Manchin throws a lifeline …

Senator Joe Manchin (D-WV) continues to demonstrate he is a riddle, wrapped in a mystery, inside an enigma.  From the beginning of President Joe Biden’s administration, Manchin has acted as a gatekeeper of sorts for any policy.  Too frequently, he has denied his party’s ambitions for spending packages which might be transformative for the country (or the next waste of taxpayer money).  

Manchin (left) and Schumer (right) worked out a deal against all odds

With the 2022 Midterm Elections just a few months away, Manchin surprised nearly everyone by agreeing to a spending bill that will revive what appeared to be a stalled Biden agenda.  Manchin and Senate Majority Leader Chuck Schumer (D-NY) spent weeks negotiating what is now referred to as The Inflation Reduction Act of 2022.  The legislation could be a boon for the nation and more importantly, shore up a fractured Democratic Party at a time when it appeared headed towards losing control of Congress.

So what’s in this bill?

As the title of the bill suggests, its primary aim is to curb the level of inflation that has been a significant problem for the nation.  In 2021, inflation stood at 7% and for 2022, it’s currently at 9.1%.  Price increases have been most noticeable in terms of gas and groceries — commodities which are ‘must haves.’   At one point, average gas prices rose to over $5 per gallon, a historically high rate for Americans.  Stress levels are high and the word recession has been tossed around.

  • First, the government will put in place a minimum corporate tax of 15%, which the Joint Committee on Taxation estimates will add over $313 billion to the government’s tax revenue.  This will reportedly ‘close the loophole’ which allows multinational corporations to avoid paying their corporate taxes in the United States.
  • The legislation will also allow the federal government to negotiate prices Medicare will pay with drug companies, something both major parties have supported as a cost saving measure.  The Congressional Budget Office estimate suggests this will save $288 billion over the next decade.
  • Subsidies for the health insurance plans of lower-income Americans will be extended under the Affordable Care Act by an additional $64 billion over the next three years.
  • More liberal Democrats will be pleased with the sizable investment into clean energy and cuts to carbon emissions.  The government would extend tax credits for electric vehicles, solar panels, and other forms of machines which utilize cleaner forms of energy.  Tax credits would also be offered to manufacturing facilities which become ‘greener’ in their approaches.  With all forms of tax credits and government spending on cleaner forms of energy and reclamation, the federal government is committing over $380 billion to climate change.  Moreover, independent researchers believe the bill could reduce carbon emissions by 40% in the next decade.

What impact will it have on inflation and elections?

The bill’s individual pieces aim to reduce costs for spending in the necessities of life.  Even with insurance, health care costs place a significant burden on Americans.  Any illness which requires hospitalization, surgery, or long term treatment can financially break aa family.  Reducing these costs for some of the most vulnerable through ACA subsidies and Medicare savings helps the bottom line.

Creating cleaner forms of energy and an infrastructure for them will decrease the demand fossil fuels, and lower prices.  American foreign policy will also factor into fuel prices.  The Russo-Ukrainian War prompted our nation and European allies to cut economic ties with Russia for their unprovoked invasion.  Russia’s status as the second leading producer of oil and the second leading producer of natural gas means the entire world is experiencing a problem with fuel prices.  The resolution of that conflict will lead to an increased supply of oil and gas, which will undoubtedly lower prices on those commodities. 

US Bureau of Labor inflation numbers on the Consumer Price Index, last 12 months

The Inflation Reduction Act isn’t a stand-alone measure, though.  The Federal Reserve Board recently approved an increase in the interest rate from 1.75% to 2.5%, in the hopes of slowing down the overall economy.  The effect on banks and their lending is yet to be seen, but typically consumers respond to increased rates by dialing back their desires for major purchases (auto and home).  

Republicans have hammered Democrats and the Biden administration for the inflation rates and they hope to see a major shift in government control in this year’s midterm elections.  With Democrats currently clinging to slim majorities in both chambers of Congress, the GOP sees an opportunity for creating a divided government.  They would, at the very least, have the ability to block the Biden administration’s goals for the next two years.

Until June, it appeared the GOP had all the ammunition it would need for a solid performance in the midterm elections.  However, this summer brought some unexpected life to Democrats.  A recent decrease in gas prices is encouraging, with national per gallon averages down from $5.03 to $4.67.  For those in the Mountain State, current averages have been hovering around $4.30 in the last week.  

