What will voters think of the Inflation Reduction Act?
Their answers could play a big role in midterm elections.
Soon after he took office, President Biden signed his $1.9 trillion American Rescue Plan (ARP) into law to help stimulate the economy during the Covid pandemic. But he was unable to pass his signature Build Back Better (BBB) social spending bill a few months later, its massive $5.5 trillion price tag proving too large a hurdle to overcome. A bipartisan group of senators did save much of its hard infrastructure elements (such as roads, bridges and an upgrade to the electric grid), putting them into a $1.2 trillion standalone bill that Congress passed in November 2021.
Still—and perhaps inspired by FDR’s New Deal, LBJ’s Great Society and Barack Obama’s Affordable Care Act (ACA) over the past century—President Biden and progressive Democrats remained dogged in their determination to craft some version of BBB that could eventually pass congressional muster ahead of the Nov. 8 midterm elections. After 16 months of perseverance, they did just that, with both chambers approving the Inflation Reduction Act of 2022 that is to be signed into law today by President Biden. Now, the question turns to how will voters respond to BBB, Jr., when they head to the polls in less than three months’ time?
What’s in the bill? According to our research friends at Piper Sandler, the Inflation Reduction Act raises $885 billion through tax increases, spends $566 billion in climate-change provisions, extends the ACA, reforms prescription drug pricing, and expanding the Internal Revenue Service, and proposes to generate a net deficit reduction of $319 billion over the next decade. To be sure, it employs many of the same fiscal policy objectives outlined in the original BBB bill, but it’s 90% smaller and is packaged in a much more palatable marketing wrapper to address soaring nominal retail inflation, which is running at four-decade highs.
Will it work? The irony, of course, is as presently constructed, the Inflation Reduction Act is unlikely to bring inflation down. According to multiple analyses conducted by the Penn Wharton Budget Model and the nonpartisan Congressional Budget Office and Joint Committee on Taxation, the bill will raise taxes but have a negligible impact on inflation.
Critics contend that the U.S. economy is already on a glide path into recession due to aggressive Federal Reserve rate hikes to combat inflation. Yet the bill’s spending provisions could offset the Fed’s policy actions and spark higher inflation. Combined with higher tax rates, which could further slow economic growth and reduce employment, wages and corporate profits, thus increasing the odds of declining stocks prices and recession.
Wither the election If true, how will voters respond when they head to the polls in November? Americans already are smarting from the economic ramifications from Biden’s ARP bill, whose spending contributed in part to the worst inflation in four decades.
Progressive presidential parallels Looking back over the past 90 years, President Biden has three progressive Democratic predecessors to guide his fiscal policy plans and how they might be received by voters in his first midterm election:
- FDR & the New Deal President Franklin Delano Roosevelt inherited the stock market crash of 1929 and the Great Depression when he took office in January 1933. Among many actions, he passed the Glass-Steagall Act of 1933, which created the Federal Deposit Insurance Corporation. FDR also started the Securities and Exchange Commission in 1934, and he established the Social Security Act in 1935. Although the economy didn’t fully emerge from the Great Depression until 1939, due to massive federal government spending associated with our participation in World War II, he was very popular with the American people, because it appeared to them that he was working hard to improve their dire economic fortunes. As a result, they rewarded him with strong election results in his first midterm, as the Democrats picked up nine seats in each of the House and Senate.
- LBJ & the Great Society President Lyndon Baines Johnson took office when President John F. Kennedy was assassinated in November 1963. He created several beneficial programs as part of his Great Society social-policy initiatives, including Medicare, Medicaid and Food Stamps (known today as the Supplemental Nutrition Assistance Program, or SNAP). While these social programs and his war on poverty were very popular, his decision to expand our involvement in the Vietnam War was not. Moreover, the seeds of the Great Inflation were sown when LBJ decided to expand social and military spending simultaneously. In LBJ’s first midterm election in 1966, voters punished his “guns & butter” policy, costing Democrats 47 seats in the House and four seats in the Senate.
- Obama & the Affordable Care Act President Barack Obama inherited the Great Recession when he took office in January 2009. But instead of fighting the 2007-09 recession first, which was the deepest in the post-war history of the U.S., Obama decided to spend his political capital creating universal healthcare coverage with the ACA. Consequently, unemployment rate remained elevated during Obama’s first two years in office, and voters punished Democrats in his first midterm election, losing 63 House and six Senate seats.
Biden’s polls not looking good President Biden’s job approval rating has fallen by 19 points since he took office in January 2021to a record low of 37% in July, and 77% of voters now believe that the country is headed in the wrong direction. The Biden administration clearly is hoping the new Inflation Reduction Act will reverse the negative sentiment associated with ARP and BBB.
The political reality is that the progressive legislative ambitions of the Biden White House to date have exceeded their electoral mandate. While President Biden may hope he’ll receive the same reception as FDR did with his successful New Deal, the midterm elections may remind he’s viewed more in line with LBJ, Obama or President Jimmy Carter.
Research assistance provided by Federated Hermes summer intern Julian Oliveros