President Joe Biden delivered on candidate Biden’s pledge to go big on COVID-19 relief. But did he go too big? Does the $1.9 trillion package he laid out three weeks ago offer more help than Americans and the economy really need?
It’s a question being posed more these days, and not just by Republicans, who have miraculously rediscovered their fiscal rectitude after four years of budgetary profligacy. Budget experts and economists are also saying the rescue bill making its way through Congress could be slimmed down.
“The package is much bigger than we need,” Maya MacGuineas, president of the nonpartisan Committee for a Responsible Federal Budget, said in an interview. “We are definitely in the camp that believes more has to be done. But don’t throw borrowed funds at places where we don’t need them.”
MacGuineas said Democrats should limit their offer of $1,400 stimulus checks to individuals and families whose incomes have been disrupted by the pandemic, leave the special bump in jobless benefits at $300 a week, rather than raise it to $400, and reconsider the scale of the $350 billion in aid slated for state and local governments, many of which “are doing better than we thought.”
In a statement issued Wednesday, her organization urged that policies not directly tied to COVID be handled separately from the Biden plan, and not be financed with debt. The expansion of tax credits for children and child care, for example, and spending on the Affordable Care Act and cybersecurity should be funded with tax increases or offsetting spending reductions.
“The answer is targeting, targeting, targeting,” MacGuineas said. “If we are going to waste money, let’s waste it fighting the pandemic.”
Budget hawks like MacGuineas aren’t the only ones raising concerns.
Economists warn that throwing too much money at the economy now risks stoking inflation, driving up interest rates, and making it harder for Biden to implement the second phase of his recovery program, which envisions trillions of dollars for rebuilding the nation’s aging infrastructure and developing green technology to take on climate change.
“The proposed fiscal program seems extremely generous, but perhaps it can be justified in the debates that are ahead,” Larry Summers, who served as Treasury secretary for Bill Clinton and director of the National Economic Council for Barack Obama, wrote last week in The Washington Post.
Democrats are hashing out the details of the bill, especially around the stimulus checks, but a significant change in the final price tag seems unlikely. Biden and his allies remember what happened in 2009, when the newly elected Obama backed off a fight for a larger stimulus package in response to the Great Recession. The Democrats lost the House in the 2010 midterm election amid an anemic recovery.
Their reluctance to repeat history is understandable, even if the amounts involved are different this time around. As Summers noted in an another Post column, Biden’s total spending is three times the shortfall between actual and potential economic output. Obama’s stimulus plan covered just half of that so-called output gap.
Put another way, even a trimmed Biden package would be an aggressive response to the pandemic and the economic hardships it has caused.
Olivier Blanchard, a former MIT professor who served as chief economist at the International Monetary Fund, recently offered a guesstimate that spending of about $1 trillion would meet the country’s needs.
“I worry that if we spend $1.9 trillion, then we are going to increase demand by so much that we’ll get overheating,” he said in a recent EconoFact Chats podcast. “The economy will not be able to actually increase production enough to satisfy that demand.”
That could set off a chain of bad events, Blanchard told podcast host Michael Klein of Tufts University’s Fletcher School: rising prices, the Federal Reserve hiking interest rates to keep inflation under control, and slower economic and job growth.
Although inflation hasn’t been a serious threat in years, investors are once again acting like that might change. The yield on the benchmark 10-year Treasury note reached 1.13 percent Wednesday, up from below 0.8 percent before Biden was elected. While that’s the highest level in nearly a year, the 10-year Treasury is well below the recent peak of 3.2 percent, set in November 2018.
The increase in yields reflects expectations that the economy, which contracted by 2.5 percent last year, will rebound sharply in 2021. Forecasters at IHS Markit this week raised their GDP growth estimate for this year to 5.7 percent from 4 percent, with 1 percentage point of the increase driven by the Biden plan.
The new package would be the third passed by Congress since the pandemic hit, with spending totaling $5.2 trillion, or nearly 25 percent of US GDP, a higher percentage than in any other country. Congress approved a $900 billion plan in December, which followed the $2.4 trillion CARES Act in March.
“The profession is struggling with the enormity of the packages right now,” said Joel Prakken, chief US economist at IHS Markit, making economic forecasting even more difficult than it normally is.
At Moody’s Analytics, chief economist Mark Zandi estimates GDP will expand by 8 percent this year, double the growth that would be expected without any additional fiscal support.
He also argues that the Biden plan could be downsized, but in a Feb. 7 note to clients said the economy still faces significant hurdles: employment nearly 10 million below its pre-pandemic peak, job losses in the hard-hit leisure and hospitality sector, and a shrinking labor force.
“In the fog of a crisis, it is prudent for policymakers to err on the side of potentially providing too much support rather than too little,” Zandi wrote. “It is critical that households and businesses know that the government has their back. Without this comfort, everyone is more skittish and prone to panic, a state that exacerbates the economic and social costs of the crisis.”
It’s hard to disagree with that.
Yes, with a enough time, Congress and the Biden administration could craft a smaller, tightly focused rescue plan that nonetheless delivered sufficient pandemic and economic relief to those who need it.
But with more dangerous coronavirus variants spreading across the country, and safety-net programs slated to run out next month, we don’t have time for perfection.