More stories

  • in

    The Path Ahead for Biden: Overcome Manchin’s Inflation Fears

    A key Democrat’s decision to pull support from the president’s sprawling climate and social agenda is rooted in the scope of the bill.WASHINGTON — Senator Joe Manchin III, the West Virginia Democrat, effectively killed President Biden’s signature domestic policy bill in its current form on Sunday, saying he was convinced the spending and tax cuts in the $2.2 trillion legislation will exacerbate already hot inflation.Economic evidence strongly suggests Mr. Manchin is wrong. A host of economists and independent analyses have concluded that the bill is not economic stimulus, and that it will not pump enough money into consumer pocketbooks next year to raise prices more than a modest amount.The reason has to do with the pace at which the bill spends money and how much it raises through tax increases that are intended to pay for that spending. The legislation spends funds over a decade, allowing the taxes it raises on wealthy Americans and businesses, which will siphon money out of the economy, to help counteract the boost from spending and tax cuts.The bill also does not provide the type of direct stimulus included in the $1.9 trillion pandemic aid package Mr. Biden signed in March — and which Mr. Manchin supported. Some of its provisions would give money directly to people, like a continued expanded child tax credit, but others would fund programs that would take time to ramp up, like universal prekindergarten.Economists say the net result is likely to be at most a tenth of a percentage point or two increase in the inflation rate. That would be a relatively small effect at a time when supply chain crunches, surging global oil demand and a pandemic shift among consumers away from travel and dining out and toward durable goods have combined to raise the annual inflation rate to 6.8 percent, its fastest pace in nearly 40 years.For months, Mr. Manchin has warned the president and congressional leaders that he was uncomfortable with the breadth of what had become a $2.2 trillion bill to fight climate change, continue monthly checks to parents, establish universal prekindergarten and invest in a wide range of spending and tax cuts targeting child care, affordable housing, home health care and more. He has cited both the risks of inflation and his fear that the package could further balloon the federal budget deficit, saying several programs that are now estimated to end in a few years would likely be made permanent.Over the past week, he has insisted that the bill shrink to fit the framework of less than $2 trillion that Mr. Biden announced this fall, and that — crucially — the legislation not use budget gimmicks to artificially lower the bill’s effect on the budget deficit.In a statement on Sunday, Mr. Manchin said Democrats “continue to camouflage the real cost of the intent behind this bill.”White House officials have tried to promote the idea that the bill would reduce price pressures right away — an outcome economists have not entirely bought into. But the general economic consensus finds little evidence to suggest the bill risks exacerbating rising food, gasoline and other prices.Today’s inflationary surge stems from a confluence of factors, many of them related to the pandemic. The coronavirus has caused factories to shutter and clogged ports, disrupting the supply of goods that Americans stuck at home have wanted to buy, like electronics, televisions and home furnishings.That high demand has been fueled in part by consumers who are flush with cash after months of lockdown and repeated government payments, including stimulus checks. Research from the Federal Reserve has shown that inflation is most likely getting a temporary increase from the coronavirus relief package in March, which included $1,400 direct checks to families and generous unemployment benefits. But Mr. Biden’s social policy bill would do relatively little to spur increased consumer spending next year and not enough to offset the loss of government stimulus to the economy as pandemic aid expires.White House aides have tried to make that case to Mr. Manchin — and the public — in recent weeks, pointing to a series of analyses that have dismissed inflationary fears pegged to the bill. That includes analysis from a pair of Democratic economists who warned about rising inflation earlier this year — Harvard’s Lawrence H. Summers and Jason Furman — and from the nonpartisan Penn Wharton Budget Model at the University of Pennsylvania. All of those analyses conclude that the bill would add little or nothing to inflation in the coming year.The disconnect between economic reality and Mr. Manchin’s stated concerns has exasperated the White House, which is struggling with voter discontent toward Mr. Biden over rising prices, as well as an unyielding pandemic.In a scathing statement about Mr. Manchin on Sunday, the White House press secretary, Jen Psaki, noted that the Penn Wharton analysis found Mr. Biden’s bill “will have virtually no impact on inflation in the short term, and in the long run, the policies it includes will ease inflationary pressures.”White House officials, who along with party leaders have spent weeks trying to bring Mr. Manchin to a place of comfort with Mr. Biden’s bill, registered a sense of betrayal after the senator’s declaration.Ms. Psaki said Mr. Manchin had last week personally submitted to the president an outline for a bill “that was the same size and scope as the president’s framework, and covered many of the same priorities.” He had also promised to continue discussions toward an agreement, she said.Republicans celebrated Mr. Manchin’s statement as evidence that the bill, which Democrats were attempting to pass along party lines, was full of inflationary policies that even the president’s own party could not get behind.Biden’s ​​Social Policy and Climate Bill at a GlanceCard 1 of 7The centerpiece of Biden’s domestic agenda. More

