Making a Reconciliation Market
Wall Street doesn’t underestimate Ken Griffin’s ability to make a market. It’s time they stop underestimating Speaker Nancy Pelosi’s ability as well.
From Wall Street to K Street, the consensus is Democrats could fail in their attempts to pass a reconciliation tax and spending bill that bypasses Republican support. If they do pass one, it’ll be limited by what moderate Democrats can accept — below $2 trillion with an equal or lesser amount of tax offsets.
Investors are more focused on the question ‘what’s the maximum amount moderates will accept?’ But Democratic leadership is equally focused on the question ‘what’s the minimum amount progressives will accept?’ It’s the job of these Democratic market makers to bridge this bid-ask spread.
While Griffin has no interest in providing the services of Citadel Securities to make a progressive market, Pelosi is no market-making neophyte. After Democrats lost their filibuster-proof majority following Republican Scott Brown’s 2010 Senate special election victory, it was Pelosi who pushed the Democratic healthcare agenda forward when others wanted to retreat. She dismissed a “namby-pamby” approach and engineered a two-track process that included reconciliation, something not dissimilar to her strategy today.
Pelosi and progressives know this reconciliation bill is a legacy marker and a literal “once-in-a-generation” opportunity as Republicans are well-positioned to break up Democratic control of Congress in 2022. It’s now or never, and Pelosi, who is expected to retire after this final term, isn’t willing to sell these Democratic priorities short just yet when reconciliation remains a viable path.
Pelosi may be the strategic mastermind, but she needs other Democratic leaders to help make a reconciliation market. She has a market-maker ally in President Biden, whose time in DC since 1973 is characterized as having a keen sense of knowing where the middle of the Democratic Party is and largely adhering to that middle.
Biden this year released a $1.9 trillion American Rescue Plan (ARP). All but one congressional Democrat voted for a $1.9 trillion ARP. The gross spending in his proposed American Jobs Plan and American Families Plan amounts to about $4.4 trillion, something of a goldilocks option between moderates ($1–2 trillion) and progressives ($6+ trillion). The Senate Budget Committee largely matched that goldilocks number with a $3.5 trillion budget resolution this week that’s in addition to $800+ billion in bipartisan bills.
Biden does have a predilection towards bipartisanship. His administration compromised on some spending to reach a bipartisan infrastructure agreement. But he’s not forgetting the left flank of his party as he leans into tax populism and progressive spending priorities. Biden inartfully let known his intent to follow Pelosi’s strategy of tying the fates of bipartisan and partisan infrastructure together.
Democratic leaders do need moderate support. Majority Leader Chuck Schumer is tasked with getting the sign-off of Senator Joe Manchin. The West Virginian extols fiscal responsibility and has an aide text him the federal debt level each morning. But “fiscal responsibility” is a malleable concept in DC. Manchin is defending the bipartisan infrastructure deal as completely paid for. But many of the pay-fors are not actual pay-fors. If Manchin is willing to use creative accounting to “pay for” the bipartisan deal, there’s no reason to think creative accounting can’t be employed in reconciliation.
Manchin wouldn’t be the first deficit hawk to contort his fiscal responsibility for partisan reconciliation. Senator Bob Corker was a self-proclaimed deficit hawk who vocally pushed back against deficit-financed tax cuts back in 2017. Yet with some help from Republican leadership, he found a way to support a budget resolution and final reconciliation bill allowing for $1.5 trillion in deficits. His reasoning was to dismiss the non-partisan budget scorekeepers, parroting the GOP line that tax cuts pay for themselves. Importantly, that $1.5 trillion was net spending, with the gross amount of tax cuts at about $5.5 trillion.
To Corker’s deficit-hawk credit, he voted against the Bipartisan Budget Act of 2018 a few months later, which paved the way for a large fiscal stimulus. Manchin, meanwhile, voted for it.
If Democratic spending remains popular, long-term borrowing costs remain low, and budget scoring remains creative, there’s a path for Manchin to bid up to $4 trillion in total spending offset with taxes and other pay-fors (real and imagined). It wouldn’t be the first time Manchin supported $4 trillion in infrastructure spending.
All of this is not to undercut the challenge Democratic leadership faces to reaching a deal. There’ll be ups and downs with compromises made. But the Ken Griffin of progressive markets isn’t shying away from the task. Assume her failure at your own risk.
