Janet Yellen
Photographer: Stefani Reynolds / The New York Times / Bloomberg
Photographer: Stefani Reynolds / The New York Times / Bloomberg
In defending the cause of a massive $ 1.9 trillion economic aid package, President Joe Biden and his acolytes maintained that economists in all sectors agreed that now is the time to grow in the fight against the pandemic.
Well, very much for that. Several prominent economists and former policymakers – from Democrat Lawrence Summers to Republican Douglas Holtz-Eakin – raised questions last week about the size of the package. The same happened with some observers of the economy in the financial markets.
While they do not disagree that the US needs additional help, they have highlighted the potential costs of doing much more: Economically, there is a risk of much faster inflation and a bubble in the stock market. And, politically, it could reduce Congress’ appetite for future fiscal actions to address long-term priorities, such as spending on infrastructure and combating climate change.
Biden doubled in his field for a big package on Friday.
“Some in Congress think that we have done enough to deal with the crisis in the country. Others think things are looking up and that we can afford to sit and do little or nothing, ”he told reporters at the White House. “This is not what I see. I see enormous pain. “
About 10 million Americans remain without work because of the precipitation of the Covid-19 virus. Almost 40% of the unemployed have been unemployed for 27 weeks or more, and uncertainty about the virus or the distribution of vaccines continues to prevent hiring and activities.
Behind part 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 a pandemic had not occurred – ran into a deficit of around $ 665 billion in the fourth quarter of last year, according to the Congressional Budget Office figures. The stimulus that Biden is looking for is almost three times that.
Perhaps the most surprising economist to raise questions about the package is Summers, the professor at Harvard University who has been a constant presence in the Democratic Party. policy making ranks for decades. He served as Treasury Secretary under President Bill Clinton and as senior economic adviser to Barack Obama.
Summers, Yellen
Inside Bloomberg Television appearances and comments to the Washington Post, Summers agreed with the Biden authorities that the risks of doing too little outweighed the risks of doing too much. It’s him Admitthe economy would have fared much better if the Obama administration had pushed for – and won – a much larger fiscal package in 2009, rather than the He played a key role in shaping the $ 787 billion program.
But Summers, who is a paid contributor to Bloomberg, argued that Biden’s team needs to be aware of the risks it is taking with its ambitious plan.
“There is a chance that macroeconomic stimulus on a scale closer to World War II levels than normal recession levels will trigger inflationary pressures of a kind that we have not seen in a generation,” he wrote to the Post. “I’m afraid that containing an inflationary surge without triggering a recession could be even more difficult now than in the past.”
On a An interview with CNN’s “Estado da União” television program on Sunday, Treasury Secretary Janet Yellen acknowledged that very rapid inflation is a risk that must be considered. But she argued that policymakers have the tools to deal with this danger if it materializes.
“As Treasury Secretary, I have to worry about all the risks to the economy,” said Yellen. “And the most important risk is to leave workers and communities affected by the pandemic and the economic price it is causing, that we don’t do enough to solve the pandemic and public health problems, that we don’t take our children back to school . “
Read more: Yellen sees full employment next year with Biden’s stimulus plan
Market View
So far, at least, investors do not seem too concerned about a major spurt in inflation. They see it averaging 2.2% over the next decade, according to trades on the Treasury bond market. While this increased from a post-pandemic drop of just 0.55% last March, it is still modest by historical standards.
Former CBO director Holtz-Eakin agreed that inflation is not a particular concern at the moment. What worries the president of the American Action Forum is the risk of financial instability, as a flood of money pushes the stock market and the prices of other assets to unsustainable levels – paving the way for a subsequent crash. It happened in 2000, with stock prices, and in 2007, with real estate.
Fed President Jerome Powell played down these concerns last month, saying he considered the risks to financial stability “moderate”.
But some market professionals are not so optimistic, especially due to the almost relentless increase in stock prices in recent months.
Jeremy Grantham of Boston GMO on Bloomberg TV.
“When you reach that level of obvious super-enthusiasm, the bubble has always, without exception, burst in the coming months, not in a few years,” Jeremy Grantham, famous value investor and cofounder of Boston-based GMO, said on January 22 Bloomberg TV interview.
There is no doubt that Biden’s package would give a big boost to the economy if it were approved. “You could make revenue for the second and third quarters look surprisingly strong,” said James Knightley, chief international economist at ING Financial Markets.
Peter Hooper, who is the global head of economic research at Deutsche Bank AG, predicted that GDP would increase 7% to 8% this year, and unemployment would fall to less than 4%, compared to 6.3% in January, if the Biden plan adopted.
But that would come with “the potential costs of some unwanted inflation, a significant increase in the US national debt and more political polarization,” wrote the former Fed official in a report to clients on February 5.
Although government debt soared to around 100% of GDP at the end of last year, many economists find this less worrying than before because interest rates are so low.
Political Capital
Rather than worrying about the extra debt generated by the Biden plan, Summers fears that its approval may dampen lawmakers’ political appetite to spend more later to tackle fundamental problems like inadequate public investment.
Asked about this risk on CBS’s “Face the Nation” program on Sunday, Yellen reiterated the government’s determination to come up with another package to deal with these long-term issues.
Biden on Friday signaled that he is prepared to move forward with his aid plan without the support of Republicans. Democratic Congressional leaders are seeking a legislative course that renounces the support of the Republican Party, known as reconciliation, with committees set to begin compiling the bill next week.
Party battles over what elements can be included in the reconciliation bill are inevitable and can make Republican Party members less likely to consider supporting the long-term economic reconstruction package that Biden plans to reveal.
Concerns about the use of political capital are justified, according to Andy Laperriere, a former Congress official who is a partner at Cornerstone Macro LLC in Washington.
“It could impact risk tolerance for the second package” among some moderate Democrats if Biden defeats his big program, said Laperriere. “If you to sense as you walked on the board in package number one, members may be more cautious when walking on the board in package number two. “
– With the help of Christopher Condon and Julia Fanzeres
(Updates with more of Yellen’s interview.)