  • in

    Democrats Push for Agreement on Tax Deduction That Benefits the Rich

    Lawmakers are coalescing around a deal to suspend a $10,000 cap on state and local tax deductions that was imposed during the Trump administration.WASHINGTON — Democrats were readying an agreement on Tuesday that would repeal a cap on the amount of state and local taxes that homeowners can deduct as part of a broader $1.85 trillion spending bill, a move that could amount to a significant tax cut for wealthy Americans in liberal states.But some liberals quickly balked at the emerging agreement, which would suspend a $10,000 cap on the so-called SALT deduction for five years, removing a limit that Republicans included in their 2017 tax package as a way to pay for cuts for corporations and the rich. The suspension would kick in for deductions related to property taxes and state and local income taxes accrued in 2021 and would run through 2025.If it passes, the deal would be a major concession to a handful of Democrats from high-income states like New York and New Jersey who have insisted on lifting the cap, in order to win their votes for President Biden’s social policy and climate change package.But liberal Democrats have scoffed at the push to include the costly proposal in the domestic policy package, particularly as party leaders have curtailed or eliminated other spending priorities as they pare down a $3.5 trillion blueprint to appease moderate and conservative-leaning Democrats.Senator Bernie Sanders of Vermont, the chairman of the Budget Committee, blasted the repeal on Tuesday as a giveaway to the rich that went against the Democrats’ priorities.“I think there is a compromise to be reached here, a middle ground, which says that for families earning less than $400,000, they can take a complete exemption, but not families earning more than that,” said Mr. Sanders, who had released a blistering statement criticizing the agreement. “What exists is unacceptable, and one way or another it will be dealt with.”It remains unclear whether the agreement would apply broadly or if Democrats planned to impose an income cap to prevent the wealthiest Americans from receiving what amounts to a tax cut.A straight repeal of the cap for every household that claims the deduction would siphon huge amounts of revenue from the federal government: about $90 billion per year, according to budget experts.To get around that, the five-year suspension assumes that the cap is reinstated in 2026 for another five years, allowing Democrats to use a budget sleight of hand to show its removal as revenue neutral in the traditional 10-year window that lawmakers look to when considering a bill’s impact on the federal deficit.Three people with knowledge of the emerging agreement described it on the condition of anonymity and cautioned that discussions were continuing. Details of the talks were first reported by Punchbowl News.With Republicans opposed to Mr. Biden’s domestic policy plan, Democrats must win the support of all 50 senators who caucus with the party and all but three House lawmakers for the plan to become law. That effort is further complicated because Democrats are using an arcane process known as budget reconciliation, which shields fiscal legislation from the 60-vote filibuster threshold in the Senate.Those restrictions mean that any lawmaker, particularly in the Senate, could effectively tank the legislation over his or her priorities, including insisting that the bill repeal SALT. Democrats from the high-income states that have been most affected by the limit have spent the past five years searching for an opportunity to roll it back for their constituents, despite complaints that it would largely benefit the wealthy.House Democrats including Representatives Tom Suozzi of New York, Mikie Sherrill of New Jersey and Josh Gottheimer of New Jersey have made clear that they will not support the broader spending package without a SALT repeal. Mr. Gottheimer wore a large button emblazoned with the words “no SALT, no dice” to votes on Capitol Hill on Tuesday. Senator Chuck Schumer of New York, the majority leader, has also voiced support for getting rid of the cap.“We’ve been fighting for this for years,” Mr. Gottheimer said on Tuesday, adding that reinstating the full deduction would amount to giving “tax relief to families that deserve it and who got hosed in 2017.”Delaying the cap for five years in a 10-year window could effectively allow lawmakers to claim that the proposal would not have an impact on the package’s cost. Yet some Democrats appeared confident that lawmakers would act again in five years to prevent the cap from going back into effect.“It’ll be pretty clear when they get tax relief, it’s going to be hard to take that back,” Mr. Gottheimer said, referring to families in his district.The SALT limit resulted in tax increases for wealthier Americans beginning in 2018, particularly higher earners from high-tax states, and helped Democrats capture some House seats that Republicans previously held in New Jersey, California and elsewhere.The deduction is largely used by wealthy homeowners who itemize their deductions and live in states and cities with high taxes, which tend to be led by Democrats. Democrats accused Republicans of using the cap to pay for other tax cuts for the rich and to penalize liberal states.“My guess is the majority of Americans with a net worth of $50 to $300 million would get a tax cut under the Build Back Better plan with a full repeal of SALT,” Jason Furman, an economist at Harvard who was the chairman of the White House Council of Economic Advisers under President Barack Obama, said on Twitter on Tuesday. “The bill would do more for the super-rich than it does for climate change, childcare or preschool. That’s obscene.”But several lawmakers in the New York and New Jersey delegations have warned that their votes for the domestic policy package hinged on the inclusion of the provision, and Democrats have haggled for months over a possible solution.“We’re still going at it over it,” said Representative Richard E. Neal of Massachusetts, the Democratic chairman of the Ways and Means Committee, who joked on Tuesday that he had earned “a Ph.D. in the SALT deduction because it’s been argued from every perspective I can think of.”The Committee for a Responsible Federal Budget described the repeal of the SALT cap as a “regressive” tax cut, estimating that it would cost $90 billion a year in lost government revenue. The wealthiest would make out the best, with a SALT cap repeal distributing more than $300,000 per household in the top 0.1 percent of earners and only $40 for a middle-income family over the first two years.“With the SALT cap repealed and current tax rates retained, in fact, the reconciliation package might actually offer a net tax cut for most high-income households,” the group said.The right-leaning Tax Foundation estimated that repealing the cap would increase after-tax income of the top 1 percent of earners by 2.8 percent, while the bottom 80 percent would get minimal benefit.Republicans seized on the agreement on Tuesday, accusing Democrats of hypocrisy for backing an “anti-progressive” handout.“First Democrats cut out paid leave,” J.P. Freire, a spokesman for Republicans on the House Ways and Means Committee, said on Twitter. “Now they’re shoveling money to the rich.” More

