Yet bold measures need to be accompanied by careful consideration of risks and how they can be mitigated. While the arguments for providing relief to those hurt by the economic fallout of the pandemic, investing in controlling the virus and supporting consumer demand are compelling, much of the policy discussion has not fully reckoned with the magnitude of what is being debated.
I agree with the general consensus of progressive economists that it would have been much better if the Obama administration had been able to legislate a much larger fiscal stimulus in early 2009, in response to the Great Recession. Yet a comparison of the 2009 stimulus and what is now being proposed is instructive. In 2009, the gap between actual and estimated potential output was about $80 billion a month and increasing. The 2009 stimulus measures provided an incremental $30 billion to $40 billion a month during 2009 — an amount equal to about half the output shortfall.
In contrast, recent Congressional Budget Office estimates suggest that with the already enacted $900 billion package — but without any new stimulus — the gap between actual and potential output will decline from about $50 billion a month at the beginning of the year to $20 billion a month at its end. The proposed stimulus will total in the neighborhood of $150 billion a month, even before consideration of any follow-on measures. That is at least three times the size of the output shortfall.
In other words, whereas the Obama stimulus was about half as large as the output shortfall, the proposed Biden stimulus is three times as large as the projected shortfall. Relative to the size of the gap being addressed, it is six times as large.
A calculation like this can only be very approximate for many reasons. Most important, estimates of potential gross domestic product may be inaccurate, and it may be that the CBO is underestimating potential GDP and the output gap. On the other hand, this crude calculation actually underestimates the difference between what was done in 2009 and what is proposed now.
First, unemployment is falling, rather than skyrocketing as it was in 2009, and the economy is likely before too long to receive a major boost as covid-19 comes under control. Second, monetary conditions are far looser today than in 2009 given extraordinary Federal Reserve policies, the booming stock and corporate bond markets, and the weakness of the dollar. Third, there is likely to be further strengthening of demand as consumers spend down the approximately $1.5 trillion they accumulated last year as the pandemic curtailed their ability to spend and as promised further fiscal measures are undertaken.
Looking at incremental deficits relative to GDP gaps is only one way of assessing the scale of a fiscal program. Another is to look at family income losses and compare them to benefit increases and tax credits. Wage and salary incomes are now running about $30 billion a month below pre-covid-19 forecasts, and this gap will likely decline during 2021. Yet increased benefit payments and tax credits in 2021 with proposed stimulus measures would total about $150 billion — a ratio of 5 to 1. The ratio is likely even greater for low-income individuals and families, given the targeting of stimulus measures.
In normal times, a family of four with a pretax income of $1,000 a week would take home about $22,000 over the next six months. Under the Biden proposal, if the breadwinner were laid off, the family’s income over the next six months would likely exceed $30,000 as a result of regular unemployment insurance, the $400-a-week special unemployment insurance benefit and tax credits.
Judged relative to either the macroeconomic output gap or declines in family incomes, the proposed covid-19 relief package appears very large. The Biden administration is right that it will never have a progressive window of opportunity like the present one. And I share its judgment that the risks of insufficient fiscal stimulus are greater than those of excessive fiscal stimulus. In many ways, an overheated economy in which employers are desperate to find workers and push up wages and benefits would be a very positive thing.
Yet as a massive program moves toward enactment and implementation, policymakers need to ensure that they have plans in place to address two possible, and quite serious, problems.
First, while there are enormous uncertainties, there is a chance that macroeconomic stimulus on a scale closer to World War II levels than normal recession levels will set off inflationary pressures of a kind we have not seen in a generation, with consequences for the value of the dollar and financial stability. This will be manageable if monetary and fiscal policy can be rapidly adjusted to address the problem. But given the commitments the Fed has made, administration officials’ dismissal of even the possibility of inflation, and the difficulties in mobilizing congressional support for tax increases or spending cuts, there is the risk of inflation expectations rising sharply. Stimulus measures of the magnitude contemplated are steps into the unknown. For credibility, they need to be accompanied by clear statements that the consequences will be monitored closely and, if necessary, there will be the capacity and will to adjust policy quickly.
Second, long before covid-19, the U.S. economy faced fundamental problems of economic injustice, slow growth and inadequate public investment in everything from infrastructure to preschool education to renewable energy. These are at the heart of Biden’s emphasis on building back better.
If the stimulus proposal is enacted, Congress will have committed 15 percent of GDP with essentially no increase in public investment to address these challenges. After resolving the coronavirus crisis, how will political and economic space be found for the public investments that should be the nation’s highest priority?
Is the thinking that deficits can prudently be expanded longer and further? Or that new revenue will be raised? If so, will this be politically feasible?
Fiscal stimulus for covid-19 relief can be a landmark achievement that helps the American economy turn the corner. But despite its scale, the limited scope of the Biden plan means that it must be a beginning and not an end. As its final details are crafted, it will be essential to carefully consider how the choices we make now may constrain what we are able to achieve in the future.
The Biden plan is a vital step forward, but we must make sure that it is enacted in a way that neither threatens future inflation and financial stability nor our ability to build back better through public investment.