The economic threats that could derail the Democrats' election dreams

Can Joe Biden "reimagine and rebuild" the American economy in just 550 days? Because that's how long it is until the 2022 midterm elections. And history suggests a good chance Democrats will lose their narrow control of Congress, most likely by losing the House. Then gridlock resumes. It's doubtful that Republicans will have much interest in helping Biden further become a "transformational president" by passing more wish-list items from the progressive agenda.

Democrats surely understand the clock is ticking. But they also have to be hoping that the extraordinary power of the emerging economic boom might make the 2022 midterms an exception to the political pattern. Moody's Analytics, for example, recently revised its 2021 real GDP growth outlook to nearly 7 percent and to over 5 percent next year. "If we are right," chief economist Mark Zandi told clients in a report, "and there's good reason to believe we will be, this will be the strongest two years of growth since 1950-1951 at the height of the post-World War II economic boom." And Moody's is hardly alone in predicting warp-speed GDP and job growth this year and next.

So we're really off the map here. Who knows, not only might the Biden Boom keep the House and Senate in Democratic hands, it might also make a second Biden term (or a first Harris term, perhaps) a pretty good bet. And when you think about it, two presidential terms might be what Democrats need to pass key legislation and then make sure those programs survive during an era of extreme partisanship. Democrats are already trying to undo the Trump presidency wherever possible, such as attempting to partially reverse the Trump tax cuts, restore environmental rules, and rebuild America's trade relationship with Europe.

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But the political impact of an unprecedented economic surge isn't the only unknown here. Putting aside the possibility of a dangerous new COVID-19 variant, perhaps the greatest risk to the recovery — and thus the Biden legacy — is how Washington is helping generate that recovery. The stimulus continues to flow even as consumers boost spending and businesses fully reopen. And some Democrats still don't think there's enough federal dough being spent, such as those who want recurring stimulus checks to be sent out and the $2.3 trillion Biden infrastructure plan to be a $10 trillion plan. As is, the tsunami of spending might yet boost inflation, resulting in surprise action from the Federal Reserve and an unexpected slowdown. Imagining pre-election recessions during the first terms of Ronald Reagan, George W. Bush, and Barack Obama creates a pretty interesting game of "what if" alternate history with Presidents Mondale, Kerry, and Romney.

An inflation surprise is hardly the only risk. While the recovery is currently generating gobs of jobs, the expansion will eventually slow. And it might slow faster than necessary thanks to generous jobless benefits that could potentially discourage work and create shortages. The $1.9 trillion COVID relief package last March extended supplemental benefits of $300 a month through early September. It’s an argument sure to gain momentum after Friday's wildly disappointing April jobs report that showed 266,000 net new jobs were created last month vs. a Wall Street forecast of a million or so. Now fat unemployment checks might not be the main reason for that undershoot. Home schooling, a lack of child care, virus fears, and data issues all might have played a role. But the report does suggest why some economists are worried about the labor-supply impact of impact of jobless benefits as the economy continues to gain strength in the coming months. A worker shortage would also add to the inflation threat. Again, many Democrats don't seem at all worried, at least so far. Late last month, nearly 40 Democrats on Capitol Hill sent the Biden White House a letter proposing "more generous and long-lasting jobless benefits on a permanent basis," according to the Wall Street Journal.

Then there's the proposed tax increases, more than $3 trillion worth — including a record increase in capital gains tax rates. A nation's tax burden matters. How an economy is taxed matters. What is taxed matters. Tax rates matter. And although the economy didn't soar after the Trump tax cuts, the impact of the business tax cuts might have been offset by the Trump trade war.

It is generally accepted, however, that tax rates affect how much and where a company invests. More investment makes workers more productive and will, over time, boost their wages. There's an economic risk that these proposed Biden tax increases will hurt investment. While many Wall Street banks have some pretty rosy economics forecasts, they are generally not incorporating any downside impact of the tax hikes. Those same firms are also, for the most part, assuming the economy returns to its modest pre-pandemic pace in 2023. So there could be less room for economic policy mistakes than it seems right now.

And Democrats — pushing for more, more, more — should be worried a transformational presidency might just end up transitioning back to a Republican one.