  • in

    Why Paid Family Leave’s Demise This Time Could Fuel It Later

    In failing to secure a benefit with bipartisan appeal, President Biden joins a long line of frustrated politicians. But some Republicans say it could be resurrected on its own.WASHINGTON — In late 2019, with bipartisan backing, including from the iconoclastic Senate Democrat Kyrsten Sinema of Arizona, President Donald J. Trump’s daughter Ivanka hosted a summit at the White House to promote her vision for paid family and medical leave.As with many domestic initiatives of the Trump years, the effort went nowhere, thanks in part to the former president’s lack of interest in legislating. But it also stalled in part because of opposition from Democrats like Senator Kirsten Gillibrand of New York, who saw the plan not as a true federal benefit but as a “payday loan” off future Social Security benefits.Ms. Gillibrand believed she could do much better.Last week was the Democrats’ turn to fail. A 12-week paid family and medical leave program, costing $500 billion over 10 years, was supposed to be a centerpiece of President Biden’s social safety net legislation. But it fell out of his compromise framework, a victim of centrists who objected to its ambition and cost.The demise of the effort, even amid bipartisan interest, in part reflected the polarization surrounding Democrats’ marquee domestic legislation, which Republicans are opposing en masse.Some business groups and G.O.P. proponents of a paid leave program believe that if it had been broken out and negotiated with Republicans, the way a $1 trillion infrastructure package was at Mr. Biden’s urging, it could have survived, and some think it still could resurrected as a bipartisan initiative.They said the problem lay with the Democrats’ decision to put paid family leave in the expansive social policy and climate bill — a multitrillion-dollar package financed by large tax increases on businesses and the wealthy — which they knew that Republicans and mainstream business groups would never support.“In any area that is substantive, when members sit down to actually walk through whether or not we can build good legislation, there are possibilities,” Senator Lisa Murkowski, Republican of Alaska, said. “We’re not being encouraged to work together to solve problems. What we’re being encouraged to do is line up with the team so that we can have the political messaging point.”At least for now, though, the United States is almost certain to remain one of only six countries with no national paid leave.“Fundamentally, to provide paid leave, you have to value women and value their work,” Ms. Gillibrand lamented, “and valuing women and their work is a hard thing for the United States.”The last-minute removal of the paid leave program underscored longstanding questions about how it can be that while 186 other countries have such a program, the United States does not.A rally for paid leave near the White House. The United States is one of only six countries that do not provide some sort of national paid leave.Valerie Plesch for The New York TimesMs. Gillibrand was highly skeptical that a bipartisan deal to address the issue was possible. She said she had been developing paid family and medical leave legislation for nearly a decade, had sought out numerous Republican and business partners, and had always found the parties too ideologically divided.But the issue driving interest in both parties — bringing more women into the work force and keeping them there — has only grown more acute since the coronavirus pandemic hit.White House officials say 95 percent of the lowest-wage workers lack any paid leave, and they are predominantly women and people of color. Some five million women lost their jobs during the pandemic, and many of them, struggling with access to child care and bedeviled by intermittent school closures and periodic Covid-19 outbreaks, have opted not to return.Mr. Trump campaigned on the issue and included six weeks of federally paid leave in his budgets, which were ignored by Republican leaders. Congressional Republicans had their own ideas. Legislation introduced in 2019 by Senators Sinema and Bill Cassidy, Republican of Louisiana, and Representatives Elise Stefanik, Republican of New York, and Colin Allred, Democrat of Texas, would offer new parents $5,000 during the first year of their baby’s life, which they would repay over the decade through cuts to their child tax credit.The Republican senators Marco Rubio of Florida, Mitt Romney of Utah, Joni Ernst of Iowa and Mike Lee of Utah similarly proposed offering workers parental leave benefits that would have to be repaid — with interest — through cuts in their Social Security retirement benefits.Senator Deb Fischer, Republican of Nebraska, championed and secured more modest legislation — tucked into the Republican tax cuts of 2017 — that gave small businesses a tax credit to fund family leave. She argued against broader versions, since many companies already offer employees paid leave.“If you have two or three employees, you cannot afford to do paid family leave because you can’t afford to hire somebody to take their place, which is why I think the tax credit that we have in law now is really beneficial,” Ms. Fischer said.According to the White House, fewer than a third of small businesses with 100 or more employees offer paid leave. Only 14 percent with fewer than 50 employees do. Ms. Fischer conceded that few small businesses have taken advantage of her credit, but she blamed the Treasury Department, under Mr. Trump and Mr. Biden, for dragging its feet on issuing detailed regulations and promoting it.To Democrats, those proposals are not true leave. They are either loans off other needed benefits or too limited to make a difference. Ms. Gillibrand said that optimally, a stable, generous family and medical leave plan would be an “earned benefit” like Social Security and Medicare: Workers would pay into the system and claim the benefit when they needed it, regardless of where they worked or how much they earned.But, she said, taxing workers has become politically difficult. Her 2013 bill envisioned family and medical leave insurance, financed by a small contribution from employers with each paycheck.This year, the Biden administration and Democratic leaders opted to fund paid leave out of general revenues, bolstered by tax increases on the wealthy and corporations. They said the program was part of a broader “human infrastructure” effort to help children and young parents, which included child care support, a child tax credit and universal prekindergarten — and therefore didn’t need a dedicated funding source.Senator Joe Manchin III, Democrat of West Virginia, opposed a plan for 12 weeks of paid family and medical leave, saying he worried that without a stable revenue source, it would be a drain on the Social Security system.Al Drago for The New York TimesThe House proposal would have guaranteed 12 weeks of paid family and medical leave annually to all workers, in private or government employment, gig work like Uber and Lyft, or self-employment. The benefit would have replaced 85 percent of wages or earnings for the lowest-paid workers, scaling back from there.That generosity was why the plan ran into a roadblock in the Senate. Senator Joe Manchin III, Democrat of West Virginia, saw an expensive new benefit without a stable revenue source that he worried would end up draining an already stressed Social Security system.Ms. Gillibrand and Senator Patty Murray, Democrat of Washington, have pleaded, cajoled and bargained with him. They said a paid leave plan would actually bolster Social Security’s finances by helping women get back to work, where they would pay Social Security taxes, and helping young families have more children, which would bolster the work force of the future. Democrats offered to scale back a 12-week leave plan to four weeks, then to limit it to leave for new babies, not medical emergencies.Mr. Manchin promised to consider the offers, but few are optimistic. Ms. Gillibrand sees societal issues at work. While it is true that virtually every country in the world has a paid leave program, that is somewhat misleading, she said.Most of those countries can afford to offer paid leave because they do not actually expect women to work once they begin having children. Long leave plans help couples get started having children, but most countries then do not help with child care because they assume women will stay home.The U.S. work force relies on women. Mr. Biden’s compromise framework does include generous subsidies for child care starting at birth and for universal prekindergarten for 3- and 4-year-olds. It now lacks the first step: helping parents through pregnancy and childbirth.“What we’re trying to achieve here is the ability of women to work effectively and to be most productive at work,” Ms. Gillibrand said.Advocates say lawmakers should not give up yet. Marc Freedman, the U.S. Chamber of Commerce’s vice president for employment policy, said the business group had been meeting with congressional offices before the pandemic, pressing for a national paid leave plan to replace the patchwork of state and local government plans popping up.The government would create a minimum benefit that businesses would be allowed to exceed for recruitment and retention, financed by a payroll tax paid by employees. Such a plan would help smaller businesses compete for labor with larger corporations, while offloading some of the burden on companies that already offer leave plans.“We very much want to restart those conversations,” he said.Some Republicans, especially Republican women, say they are ready to join those talks.“It’s an issue we need to address as a nation and look at and get creative with,” said Senator Shelley Moore Capito, Republican of West Virginia, who helped secure paid leave for federal workers.But as with the infrastructure deal struck over the summer, Democrats would not be likely to get all they want. Ms. Capito, for instance, said the plan that Mr. Manchin killed was too generous, with leave beyond care for new babies and sick family members.Ms. Gillibrand said she had already begun outreach. She talked to Senator Susan Collins, Republican of Maine, about an interim step of helping small states pool with larger ones to create regional leave programs. She signaled flexibility on funding the kind of insurance mechanism that Mr. Freedman said the Chamber of Commerce favored.But none of those ideas would happen as quickly as the broad program that Mr. Manchin is opposing, she said.“There is work I can do over the next six months to a year, sure, but will take time,” Ms. Gillibrand concluded. “And it won’t be simple.” More

