Huge Fiscal Boost to the Economy Is About to Fade
The multiple relief packages enacted by Congress flooded the U.S. economy with cash, providing much-needed liquidity as the Covid-19 pandemic sharply reduced activity in multiple sectors including travel, hospitality, dining and entertainment. But as Neil Irwin of The New York Times notes Tuesday, most of the aid money was front-loaded, issued in a matter of weeks or months. While that approach helped the federal programs achieve their goal of stabilizing the economy, it comes with a serious downside: in the coming months, the cessation of that federal spending will detract from economic growth.
“That which fiscal stimulus giveth, fiscal stimulus taketh away,” Irwin writes.
Ideally, the private economy will pick up the slack as people return to work and demand surges for all those things that people avoided during the pandemic. But the risk remains that this unprecedented transition may not go smoothly.
“We’re definitely going to see a huge drop-off in fiscal stimulus,” Nancy Vanden Houten, lead economist at Oxford Economics, told Irwin. “The question then is how well positioned is the economy to deal with that, and we don’t really know for sure, which applies to so much about this period we’re going through.”
A boost becomes a drag: According to the Hutchins Center on Fiscal and Monetary Policy, federal spending added 8.5 percentage points to the economic growth rate in the first quarter of 2021. But that fiscal impact will turn modestly negative in the second and third quarters, and then become a significant drag starting in the fourth quarter, assuming no additional stimulus or near-term spending packages are passed.
The strongest negative effect will occur in the second quarter of 2022, when the stimulus hangover is projected to subtract 3.3 percentage points from the economic growth rate.
The big question, then, is how much demand emerges as the economy reopens. The enormous pile of savings Americans are sitting on — including the roughly $2.5 trillion saved during the pandemic — could go a long way toward picking up the slack. But much of that cash is held by a wealthy minority, who may not be in a rush to spend it, potentially putting the recovery at risk.
“Today’s fiscal tailwinds are projected to shift to headwinds next year,” Fed Governor Lael Brainard said earlier this month. “So an important question is how much household spending will continue to support growth into next year, as opposed to settling back to prepandemic trends.”
Why Powell Isn’t Too Worried About Inflation
Plenty of analysts are worried that rising inflation could do real damage to the U.S. economy, but Federal Reserve Chair Jay Powell is sticking to his view that the current burst of inflation is transitory.
“Inflation has increased notably in recent months,” Powell said in prepared comments released ahead of his appearance Tuesday before the House Select Subcommittee on the Coronavirus Crisis. The increase is driven by multiple factors, he said, including the statistical distortions created by last year’s unusually low prices for many goods, a sudden burst of consumer spending and supply bottlenecks that have limited a ramp-up in production. “As these transitory supply effects abate, inflation is expected to drop back toward our longer-run goal,” Powell added.
In light of Powell’s comments, The Wall Street Journal’s Kara Dapena and Peter Santilli took a look at the issue of so-called base effects, the distortions in the data that result from last year’s unusually low prices serving as the point of comparison, or base, for current inflation numbers. Instead of using 2020 as a baseline, the reporters calculated the inflation rate relative to 2019. Doing so cuts the annualized inflation rate in May in half, from 5% to 2.5%.
Taking a longer view of changes in inflation also provides some context that may reassure worried analysts. The chart below shows year-over-year inflation in the U.S. since 1950. While the standard measure of inflation shows it rising to a 13-year high in May, the long-term trend suggests that a return to more muted levels is likely.
Charts of the Day: The ‘Crazy’ Cost of the New Alzheimer’s Drug
The projected costs to Medicare from the newly approved Alzheimer’s drug Aduhelm (aducanumab) are astronomical.
“Plenty of other drugs cost more than Aduhelm, which is made by Biogen and will be priced at $56,000 annually,” The New York Times noted on Tuesday. “What makes it different is that there are millions of potential customers, and the drug is expected to be taken for years.”
Nearly 6 million Americans have been diagnosed with Alzheimer’s. Despite little evidence that Aduhelm slows the progression of dementia, if 1 million Medicare beneficiaries take the drug, which is administered by intravenous infusion, the cost to Medicare could potentially top $57 billion a year, according to estimates from the Kaiser Family Foundation — $20 billion more than Medicare Part B, which covers physician-administered medications, spent on all drugs combined in 2019. More conservative projections put the annual cost of Aduhelm between $5.8 billion and $29 billion, with the latter number still dwarfing what Medicare spends on any other single drug.
“It’s unfathomable,” said Tricia Neuman of the Kaiser Family Foundation told the Times. “These are crazy numbers.”
The spending on Aduhelm would be borne by taxpayers and by all Medicare beneficiaries, who would face higher premiums. “And the costs are likely to spill over into state budgets, where Medicaid pays premiums for low-income Medicare enrollees,” the Times says.
The Times on Tuesday put those numbers in some useful context with a couple of charts showing how the expected costs of Aduhelm compare to Medicare’s 10 costliest drugs in 2019 — and to government programs like NASA and the Centers for Disease Control and Prevention.
Cost-control options: Medicare does have some options for controlling its costs. “It could decide to cover the drug in a way that is more limited than the F.D.A. approval, a break from its normal practice,” the Times notes. Or it could evaluate the drug’s efficacy by putting it into an experiment, covering costs in some regions but not others. “Such policy experiments were authorized under the Affordable Care Act, but one has never been used to limit coverage of a drug in this way,” the Times says.
Sen. Ron Wyden on Tuesday outlined a proposal to lower prescription drug costs, including by allowing Medicare to negotiate drug prices, a Democratic priority opposed by Republicans.
Read the full story at The New York Times.
US Will Fall Short of Biden’s July 4 Vaccination Goal
President Joe Biden set a goal of getting 70% of U.S. adults vaccinated by July 4, but on Tuesday the White House said that it would fall short of that target. The country is close, though, with 70% of all adults aged 30 and older having received at least one dose of vaccine.
“Where the country has more work to do is with 18- to 26-year-olds,” Biden’s Covid-19 Coordinator Jeffrey Zients said in prepared remarks obtained by Bloomberg News. “We are working with state and local leaders to reach them, and based on current data trends we think it will take a few extra weeks to get to 70% of all adults with that age group factored in.”
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- Biden's Budget Gamble and the Twin Deficit Problem – Desmond Lachman, The Hill
- A Fee for Miles Driven Would Be Hard to Impose – Peter R. Orszag, Bloomberg
- Medicaid Boasts Record Enrollment, but a Purge Is Coming – Paige Winfield Cunningham, Washington Post
- New Drug Could Cost the Government as Much as It Spends on NASA – Josh Katz et al, New York Times
- Biden's Corporate Tax Hike Is Bad for Growth — Try a Carbon Tax Instead – Alex Brill and Alex Flint, The Hill
- A Flat Tax Would Collect More Revenue Than 85,000 Added IRS Agents – Steve Forbes and Stephen Moore, The Hill
- Democrats Know Big Government Is a One-Way Ratchet. Just Look at Obamacare – Marc A. Thiessen, Washington Post
- Where Will You Go When a Robot Takes Your Job? – Noah Smith, Bloomberg
- Why Airline Bailouts Couldn’t Prevent Airport Chaos – Brooke Sutherland, Bloomberg
- Biden’s Paid Leave Plan Is Years Out of Date – Bryce Covert, New York Times