Tue, November 30, 2021

international

Biden budget expects hot - but not overheating - economy heading into 2022 midterm elections


WASHINGTON - The budget officially released Friday by the White House hinges on an optimistic projection that the economy will grow at a rapid pace for the next two years, with inflation under control and unemployment falling to near pre-pandemic levels.

In its first budget, the Biden administration said the economy will grow at just north of 5% this year as the nation rebounds from the coronavirus pandemic. The White House sees robust growth continuing through the following year as well, with the economy expanding by 4.3% in 2022. The economy has not grown at a rate faster than 4% rate in more than 20 years. White House officials told reporters on Friday that these projections predate the rollout of the Biden administration's full economic spending proposals and may therefore prove to be conservative estimates.

The budget also projects that the unemployment rate will fall from 6.1% as of April 2021 to 4.1% in 2022. The jobless rate was 3.5% in February 2020 before the pandemic pushed it up to 14.8% in April 2020.

All of these forecasts would set the table for a vibrant economy just ahead of the 2022 midterm elections, possibly bolstering Democrats' shot at maintaining control of Congress despite tough odds. But numerous economists believe that predicting the economy's performance coming out of the pandemic is very difficult, as there is little precedent for what the country has endured since early last year.

One part of the newly released budget that will likely face the most scrutiny is the White House's estimate that this hot economy will not lead to a dramatic and sustained spike in inflation, despite a sharp uptick over the past two months. The administration says the consumer price index - the main measure of inflation - would increase by a little more than 2% every year over the next decade. Republicans have said that the Biden administration's economic agenda would flood the economy with too much cash and lead to a surge of inflation that hurts the economy.

Recent reports appear to be somewhat skewed because the economy is reopening quickly after many parts of it were sluggish during the pandemic. Prices jumped 3.6% in April compared to one year ago, although policymakers including central bankers have said that will likely be transitory rather than permanent change. The University of Michigan Surveys of Consumers said Friday that consumers are bracing for an uptick in inflation to persist throughout the year but largely expect a healthy economic recovery.

The projections may give congressional Democrats a glimmer of hope in what is otherwise expected to be a difficult battle to maintain control of the House and Senate in the 2022 midterm elections. The Senate is evenly divided between the parties and Democrats only have a narrow margin in the House, meaning even a minor electoral setback could cost them control of Congress. They are swimming against the historical tide: The president's party has lost seats in the House in every midterm election since 1938 with only two exceptions - 1998 and 2002, according to David Hopkins, a political scientist at Boston College.

Upbeat economic projections are common in White House budget proposals, but economists believe forecasting the next few years is very difficult. The pandemic delivered an enormous shock to the U.S. and global economies, and it is still unclear which sectors will return to pre-pandemic levels and which sectors might never return to normal.

"We are seeing waves of the virus continue globally, and in that world forecasting becomes highly uncertain," said Constance Hunter, chief economist at KPMG. Hunter added that the uncertain state of congressional negotiations over the administration's priorities further cloud the projections. "There are still many negotiations between now and the point we have legislation, and those negotiations will contract this plan not expand it."

Biden's approval rating has hovered around the mid-50s, but many political scientists think it will have to be above 60% for Democrats to retain control of Congress. It is unclear if even relatively robust economic growth can pull him over that threshold given the country's deep partisan divides.

"There will be a lot of twists and turns between now and the election, but to the extent you're running on impressive economic growth this has to be encouraging for them," said Jim Manley, a former aide to Sen. Harry Reid, D-Nev. "If you look at history, the House is destined to change. But this has to make Democratic strategists optimistic. These are pretty good numbers."

The economic projections are included as part of the White House's release of a $6 trillion budget on Friday for the fiscal year that begins in October. That budget includes no major new spending proposals but reflects what the administration has already said it wants to advance, including a $2.3 trillion jobs and infrastructure plan, a $1.8 trillion education and families plan, and a $1.5 trillion discretionary spending plan for agencies like the Department of Defense.

The proposal kicks off negotiations between the White House and Congress over the federal budget, which must be agreed to avert a shutdown of the U.S. government.

Republicans and even some Democrats dispute the administration's projections of a rosy economic rebound. These critics have pointed to rising inflation, as well as weaker-than-expected hiring and the continued growth of the federal debt. The administration's economic projections are based in part on assuming some of their infrastructure and other domestic spending priorities as written are signed into law, which is far from clear given Biden's negotiations with congressional Republicans over those priorities and Democrats' narrow congressional majorities.

"We just got the most dramatic monthly inflation report in decades," Senate Minority Leader Mitch McConnell, R-Ky., told CNBC on Friday.

Other parts of the administration's economic projections could prove overly optimistic. The coronavirus continues to wreak havoc on global supply chains and dry up demand for U.S. exports. A new outbreak in Malaysia led to the announcement of a new lockdown this week, for instance, and coronavirus variants could pose further problems.

Conservatives also warn that the administration's tax plans could slow growth. The administration has proposed increasing the corporate tax rate from 21% to 28%, while also imposing dramatically higher taxes on multinational corporations operating abroad. The White House has denied those plans will slow the growth rate, though Biden has said he's willing to negotiate with Republicans on other alternatives.

Much of the next year in Washington could be defined by debates about government spending, but the economy's performance could prove a major factor in the 2022 elections. And the White House is not alone in believing Biden could oversee a rapid economic rebound. The economic growth projections were squarely in line with the "blue chip" forecasters on Wall Street. The Wall Street forecaster Moody's has said the economy will grow even faster than the White House suggested, projecting 7.4% growth in 2021. Moody's and the White House have both forecast 4.3% growth for 2022, falling to a little above 2% in the year after that.

Published : May 29, 2021

By : The Washington Post · Jeff Stein