  • in

    How $2 Trillion in Tax Increases in Biden's Bill Target Companies and the Rich

    The proposal to fund the president’s sprawling spending plan mostly turns up the dial on more conventional tax policies, while trying to curb maneuvers that allow tax avoidance.WASHINGTON — President Biden’s new plan to pay for his climate change and social policy package includes nearly $2 trillion in tax increases on corporations and the rich. But many of the more contentious and untested proposals that Democrats have been considering in recent weeks were left on the cutting-room floor.The latest proposal reflects the reality that moderate Democrats are unwilling to back certain ideas aimed at raising money, including taxing the unrealized capital gains of billionaires and giving the Internal Revenue Service more insight into the finances of taxpayers. Ultimately, the package of tax increases mostly turns up the dial on more conventional tax policies, while adding some new wrinkles to curb maneuvers that allow tax avoidance.“I think in terms of who they’re targeting, they did decide to target the larger population of very rich people and not just get the money from a very small group of superrich people,” said Howard Gleckman, a senior fellow at the Urban-Brookings Tax Policy Center.Here’s a look at what’s in the new tax plan:Taxing the rich.Instead of a wealth tax or a special tax on billionaires, Mr. Biden rolled out a new “surtax” on income for multimillionaires and billionaires. It would effectively raise the top tax rate on ordinary income to 45 percent for the highest earners.Those with adjusted gross income of more than $10 million would face an additional 5 percent tax on top of the 37 percent marginal tax rate they already pay. Those making more than $25 million would face an extra 3 percent surtax.The Biden administration estimates that these tax increases would hit the top .02 percent of taxpayers and raise $230 billion of tax revenue over a decade.The plan also aims to ensure that people making more than $400,000 are not able to use loopholes to avoid paying a 3.8 percent Medicare tax. The White House estimates that provision alone will generate $250 billion in tax revenue over the next 10 years.Making corporations pay more.Borrowing a page from his campaign playbook, Mr. Biden wants to impose a 15 percent minimum tax on profitable companies that have little to no federal tax liability. Many profitable companies are able to reduce or eliminate their tax liability through the use of tax credits, deductions and previous losses that can carry over. The new tax would apply to companies with more than $1 billion in so-called book income — profits that firms report to their shareholders but not to the I.R.S.The plan is meant to ensure that the approximately 200 companies that pay no corporate income tax will have to pay some money to the federal government.The White House estimates the provision, which was also included in a plan presented by Senate Democrats, will raise an additional $325 billion in tax revenue over a decade.Chye-Ching Huang, the executive director of the Tax Law Center at New York University, said on Thursday that the proposal could mean that financial statements where book income is reported could become the new “locus for tax avoidance.”A separate proposal would also enact a 1 percent surcharge on corporate stock buybacks. Buybacks have surged along with the stock market, with cash-rich firms like Apple, JPMorgan Chase and Exxon spending billions of dollars each year to buy back, then retire, shares in their own companies. That can help drive up the company’s stock price, enriching both shareholders and corporate executives whose compensation is often tied to their firm’s stock performance.The provision is projected to raise $125 billion over 10 years.Ending the tax race to the bottom.Mr. Biden’s framework would raise the tax that companies pay on foreign earnings to 15 percent, putting the United States in line with a global minimum tax that is being completed at the Group of 20 summit in Rome this week.The Biden administration initially wanted to double the current rate to 21 percent from 10.5 percent. In settling on 15 percent, the U.S. rate would match what was agreed to by the 136 countries participating in the global deal and could blunt criticism that American companies will face a competitive disadvantage.The global agreement is meant to end corporate tax havens and stop what Treasury Secretary Janet L. Yellen describes as the “race to the bottom” of declining corporate tax rates around the world.To deter companies from finding ways to avoid the tax, the plan would impose a penalty rate on foreign corporations based in countries that are not part of the agreement.The Biden administration projects the international plans would raise $350 billion over a decade.Narrowing the tax gap.White House and Treasury Department officials have spent months pushing a proposal to narrow the $7 trillion gap in taxes that are owed by individuals and businesses but not collected. The administration initially wanted to invest $80 billion in additional enforcement staffing at the I.R.S. and require banks to hand over more information about the finances of their customers.Under the new proposal, the I.R.S. would get more money to ramp up audits of people making more than $400,000. However, the new bank reporting proposal — which the Treasury has called critical to its ability to hunt down hidden revenue — was conspicuously absent. A lobbying campaign from banks prompted huge blowback from lawmakers, including Senator Joe Manchin III, a West Virginia Democrat whose vote is critical to passing the overall package.Treasury officials and a group of Senate Democrats are continuing to negotiate with Mr. Manchin on narrowing the proposal in a way that he could support.As it stands, the plan to bolster I.R.S. enforcement is projected to raise $400 billion over a decade, down from the $700 billion in the original proposal.Reducing the deficit, maybe.Mr. Biden said on Thursday that his plans were “fiscally responsible” and claimed that the proposals, if enacted, would reduce the country’s budget deficit.The $2 trillion of proposed tax increases would more than offset the $1.85 trillion in spending on housing, child care and climate initiatives. However, nonpartisan scorekeepers such as the Congressional Budget Office have in the past offered less rosy projections of what Biden administration proposals might actually raise in revenue.Additional I.R.S. enforcement personnel will take years to get up to speed, and audits could be less effective without the additional bank information the Treasury Department is seeking.Some Democratic lawmakers are also still fighting for the inclusion of provisions that could actually cost money, including a partial or temporary restoration of SALT, the state and local tax deduction that Republicans capped in 2017. Last-minute additions such as that could add to the cost of the overall package. More

  • in

    Stocks Hit a Record as Investors See Progress Toward a Spending Deal

    After weeks of fluctuations driven in part by Washington gridlock, share prices hit another high and put a dismal September in the rearview mirror.Wall Street likes what it’s hearing from Washington lately.The S&P 500 inched to a new high on Thursday, continuing a rally aided by signs of progress in spending talks that could pave the way for an injection of some $3 trillion into the U.S. economy.The index rose 0.3 percent to 4,549.78, its seventh straight day of gains and a fresh peak after more than a month of volatile trading driven by nervousness over the still-wobbly economic recovery and policy fights in Washington.The S&P 500’s performance this year

