A Revolt on the Left

Insights and Market Perspectives

Author: Greg Valliere

June 14, 2021

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WITH THE BOSS OUT OF TOWN, Democrats are increasingly vocal that last week’s proposed compromise on infrastructure is insufficient. President Biden will have to focus on this issue immediately upon his return, because a bare-bones deal on bridges, roads, water, etc. simply isn’t enough for rebellious Democrats.

WHAT’S CHANGED? The willingness of Biden to accept a modest infrastructure deal — while postponing tax reform and a second spending bill until later this year — has prompted the progressive left to waver in its support for even the initial infrastructure measure.

THE REBELLION IS LED by Sen. Bernie Sanders, who proclaimed yesterday that he will oppose a bipartisan compromise that would spend far less than the $2.25 trillion over eight years that was originally proposed. A compromise of around $1.2 trillion over eight years is unacceptable to him.

THERE’S GROWING SKEPTICISM over how to pay for the compromise unveiled last week. Indexing the gasoline tax to inflation has little support; neither does clawing back Covid relief money from states that are flush with cash.

A KEY ISSUE FOR PROGRESSIVES is their desire to use this legislation to tax the wealthy and big corporations — not necessarily for the revenue, but to address income inequality. The compromise bill also has little focus on climate change, they charge.

IS THERE A PLAN B? If the compromise proposed by five Democrats and five Republicans collapses in the next week because supporters can’s find 60 Senate votes for it, Plan B would be an embrace of the reconciliation process, which would require only 51 votes.

THIS TACTIC WOULD THRILL THE LEFT, but moderate Democrats, led by Sen. Joe Manchin, probably would oppose such a move. Gridlock could ensue, with no infrastructure bill moving this summer.

THE PROSPECT OF A COLLAPSE will get Biden deeply involved in negotiations this summer, and we think he could win just enough votes to get a modest bill passed. But even this is now in jeopardy, and the rest of his agenda — taxes, more spending, police reform, gun control, etc. — could stall.

MARKET IMPLICATIONS: The Joe Manchin bond rally may continue, as prospects for blowout spending recede. With fiscal spending perhaps not as huge as anticipated, the Federal Reserve may be less inclined reduce its asset purchases until the second half GDP and inflation outlook comes into better focus.