One would also have to believe Democratic candidates for office will receive a boost in support after the Supreme Court’s decision in Dobbs v. Jackson Women’s Health.  That decision, which overturned the right to an abortion, has energized the left.  It just so happens that overturning a 50 year old precedent and centerpiece of liberal belief can shock people into action.  

In case folks haven’t been paying attention in West Virginia, the Legislature is on fire with activity.  Pro-choice supporters rallied to object to new legislation which would govern what, if any, circumstances a woman could have an abortion.  One would almost have to expect an uptick in voter turnout this year.

And then, Joe Manchin entered the chat.  West Virginia’s conservative-yet-Democrat senator threw his party the support they have wanted for the last two years.  This spending bill is not only a legislative victory for the Biden administration and the party, but a measure which will do what Republicans haven’t done.  This bill will reduce the federal deficit by $300 billion in the next decade.  Republicans have consistently talked a good game on spending and deficits, but it’s the Democrats who are doing the heavy lifting.  

The Inflation Reduction Act gives liberal candidates a measure of crossover appeal to more moderate voters.  The legislation becomes more meaningful in terms of its timing.  At this point in the election season, Republicans were content to ‘run out the clock’ and not pass anything which might help President Biden and his party.  The fact that Joe Manchin consistently rebuffed his own party meant nothing was likely to happen and Republicans could claim the left lacked the ability combat inflation and other key problems the country faces.

When Manchin signed on to this bill, he effectively gave his party a lifeline that they desperately needed.

Why did Manchin agree to this?

Manchin likely has multiple reasons for signing on to this piece of legislation, notably the fact that helping his party increases the chances he stays in a position of importance for the next two years.  As long as the partisan balance in the Senate remains so close, Manchin’s position as a sort of swing vote remains in tact.  Legislation from either party would need his seal of approval.  Also, maintaining a Democratic majority means Manchin retains his position as the Chair of the Committee of Energy and Natural Resources.  Manchin’s party might also have put increasing pressure on him, as he noted he supported the bill, in part, because he didn’t want to “disappoint people again.”

Manchin’s support for the bill also connects to its help for West Virginia.  Included in the spending is a permanent extension for the Black Lung Disability Fund, which provides medical care for coal miners affected by black lung.  West Virginia also has the fourth highest median age for any state, and our seniors will benefit from changes to Medicare.  Manchin’s home state also has the fourth highest poverty rate, meaning its citizens will benefit from ACA subsidies and a potential decrease in inflation rates.

Perhaps most importantly, the investment into greener energy and reduction in carbon emissions will be a positive step for a state who might finally see that coal consumption is declining.  The state needs viable alternatives for the coal industry in the future.  This bill does not do away with coal, but could help to diversify West Virginia’s economy.  

Tack on the fact that the predicted overall net effect of the bill is a reduction in the federal deficit, and it’s a no-brainer for Manchin.  

Are there any downsides to this bill?

Economies are never quite like a science laboratory.  Too many variables exist and government officials have no control over most of them.  It’s possible that the result of the experiment isn’t quite what the experts predict.  Even then, not all experts agree about what the bill might do for inflation rates.  

The name of the legislation seems more like a misnomer.  Its impact will ease financial burdens on some of the more vulnerable sectors of American society, but the law itself may not move the needle much on inflation rates.  Monetary policy tools like the adjustment of interest rates and changes in money supply must be properly utilized in conjunction with fiscal policies.  

Furthermore, the larger factors which contributed to the rise of inflation remain unresolved.

The growth of the money supply in 2020 was significant, to say the least

The growth of the American money supply during the Covid shutdown in 2020 was an unheard of economic response and the single greatest increase in money supply in the nation’s history.  While people of good conscience can debate whether or not it was needed at the time, there’s no doubt that the action injected so much money into the economy, that businesses naturally responded by increasing prices.  While the Federal Reserve Banks are working to correct this problem, it cannot, nor should it, remove that excess cash all at once.

The broken supply chains from the Covid shutdown have contributed to the inflation problems.  The demand for various goods and services never changed but the world’s ability to move the necessary products for those goods and services diminished and has yet to return to normal.  When the same demand exists for less of the commodities people want, prices rise.

Finally, until the Russo-Ukrainian War ends with Russia withdrawing its forces, much of the world will continue to boycott Russian coal, oil, and natural gas.  This will put a strain on fuel costs worldwide (though OPEC is increasing its output to offset these issues).

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