    Source: S&P Dow Jones IndicesBy The New York TimesBut even baby steps by lawmakers have helped end a market swoon that began in September.Share prices began to rise this month when congressional leaders struck a deal to allow the government to avoid breaching the debt ceiling, ending a standoff that threatened to make it impossible for the country to pay its bills. The rally has gained momentum as investors and analysts grow increasingly confident about a government spending package using a recipe Wall Street can live with: big enough to bolster economic growth, but with smaller corporate tax increases than President Biden’s original $3.5 trillion spending blueprint.“It seems like we’re kind of reaching a middle ground,” said Paul Zemsky, chief investment officer, multi-asset strategies at Voya Investment Management. “The president himself has acknowledged it’s not going to be $3.5 trillion, it’s going to be something less. The tax hikes are not going to be as much as the left really wanted.”Share prices had marched steadily higher for much of the summer, hitting a series of highs and cresting on Sept. 2. But a number of anxieties sapped their momentum as the certainty that markets crave began to evaporate. Gridlock over government spending, continuing supply chain snarls, higher prices for businesses and consumers and the Federal Reserve’s signals that it would begin dialing back its stimulus efforts all helped sour investor confidence. The S&P 500’s 4.8 percent drop in September was its worst month since the start of the pandemic.It has made up for it in October, rising 5.6 percent this month. But it’s not just updates out of Washington that have renewed investors’ optimism.The country has seen a sharp drop in coronavirus infections in recent weeks, raising, once again, the prospect that economic activity can begin to normalize. And the recent round of corporate earnings results that began in earnest this month has started better than many analysts expected. Large Wall Street banks, in particular, reported blockbuster results fueled by juicy fees paid to the banks’ deal makers, thanks to a surge of merger activity.Elsewhere, shares of energy giants have also buoyed the broad stock market. The price of crude oil recently climbed back above $80 a barrel for the first time in roughly seven years, translating into an instant boost to revenues for energy companies.But the recent rally seemed find its footing two weeks ago. On Oct. 6, word broke that Senator Mitch McConnell of Kentucky, the Republican leader, was willing to offer a temporary reprieve allowing Congress to raise the debt ceiling. The market turned on a dime from its morning slump, finishing the day in positive territory. That week turned out to be the market’s best since August.Once done as a matter of course in Washington, raising the debt ceiling has been an increasingly contentious issue in recent years — with sometimes serious implications for the market. In August 2011, a rancorous battle over the debt ceiling sent share prices tumbling sharply as investors began to consider the prospect that the United States could actually default on its debts.But the recent deal on the ceiling — even though it only pushed a reckoning into December — suggested to investors that there’s little appetite in Washington for a replay of a decade ago.“I think that let some pressure out of the system,” said Alan McKnight, chief investment officer of Regions Asset Management. “What it signaled to the markets was that you can find some area of agreement. It may not be very large. But at least they can come together.”With the impasse broken, the rally gained strength. Last Thursday, the S&P 500 jumped 1.7 percent — its best day in roughly seven months — as financial giants like Morgan Stanley and Bank of America reported stellar results.Potential progress on a deal in Washington has only brightened investors’ outlook.“Democrats are now moving in the same direction, and hard decisions are being made,” wrote Dan Clifton, an analyst with Strategas Research, who monitors the impact of policy on financial markets, in a note to clients on Wednesday.Understand the U.S. Debt CeilingCard 1 of 6What is the debt ceiling? More

  • in

    Biden’s Plans Raise Questions About What U.S. Can or Cannot Afford to Do

    Democrats are debating whether doing nothing will cost more than doing something to deal with climate change, education, child care, prescription drugs and more.WASHINGTON — As lawmakers debate how much to spend on President Biden’s sprawling domestic agenda, they are really arguing about a seemingly simple issue: affordability.Can a country already running huge deficits afford the scope of spending that the president envisions? Or, conversely, can it afford to wait to address large social, environmental and economic problems that will accrue costs for years to come?It is a stealth battle over the fiscal future at a time when few lawmakers in either party have prioritized addressing debt and deficits. Each side believes its approach would put the nation’s finances on a more sustainable path by generating the strongest, most durable economic growth possible.The debate has shaped a discussion among lawmakers about what to prioritize as they scale back Mr. Biden’s initial proposal to dedicate $3.5 trillion over 10 years to programs and tax cuts that would curb greenhouse gas emissions, make child care more affordable, expand access to college and lower prescription drug prices, among other priorities. The smaller bill under