/Suffolk University poll in August, 63% of Americans backed the bipartisan infrastructure bill. A smaller majority also backed the $3.5 trillion spending bill that would expand the social safety net.
Yet since that time, Democrats, largely to win over Senators Manchin and Sinema, have been paring back their demands. Today, the spending bill is only about $1.5 trillion. They’ve also removed some of the more popular elements of the spending bill, including expanded access to health care and education funding. If the Democratic Party was a private business, we’d call them complete failures when it comes to marketing.
The moment for action may have already passed them by. Joe Biden’s honeymoon, brief as it was, is gone. As inflation continues to hit consumers and the COVID-19 pandemic endures, President Joe Biden’s popularity is declining. It’s hard for him to fight back effectively when he doesn’t have a recent legislative accomplishment he can put before the American people.
Because the Democrats have been unable to unite around a common proposal, most Americans don’t really know what’s even in these spending bills. They just know how much they are going to cost. Thus, it’s not surprising that a new poll shows a plurality of Americans think that the bills will hurt them, rather than help them. Democratic division has enabled the Republicans to frame the debate around spending and inflation rather than what the money would be spent on.
Senator Manchin is offering Democrats a way out by suggesting that the House simply pass the infrastructure bill that has already made it through the Senate. It would allow Joe Biden to claim a political triumph (notably over former president Donald Trump), it would soothe markets that have long since priced in an infrastructure bill, and it would allow the Democrats to reorganize for a clear cut battle with Republicans over a separate spending bill. This could potentially split the Republicans, many of whom opposed the initial infrastructure bill.
However, the White House has doubled down on the plan to pass both bills at once, counting on Senator Manchin to come around on supporting a spending bill. That’s a major gamble. It’s what the president is staking his administration on.
What may ultimately decide the battle is what happens today in Virginia. Former Virginia governor Terry McAuliffe is trying to reclaim his old position. Republican businessman Glenn Youngkin is essentially tied in the polls. Youngkin needs Donald Trump’s voters to turn out for him but he can’t afford to be too closely associated with a figure who is unpopular in many quarters, especially among some suburban voters.
Glenn Youngkin has walked the tightrope successfully. He goes into today’s election as his own man.
A Republican victory in a reliably Democratic state would put already nervous liberals into a state of absolute panic. More than that, a defeat might further divide the Democrats. Terry McAuliffe symbolizes the pro-business wing of the party. If he loses, progressives can and will claim that it was because he didn’t do enough to turn out the Democratic base. Meanwhile, moderates could blame the defeat on Democratic inaction at the federal level. Senator Manchin’s call to pass infrastructure first and social spending later (if at all) will look far more appealing.
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In contrast, a McAuliffe victory would force overly confident Republicans to rethink their premises. Many of them are already assuming Youngkin is going to win. His defeat, at this point, would be unexpected for many Republicans. A purely obstructionist approach wouldn’t look so wise.
A Democratic victory would also send a message to Senator Manchin. It would tell him that it’s time to compromise and strike a deal. Thus far, the wily West Virginian has avoided saying that he absolutely opposes a separate spending bill. He’s simply argued about the cost. If Democrats prevail in Virginia, I expect he’ll cave and vote with his party. President Biden will then have something his party can campaign on as they go into the midterms.
For investors, the stakes today are high. Though the market continues to defy pessimists and soar to new heights, there is a definite uncertainty among traders over issues like inflation, energy costs, supply chain disruptions, and the Chinese real estate market. The federal government passing an infrastructure bill would soothe many of these concerns. For those who have priced in clean energy, a Democratic victory would be especially comforting. The larger Democratic spending bill (and accompanying tax hikes) is far more controversial, but the initial bipartisan infrastructure bill would be popular on Wall Street.
The worst case scenario for investors would be a close or disputed election that would encourage Republicans to dig in and Senators Manchin and Sinema to keep stalling for time. That would mean that even a bipartisan infrastructure bill with overwhelming support would essentially be relitigated in the 2022 midterms. Investors have already priced in this bill and won’t welcome yet more delays and uncertainty.
There’s no specific outcome that investors generally should want in Virginia. It depends on your specific investments. I’m also not making judgments on who is right or wrong in terms of policy. My only interest is the bottom line.
Therefore, it’s from that perspective that I say there’s definitely one outcome investors should not want. That’s yet more inaction on infrastructure spending that traders, rightly or wrongly, already assumed was a done deal.
Mr. X is an investment analyst working in the Washington DC area who specializes in the intersection of business and public policy. After fifteen years working in politics, he writes on a classified basis for RogueInvesting.com three times a week to bring you news on what those with power are debating, planning, and doing.
