Huge Boost to the Economy Is About to Fade

By Yuval Rosenberg

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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