discussion could increase the total amount of government spending on all current programs by about 1.5 percent to 2.5 percent over the next decade, depending on its size and components. Mr. Biden has proposed fully paying for this with a series of tax increases on businesses and the wealthy — including raising the corporate tax rate, increasing taxes on multinational corporations and cracking down on wealthy people who evade taxes — along with reducing government spending on prescription drugs for older Americans.As the negotiations continue, Democrats are considering cutting back or jettisoning programs to shave hundreds of billions of dollars off the final price to get it to a number that can pass the House and Senate along party lines. One key part of Mr. Biden’s climate agenda — a program to rapidly replace coal- and gas-fired power plants with wind, solar and nuclear energy — is likely to be dropped from the bill because of objections from a coal-state senator: Joe Manchin III, Democrat of West Virginia.The discussions have focused attention on Washington’s longstanding practice of using budgetary gimmicks to make programs appear to be paid for when they are not, as well as opening a new sort of discussion about what affordable really means.The debate about what the United States can afford used to be pegged to its growing budget deficits and warnings that the government, which spends much more than it brings in, could saddle future generations with mountains of debt, sluggish economic growth, runaway inflation and enormous tax hikes. But those concerns receded after no such crisis materialized. The country experienced tepid inflation and low borrowing costs for a decade after the 2008 financial crisis, despite increased borrowing for economic stimulus under President Barack Obama and for tax cuts under President Donald J. Trump.In its place is a new debate, one focused on the long-term costs and benefits of the government’s spending decisions.Many Democrats fear the United States cannot afford to wait to curb climate change, help more women enter the work force and invest in feeding and educating its most vulnerable children. In their view, failing to invest in those issues means the country risks incurring painful costs that will slow economic growth.“We can’t afford not to do these kinds of investments,” David Kamin, a deputy director of the White House National Economic Council, said in an interview.Take climate change: The Democratic think tank Third Way estimates that if Congress passes an aggressive plan to reduce greenhouse gas emissions, U.S. companies will invest an additional $1.3 trillion in the construction and deployment of low-emission energy like wind and solar power and energy-efficient technologies over the next decade, and $10 trillion by 2050. White House officials say that if the country fails to reduce emissions, the federal government will face mounting costs for relief and other aid to victims of climate-related disasters like wildfires and hurricanes.“Those are the table stakes for the reconciliation and infrastructure debate,” said Josh Freed, the senior vice president for climate and energy at Third Way. “It’s why we think the cost of inaction, from an economic perspective, is so enormous.”But to some centrist Democrats, who have expressed deep reservations about spending $2 trillion on a bill to advance Mr. Biden’s plans, “affordable” still means what it did in decades past: not adding to the federal debt. The budget deficit has swelled in recent years, reaching $1 trillion in 2019 from additional spending and tax cuts that did not pay for themselves, before topping $3 trillion last year amid record spending to combat the coronavirus pandemic.Mr. Manchin says he fears too much additional spending would feed rising inflation, which could push up borrowing costs and make it harder for the country to manage its budget deficit. He has made clear that he would like the final bill to raise more revenue than it spends in order to reduce future deficits and the threat of a debt crisis. Mr. Biden says his proposals would help fight inflation by reducing the cost of child care, housing, education and more.A few economists agree with Mr. Manchin, warning that even fully offsetting spending and tax cuts could fuel inflation. Michael R. Strain, a centrist economist at the conservative American Enterprise Institute who supported many of the pandemic spending programs, said in an interview this year that additional spending that stoked consumer demand would “exacerbate pre-existing inflationary pressures.”President Biden visited the Capitol Child Development Center in Hartford, Conn., on Friday. He has warned that if Congress does not act to invest in children, the United States will face slower economic growth for generations to come.Sarahbeth Maney/The New York TimesRepublicans, who have vowed to fight any version of the spending bill, argue that the national economy cannot afford the burden of taxes on high earners and businesses that Democrats have proposed to help offset their plans. They say the increases will chill growth when the recovery from the pandemic recession remains fragile.“The tax hikes are going to slow growth, flatten out wages and both drive U.S. jobs overseas and hammer small businesses,” said Representative Kevin Brady of Texas, the top Republican on the Ways and Means Committee. “There will be a significant economic price to all this spending.”U.S. Inflation & Supply Chain ProblemsCard 1 of 6Covid’s impact on supply continues. More

