youS President Joe Biden did the world a favor last Thursday by signing a bill delivering $ 1.9 trillion (£ 1.4 trillion) of bailout funds to state and federal agencies, millions of students and workers and the US vaccination program.
The money will appear first as checks on domestic doormats this week, easing the pandemic blow for those who work and for the many who remain unemployed and under severe financial pressure.
Over the rest of the year, funds are expected to increase US national income by between 3% and 4% and put the economy back on the path it would have been on if the pandemic had never happened.
More than that, the effect on trade of increased U.S. imports and exports will boost the global economy by an extra percentage point, adding almost a quarter more to its 2021 growth rate, according to the Organization’s latest forecast for Economic Cooperation and Development. The Paris-based thinktank estimates that the world economy will grow 5.6% this year from its pandemic-induced decline – an increase in its 4.2% forecast made last December.
With so much at stake, some Democrats were surprised by the disputed vote in both houses of Congress. The victory followed a 220-211 vote in the House of Representatives, and a single vote, cast by Vice President Kamala Harris, to lead the day in the Senate.
However, it was far from being a heated debate among the general public. A survey by the Pew Research Center last week revealed that 70% of Americans are in favor of the stimulus package.
David Blanchflower, a renowned labor market economist at Dartmouth’s Ivy League College, said Republicans would regret his criticism and his efforts to derail the plan.
“It is exactly what the US economy needs right now,” he said. “Entering the pandemic, the economy was weaker than they imagined, with a significant number of people either underemployed or not participating in the labor market. The situation is much worse now that millions of people need help ”.
Blanchflower, who spent three years on the Bank of England’s monetary policy committee before and after the 2008 bank crash, said the US economy had more slack than shown in official figures, meaning that even a major stimulus from the Biden’s size may fail to put the US economy on a permanent path of growth.
This month, the Bureau of Labor Statistics reported that, in mid-February, the economy was still 9.5 million jobs below what it was in February 2020. Elise Gould, economist at the Institute for Economic Policy, said this translated in an 11.9 million job deficit “by using a reasonable counterfactual of job growth if the recession had not occurred”.
As a rescue measure, the Biden package is a blunderbuss, spreading money across a wide range of targets. It will provide $ 350 billion to state, local and tribal governments, avoiding a repeat of the 2008 crisis, when many of these organizations, which need to balance their accounts, were forced to make severe spending cuts.
There will be $ 30 billion for transport authorities to cover the loss of passengers and $ 130 billion for primary and secondary schools. As in the UK, there will be assistance for those unable to pay the mortgage, although tenants, who are excluded from aid in the UK, are also part of the deal.
Students will be paid tax forgiveness on loans and the federal unemployment payment of $ 300 per week will be extended until September. Most significantly, it provides another round of direct payments to families, sending checks of up to $ 1,400 to individuals earning up to $ 80,000, single parents earning $ 120,000 or less, and couples with a family income of up to $ 160,000.
Barry Naisbitt, a US economics expert at the UK’s National Institute for Economic and Social Research, said parts of the package may be insufficient: “There is a question whether the $ 350 billion for states and local areas will be sufficient when they are dealing with a large part of pandemic spending ”.
Economists at the Washington-based Brookings Institution said that while $ 700 billion in direct payments would increase consumer spending, the one-year wave could result in a hangover. “Although our estimates show a soft landing, with a temporary and shallow decline in GDP after the fourth quarter of 2021, the slowdown may be more abrupt and painful than our projections suggest,” said senior fellows Wendy Edelberg and Louise Sheiner.
Biden faced a double attack on the package. On the one hand were Republicans who, despite driving a $ 2.2 trillion increase last year, said they feared that the latest version would increase national debt to dangerous levels.
Within the Democratic camp, some economists – notably Larry Summers, Bill Clinton’s former adviser and Harvard president – said it was overkill, fearing that anything above $ 1 trillion would overheat the economy and trigger an inflationary spiral.
US inflation expectations show that investors expect an increase from the 1.7% annual reading in February, but only 2.9% between April and June, before dropping to 2.5% for the rest of the year. and to 2.2% in 2022.
US Federal Reserve Chief Jerome Powell said last week that an increase in inflation above the 2% target would be temporary and could therefore be ignored. In fact, he added, the US economy needed some inflation after more than 10 years without inflation.
Modestly rising prices are an indication of economic health and are welcome, he added, which is the central bank’s way of applauding the package and telling people not to panic about some of the side effects, such as rising rates interest rates, the corollary of high inflation.
In more restricted parts of the world, the prospect of overheating is a distant dream. European Union countries have been struggling to boost their vaccination programs and a € 740 billion (£ 635 billion) stimulus will come into effect more slowly, probably in two years.
Even the UK, which is matching US vaccination rates and expects a rapid recovery starting in June, has allowed fears of high debt and inflation to dampen its stimulus plans.
Fortunately, Biden’s plan, like many of his policies, extends beyond the borders of the United States and will lift all boats.