Janet Yellen
Photographer: Stefani Reynolds / The New York Times / Bloomberg
Photographer: Stefani Reynolds / The New York Times / Bloomberg
By advocating a huge $ 1.9 trillion financial aid package, President Joe Biden and his acolytes had maintained that economists across the board agreed that now is the time to grow up in the fight. against the pandemic.
Well, that’s why. Several prominent economists and former political leaders, from Democrat Lawrence Summers to Republican Douglas Holtz-Eakin, have raised questions last week about the size of the package. So have some observers of the economy in the financial markets.
While they disagree that the U.S. needs extra help, they have highlighted the potential costs of doing much more: economically, there is the risk of much faster inflation and a stock market bubble. And, politically, it could reduce appetite in Congress for future fiscal actions to address long-term priorities, such as infrastructure spending and the fight against climate change.
Biden doubled his playing field to get a big package on Friday.
“Some in Congress think we have done enough to deal with the country’s crisis. Others think things are getting better and we can afford to sit back and do little or nothing, ”he told White House reporters. “It simply came to our notice then. I see a huge pain ”.
There are about ten million Americans left unemployed due to the consequences 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 hamper recruitment and activity.
Behind some skepticism about the size of the president’s plan is simple arithmetic. The production gap, the difference between where the economy is and where it should be if there had been no pandemic, stood at a deficit of about $ 665 billion in the fourth quarter of last year, according to the Congressional Budget Office figures. The stimulus Biden seeks is approximately three times greater.
Perhaps the most striking economist who has asked questions about the package is Summers, the Harvard University professor who has been a benchmark in policy formulation for decades. He served as Secretary of the Treasury under President Bill Clinton and as a senior economic adviser to Barack Obama.
Summers, Yellen
In Appearances on Bloomberg television and in comments from the Washington Post, Summers agreed with Biden officials that the risks of doing too little were higher than those of doing too much. And he admitThe economy would have been much better off if the Obama administration had pushed for – and won – a much larger fiscal package in 2009, rather than The $ 787 billion program played a key role in the formulation.
But Summers, who is a paid Bloomberg contributor, argued that Biden’s team needs to be aware of the risks they take with their ambitious plan.
“There is a possibility that macroeconomic stimulus on a scale closer to World War II levels than normal recession levels will cause inflationary pressures of a kind we have not seen in a generation,” he wrote for the Post. “I’m concerned that containing an inflationary outbreak without causing a recession is even more difficult than in the past.”
In a In an interview with CNN’s “State of the Union” television program on Sunday, Treasury Secretary Janet Yellen acknowledged that inflation too fast was a risk to consider. But he argued that policymakers have the tools to deal with this danger should it materialize.
“As Secretary of the Treasury, I have to worry about all the risks to the economy,” Yellen said. “And the most important risk is that we leave workers and communities marked by the pandemic and the economic toll that is being made, that we do not do enough to address the pandemic and public health problems, that we do not get our children they have to go back to school. “
Read more: Yellen sees full employment next year with Biden’s stimulus plan
Market view
At least so far, investors don’t seem overly concerned about a major inflation outbreak. They see it as averaging 2.2% over the next decade, according to Treasury debt market operations. While this exceeds a post-pandemic low of just 0.55% last March, it is still modest by historical standards.
Former OBC director Holtz-Eakin agreed that inflation is not a particular concern at this time. What worries the president of the American Action Forum 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 fall. This happened in 2000, with stock prices, and in 2007, with real estate.
Fed Chairman Jerome Powell downplayed those concerns last month and said he considered the risks to financial stability to be “moderate.”
But some market professionals are not so bloody, especially because of the virtually relentless rise in stock prices in recent months.
Jeremy Grantham, of the Boston GMO, on Bloomberg TV.
“When you’ve reached that level of obvious over-enthusiasm, the bubble has always been broken, without exception, in the next few months, not a few years,” said Jeremy Grantham, famed value investor and co-founder of Boston-based GMO. he said on a Jan. 22 Bloomberg TV interview.
There is no doubt that the Biden package would give a big boost to the economy if enacted. “You could make the second-quarter and third-quarter revenue look incredibly strong,” said James Knightley, chief international economist at ING Financial Markets.
Peter Hooper, who is the head of global economic research at Deutsche Bank AG, predicted that this year GDP would rise from 7% to 8% and that unemployment would fall from 4% to 6.3% in January, if ‘adopts the Biden plan.
But that would mean “the potential costs of some unwanted inflation, a significant rise in U.S. national debt and greater political polarization,” the former Fed official wrote in a Feb. 5 report to clients.
Although public debt soared to around 100% of GDP late last year, many economists find it less disturbing than before because interest rates are very low.
Political capital
Instead of worrying about the additional debt generated by the Biden plan, Summers worries that its move could dampen lawmakers ’political appetite to spend later on attacking key issues such as inadequate public investment.
Asked about this risk on CBS’s “Face the Nation” program on Sunday, Yellen reiterated the administration’s determination to present another package to address these long-term issues.
On Friday, Biden said he was ready to move forward with his relief plan without Republican support. Democratic leaders in Congress are following a legislative course that waives support for the Republican Party, known as reconciliation, and committees will begin drafting the bill next week.
Partisan battles over what elements can be included in the reconciliation bill are inevitable and could leave GOP members less likely to support the long-term economic reconstruction package Biden plans to introduce.
Concerns about the use of political capital are justified, according to Andy Laperriere, a former congressman who is a partner at Washington-based Cornerstone Macro LLC.
Laperriere said it “could affect the risk tolerance of the second package” among some moderate Democrats. “If you feel as if you had walked through the board of package number one, perhaps members are more cautious when walking the board of package number two ”.
– With the assistance of Christopher Condon and Julia Fanzeres
(Updates with more from the Yellen interview.)