  • in

    Finance Executives Say Risk of Default Is Already Damaging the Economy

    Shortly after the C.E.O.s met with President Biden, Senator Mitch McConnell said he would allow Democrats to raise the debt ceiling enough to push a potential default to December.Finance executives met with President Biden as an Oct. 18 debt-ceiling deadline inched closer, warning that a U.S. default would threaten the global economy. Senate Republicans have promised to filibuster a long-term suspension of the borrowing limit.Doug Mills/The New York TimesPresident Biden met with finance executives on Wednesday as he continued to try to put maximum pressure on Senate Republicans to raise the debt ceiling before Oct. 18, the date the Treasury Department has said the United States would go into default.Shortly after the meeting, Senator Mitch McConnell, the minority leader, seemed to relent from his opposition to allowing Democrats to lift the ceiling in the short term through regular channels. He said he would “allow Democrats to use normal procedures to pass an emergency debt limit extension at a fixed dollar amount to cover current spending levels into December.”The White House dismissed Mr. McConnell’s statement as an informal offer and said the president would rather Republicans allow a vote on a spending bill to go forward.The executives all warned that the economy would be threatened should the country default on its debts for the first time in history.“It’s already beginning to cause some damage in the economy,” Jane Fraser, the chief executive of Citigroup, told the president. “It will hurt consumers. It will hurt small businesses.”“It’s not an exaggeration to say that even small distortions in the Treasury market can cost taxpayers tens of billions of dollars over many years,” she added, referring to the market for bonds issued by the Treasury Department.Mr. Biden, seeking to convey the consequences to everyday Americans, asked the executives to explain what would happen if the United States went into default for only a day or two.“Certainly, as we know, there are hundreds of millions of investors that are involved in the markets today that have put their hard-earned savings into the markets,” said Adena Friedman, the chief executive of Nasdaq. “And we would expect that the markets will react very, very negatively.”Mr. McConnell of Kentucky had long said Democrats must use a more complicated process known as reconciliation to overcome Republican opposition to raising the debt ceiling. In his statement on Wednesday, he reiterated that the reconciliation process was the only option he supported for a longer-term increase in the limit, unless “Democrats abandon their efforts to ram through another historically reckless taxing and spending spree.”The financial sector had been projecting a grim two weeks ahead. A report released by Goldman Sachs said that there was little reason to believe Congress would meet the Oct. 18 deadline, but that “the public and financial market response would likely force a quick political resolution.”Senate Democrats are still weighing their options for a path forward. Jen Psaki, the White House press secretary, told reporters on Wednesday that the White House did not want to keep prolonging things with an extension. “We don’t need to go through a cumbersome process that every day brings additional risks,” Ms. Psaki said.Asked why the White House does not support a short-term debt ceiling increase that could, at least temporarily, calm financial markets, Ms. Psaki replied, “Why not just get it done now?” She said Mr. Biden and Mr. McConnell had not yet spoken about the debt limit.The budget process of reconciliation would most likely involve two marathons of politically charged votes that Mr. Biden has predicted would be “fraught with all kinds of potential danger for miscalculation.” Democrats say there is no guarantee that Republicans wouldn’t drag those votes out to inflict procedural and political discomfort.Understand the U.S. Debt CeilingCard 1 of 9What is the debt ceiling? More

