Janet Yellen
Photographer: Stefani Reynolds / The New York Times / Bloomberg
Photographer: Stefani Reynolds / The New York Times / Bloomberg
President Joe Biden and his acolytes have argued that a $ 1.9 billion $ 1.9 billion emergency economic relief package has maintained that economists across the council agree that now is the time to grow in the fight against the pandemic.
Well, so much for that. A number of prominent economists and former policymakers – from Democrat Lawrence Summers to Republican Douglas Holtz-Eakin – have raised questions about the size of the package over the past week. Some economics viewers in the financial markets have too.
While they do not agree that the US needs additional aid, they have emphasized the potential cost of a whole lot more: economically, there is the risk of much faster inflation and a stock market bubble. And politically, it could reduce Congress’ appetite for future fiscal action to address long-term priorities, such as spending on infrastructure and combating climate change.
Biden doubled on a big package on Friday for a big package.
“Some in Congress think we’ve done enough to tackle the crisis in the country. “Others think it’s better and we can afford to sit back and do little or nothing,” he told White House reporters. “It’s not what I see. I see tremendous pain. ”
About 10 Million Americans Remain without work due to the effects of the Covid-19 virus. Nearly 40% of the unemployed have been unemployed for 27 weeks or more, and uncertainty about the virus or the deployment of vaccines continues to hinder employment and employment.
Behind some of the skepticism about the size of the president’s plan is simple arithmetic. The output gap – the difference between where the economy is and where it should be if there was no pandemic – stood at a deficit of about $ 665 billion in the fourth quarter of last year, according to the Congressional Budget Office. numbers. The stimulus that Biden seeks is about three times that.
The most surprising economist who has raised questions about the package is Summers, the professor at Harvard University who has held a firm role in Democratic states. policy making decades ago. He serves as Treasury Secretary under President Bill Clinton and as a senior economic adviser to Barack Obama.
Somers, Yellen
In appeared on Bloomberg Television and in comments for the Washington Post, Summers agrees with Biden officials that the risks of doing too little outweigh those of doing too much. And he acknowledgethe economy would have done much better if the Obama administration had pursued and won a much larger fiscal package in 2009 – instead of the $ 787 billion program, he played a key role in the formulation.
But Summers, who is a paid contributor to Bloomberg, argued that the Biden team should be aware of the risks they are taking with their ambitious plan.
“There is a chance that macroeconomic stimulus on a scale closer to World War II levels than normal recession levels will ease the inflationary pressures of the kind we have not seen in a generation,” he said. he wrote for the Post. “I am concerned that it may now be even more difficult to have an inflationary outbreak without triggering a recession than in the past.”
In a Finance Minister Janet Yellen admitted in an interview with CNN’s television program “State of the Union” on Sunday that too rapid inflation is a risk to be considered. But she argued that policymakers have the tools to deal with the danger should it materialize.
“As treasury secretary, I have to worry about all the risks to the economy,” Yellen said. ‘And the most important risk is that we frighten workers and communities because of the pandemic and the economic toll it takes, that we do not do enough to address the pandemic and the health problems, that we do not get our children. back to school. “
Read more: Yellen sees full service next year with Biden’s stimulus plan
Market view
So far, investors do not seem too worried about a major outbreak of inflation. According to trade in the treasury market, this averages 2.2% over the next decade. Although it was lower than a low after a pandemic of just 0.55% in March, it is still modest by historical standards.
Former CBO Director Holtz-Eakin agreed that inflation is not a particular issue at present. What worries the U.S. action forum president is the risk of financial instability as a flood of cash pushes the stock market and other asset prices to unsustainable levels, paving the way for a subsequent collapse. This is what happened in 2000 with stock prices and in 2007 with real estate.
Fed Chairman Jerome Powell dismissed the concerns last month, saying he considered the risks to financial stability “moderate”.
But some professionals in the market are not so ominous, especially due to the virtually relentless rise in stock prices in recent months.
Jeremy Grantham of Boston’s GMO on Bloomberg TV.
“If you have reached this level of clear super-enthusiasm, the bubble has always, without exception, broken in the next few months, not a few years,” said Jeremy Grantham, well-known investor and co-founder of GMO in Boston, in a Bloomberg TV broadcast on January 22 maintenance.
There is no doubt that the Biden package will give the economy a huge boost if introduced. “You can get the recipe for the second quarter and the third quarter to look amazing,” said James Knightley, international chief economist at ING Financial Markets.
Peter Hooper, who is world head of economic research for Deutsche Bank AG, predicted that GDP would rise by 7% to 8% this year, and unemployment would fall to below 4% from 6.3% in January as the Biden plan be accepted.
But it would come “the potential cost of unwanted inflation, a significant increase in U.S. national debt and further political polarization,” the former Fed official wrote in a February 5 report to clients.
While government debt rose to about 100% of GDP at the end of last year, many economists consider it less troubled than before because interest rates are so low.
Political capital
Summers is not worried about the extra debt generated by the Biden plan, but that it could reduce the political appetite of lawmakers to spend more later on tackling fundamental problems such as insufficient public investment.
Asked about the risk on CBS ‘”Face the Nation” program on Sunday, Yellen reiterated the government’s determination to come up with a different package to deal with the long-term issues.
Biden indicated Friday that he is willing to continue with his emergency relief plan without the support of Republicans. Democratic leaders of Congress are following a legislative course that rejects GOP support, known as reconciliation, with committees drafting the bill in the coming week.
Partial battles over which elements could be included in the reconciliation bill are inevitable, and it could all the less consider the members of the IDP to support the long-term economic reconstruction package that Biden plans to unveil.
Concerns about the use of political capital are justified, according to Andy Laperriere, a former Washington-based congressman for Cornerstone Macro LLC.
“It could affect the risk tolerance for the second package” among some moderate Democrats as Biden marched with his grand program, however, Laperriere said. “If you bird as if you were walking the boards on package number one, members may be more careful about walking the boards on package number two. ”
– With help by Christopher Condon and Julia Fanzeres
(Updates with more from the Yellen interview.)