Joe Biden got a big, if preliminary, win in the Senate this morning on his my-way-or-the-highway COVID-19 relief bill. Biden and his team have repeatedly declared that they think the bill avoids the supposed mistakes of Barack Obama’s 2009 stimulus bill, which progressives have insisted for a dozen years was too timid for the kind of robust economic recovery that they expected. They refused to negotiate with Republicans on a smaller bill that would have allowed for more time to see the impact of previously appropriated relief and stimulus before going deeper into debt to spend nearly $2 trillion.
But what if the bill is more of a my-way-and-the-highway bill? Politico reports this morning that staffers in the White House have become worried that former Obama adviser Larry Summers could be correct that the Biden plan is too big. Summers predicts that the bill’s impact will start draining economic growth in the second half of next year — precisely when Democrats need to protect their razor-thin majorities in Congress:
Summers, the former Treasury secretary for BILL CLINTON and top economic adviser to BARACK OBAMA, puts down on paper what many liberal wonks have been whispering about for weeks: that President JOE BIDEN’S stimulus bill may be too big, that its overall cost could sacrifice other progressive priorities and that it could harm the economy next year, when Democrats will be defending narrow congressional majorities in the midterms.
For weeks the key economic talking point from the White House has been that the risk of going too small is worse than the risk of going too big. Now comes Summers who says … that might not be true. “[M]uch of the policy discussion has not fully reckoned with the magnitude of what is being debated,” he wrote.
Summers cops to the fact that the 2009 stimulus, which he helped craft, wasn’t big enough to fill the hole in the economy back then. The shortfall was $80 billion a month and the Obama stimulus only filled about half of that.
But in 2021, after the December package of $900 billion, the economy will face a $20-$50 billion-a-month hole. The Biden plan would fill it with some $150 billion a month.
Summers offers a couple of bleak predictions about the impact of the overstimulus. First, we might end up with 1970s-style inflation all over again:
First, while there are enormous uncertainties, there is a chance that macroeconomic stimulus on a scale closer to World War II levels than normal recession levels will set off inflationary pressures of a kind we have not seen in a generation, with consequences for the value of the dollar and financial stability. This will be manageable if monetary and fiscal policy can be rapidly adjusted to address the problem. But given the commitments the Fed has made, administration officials’ dismissal of even the possibility of inflation, and the difficulties in mobilizing congressional support for tax increases or spending cuts, there is the risk of inflation expectations rising sharply. Stimulus measures of the magnitude contemplated are steps into the unknown. For credibility, they need to be accompanied by clear statements that the consequences will be monitored closely and, if necessary, there will be the capacity and will to adjust policy quickly.
Second, long before covid-19, the U.S. economy faced fundamental problems of economic injustice, slow growth and inadequate public investment in everything from infrastructure to preschool education to renewable energy. These are at the heart of Biden’s emphasis on building back better.
If the stimulus proposal is enacted, Congress will have committed 15 percent of GDP with essentially no increase in public investment to address these challenges. After resolving the coronavirus crisis, how will political and economic space be found for the public investments that should be the nation’s highest priority?
What happens when Democrats run for Congress in 2022 having run out of money for their progressive agenda, after flushing it down the toilet with this Biden bill? It might mean economic disaster, followed quickly by political disaster. And while Summers doesn’t mention it, economic and political disaster could reopen the door to radical populism on both sides of the aisle, meaning Democrats could leave us in worse shape that when Biden came into office last month.
Imagine the impact of double-digit inflation on a nation of retirees in the current political environment of distrust in institutions. The riots of 2020-1 might seem like a garden party when the people with real investment in the status quo find out their life savings are essentially worthless.
Plus, the jury’s still out on whether any more stimulus is actually necessary. Today’s job’s report shows only 49,000 jobs added in January, a bit of a bounce back up from the negative December report. A more positive move in the unemployment rate looks more like an artifact of changes in the workforce:
The unemployment rate fell by 0.4 percentage point to 6.3 percent in January, while nonfarm payroll employment changed little (+49,000), the U.S. Bureau of Labor Statistics reported today. The labor market continued to reflect the impact of the coronavirus (COVID-19) pandemic and efforts to contain it. In January, notable job gains in professional and business services and in both public and private education were offset by losses in leisure and hospitality, in retail trade, in health care, and in transportation and warehousing. …
In January, the unemployment rate fell by 0.4 percentage point to 6.3 percent, and the number of unemployed persons decreased to 10.1 million. Although both measures are much lower than their April 2020 highs, they remain well above their pre-pandemic levels in February 2020 (3.5 percent and 5.7 million, respectively). (See table A-1. See the note at the end of the news release and tables B and C for information about annual population adjustments to the household survey estimates. See the box note on page 5 for more information about how the household survey and its measures were affected by the coronavirus pandemic.) …
After accounting for the annual adjustments to the population controls, both the civilian labor force and the number of employed persons changed little in January. At 61.4 percent, the labor force participation rate was about unchanged over the month but is 1.9 percentage points lower than its February level. The employment-population ratio, at 57.5 percent in January, changed little over the month but is 3.6 percentage points lower than in February. (See table A-1. For additional information about the effects of the population adjustments, see table C.)
The New York Times suggests that the relief and stimulus bill passed in December has already begun to work:
The January numbers are certain to affect the debate in Washington over further federal intervention. The Biden administration and Democratic lawmakers have been pressing for a $1.9 trillion measure, while some Republicans have said a smaller package would suffice and others have said it is too soon for another round of aid.
Democrats took a step forward in enacting the $1.9 trillion proposal early Friday. The Senate narrowly passed a budget resolution that will next go to the House, where Democrats will not need Republican support to approve it.
Nearly a year after the pandemic devastated the job market, many forecasters predict that the economy will strengthen from here on. The $900 billion federal relief package enacted in December is expected to bolster the economy, with more aid potentially on the way. The vaccination push, though slower than hoped, is paving the way for wider reopenings even as coronavirus mutations around the world make the rollout more urgent.
This makes some sense, as the money from the $900 billion package began to get released in January. That money will continue through March, along with the vaccinations, and the latter will allow for reopening of commercial and retail businesses. It’s that reopening that will provide the economic growth to provide the rebound, not more government spending except that which accelerates the reopening. Money for vaccinations and school reopenings would be well spent at this point, but more stimulus cash could very well prove counterproductive.
Will Biden listen to Summers? It’s not too late to scale back the $1.9 trillion bill, which Biden could use as an entrée to moderate Republicans that would back more targeted spending. Biden seems more interested in virtue-signaling to the Left than governing at this point, so color me skeptical that Summers will get any attention from the administration at this point.