  • in

    Biden Calls Republicans 'Reckless' Over the Debt Limit Increase

    The president warned Republicans “not to use procedural tricks to block us from doing the job.”President Biden said Americans could see the implications as early as this week if Senate Democrats were not able to vote to increase the debt limit.Doug Mills/The New York TimesWASHINGTON — President Biden excoriated Republicans on Monday for blocking his party’s efforts to raise the debt ceiling weeks before a projected government default, calling their tactics “reckless” and “disgraceful” and warning they risked causing “a self-inflicted wound that takes our economy over a cliff.”Mr. Biden, trying to convey the risks to everyday Americans, warned that they could see the effects as early as this week if Senate Democrats were not able to vote to raise the debt limit. That cap dictates the amount of money the government can borrow to fulfill its financial obligations, including paying Social Security checks, salaries for military personnel and other bills.“As soon as this week, your savings and your pocketbook could be directly impacted by this Republican stunt,” Mr. Biden said, cautioning that a failed vote could rattle financial markets, sending stock prices lower and interest rates higher. “A meteor is headed for our economy.”Despite Mr. Biden’s attempts to blame Republicans for the impasse, Democrats are increasingly confronting the possibility that they may need to raise the debt limit through the one legislative path that Republicans have left open: a process known as budget reconciliation that bypasses a Senate filibuster. Mr. Biden and Democratic leaders have chafed at that approach, saying Republicans bear a share of responsibility for Washington’s ongoing budget deficits and must at least allow an up-or-down vote, as has been the case under previous presidents.Investors in U.S. government debt are already getting spooked: Yields for certain Treasury bonds that could be affected by a default spiked on Monday, as investors demanded higher interest payments to offset the risk.The Treasury Department has warned the United States will run out of money to pay all its bills by Oct. 18 if the borrowing cap is not raised, a situation that could force the government into default and wreak havoc on an American economy already shaken by the coronavirus.The dire stakes of the debt limit impasse add a level of seriousness to what has become a perennial exercise of political brinkmanship in Washington. Mr. Biden and congressional Democrats say Republicans are putting the entire economy at risk by blocking a Senate vote that would raise the debt limit with just Democrat support. Republicans, who have allowed such votes to occur in the past, have twice blocked Democrats from taking up a bill and are trying to force the party to use reconciliation, which is a more complicated process that could take a week or more to come together.On Monday, the president said that he could not guarantee the limit would be raised.“That’s up to Mitch McConnell,” Mr. Biden said, referencing the senator of Kentucky and minority leader. “I don’t believe it. But can I guarantee it? If I could, I would, but I can’t.”The president’s remarks escalated a showdown with Mr. McConnell, who on Monday sent a letter to Mr. Biden stating that he would not relent in using the filibuster to prevent a Senate vote and that the onus was on Democrats to find a solution.Senator Mitch McConnell, the minority leader, sent a letter to Mr. Biden stating that the onus was on Democrats to find a solution to the debt-limit problem.T.J. Kirkpatrick for The New York Times“I respectfully submit that it is time for you to engage directly with congressional Democrats on this matter,” Mr. McConnell wrote in a letter to Mr. Biden. “Your lieutenants in Congress must understand that you do not want your unified Democratic government to sleepwalk toward an avoidable catastrophe when they have had nearly three months’ notice to do their job.”Democratic leaders in the Senate, along with Mr. Biden, have bristled at Mr. McConnell’s stance, saying Republicans bear responsibility for having approved spending that now requires more government borrowing, and have no right to stand in the way of a Senate vote.“Why? Why are we doing this?” Senator Richard J. Durbin of Illinois, the No. 2 Senate Democrat, said on Monday. “Because McConnell wants to make a point.”Senator Jon Tester, Democrat of Montana, visibly frustrated, said the brinkmanship “speaks to how broken this country is.”“I mean it’s crazy — we’re offering a way to do it, where he doesn’t have to have any members vote for it, and he said that’s not good enough,” Mr. Tester said. “It’s got to be on this piece of legislation or we’re out.”Senator Chuck Schumer of New York, the majority leader, told Democrats that a bill that would raise the debt limit would need to reach Mr. Biden’s desk within days, not weeks, and threatened to hold members in Washington over the weekend and cancel an upcoming recess to do it.“Let me be clear about the task ahead of us: We must get a bill to the President’s desk dealing with the debt limit by the end of the week. Period. We do not have the luxury of waiting until Oct. 18,” he wrote in a “dear colleague” letter dated Monday.Mr. McConnell made clear that the Republican decision to filibuster a vote was driven by politics. He cited the votes Mr. Biden cast against raising the debt limit under former President George W. Bush, which he said “made Republicans do it ourselves.”“Bipartisanship is not a light switch that Speaker Pelosi and Leader Schumer may flip on to borrow money and flip off to spend it,” Mr. McConnell wrote. “For two and a half months, we have simply warned that since your party wishes to govern alone, it must handle the debt limit alone as well.”Administration officials and Democratic leaders note a large difference between the votes under Mr. Bush and the ones now: Democrats did not filibuster those votes, allowing Republicans to bring a bill to the floor and raise the limit on their own.With that avenue in peril, administration officials and congressional leaders are privately sifting through the party’s options if Mr. McConnell does not budge and the vote fails. If that happens, Mr. Biden could face increased pressure to get Mr. Schumer and other party leaders to use budget reconciliation.The reconciliation process would likely involve two marathons of politically charged votes that could extend for the better part of a day. Democrats say there is no guarantee that Republicans won’t drag those votes out to inflict procedural and political discomfort.Understand the U.S. Debt CeilingCard 1 of 8What is the debt limit? More