Combined with the $900 billion in aid passed in December, President Biden’s $1.9 trillion relief bill would produce the largest stimulus effort in modern American history. Could it be so big that it overheats the economy? As Neil Irwin of The New York Times writes Friday, the answer is probably yes – but that might not be such a bad thing.
According to Mark Zandi, chief economist at Moody's Analytics, Biden’s Covid bill amounts to roughly 8% or 9% of U.S. GDP this year and would be about twice as large as the current output gap – the difference between what the economy will produce and what it is capable of producing. That would almost certainly be enough to make the economy run hot.
Zandi, whom the Biden economics team has cited, says that as far as he is concerned, this is not a problem. “It’s better to err on the side of too much rather than too little,” he told Irwin. “Interest rates are at zero, inflation is low, unemployment is high. You don’t need a textbook to know this is when you push on the fiscal accelerator. Let’s go.”
Conservatives are far less enthusiastic about the plan due to concerns about inflation and the national debt. Douglas Holtz-Eakin, a Republican who served as director of the Congressional Budget Office, said the economy is “already in uncharted territory.” Pointing out that fourth quarter GDP was $119 billion lower than on a year-over-year basis, he asked Irwin, “Do we need another $1.9 trillion to deal with that problem? I have an arithmetic problem with where we are.”
But some experts say that the problem goes beyond the relatively straightforward question of the size of the relief package relative to GDP. The Biden administration’s goal is to make up not just for the loss incurred by the coronavirus pandemic but also for years of lukewarm growth that have done little for those at the bottom and middle of the economy.
“We don’t really know what the G.D.P. output gap truly is,” Mark Paul, an economist at New College of Florida, told Irwin. “Economists for decades have erred and been too cautious, thinking that full production is significantly lower than it actually is. We’ve been consistently running a cold economy, creating massive problems for social cohesion.”
As Irwin puts it at the end of his review of the issue: “It’s hard to worry too much about getting burned after a decade-long winter out in the cold.”
