Blog No. 280, posted on February 10, questioned the $1.9 trillion size of the proposed American Rescue Plan and urged that it be better targeted. Two days later, significant support for that position was provided by the respected, bipartisan Committee for a Responsible Federal Budget which published a collection of views from a broad range of economists. The full report of the Committee follows:
Voices Skeptical of the Size of $1.9 Trillion COVID Relief Plan
FEB 12, 2021 | OTHER SPENDING
Congress is currently marking up a $1.9 trillion COVID relief package using budget reconciliation. While it’s important to spend what is necessary to end the pandemic and support households and businesses harmed by the economic downturn, a growing number of experts have noted that the bill goes beyond what the economy currently needs.
In a recent analysis, we found that the $1.9 trillion plan could overshoot the economic output gap two or three times over. We recently suggested principles that the next COVID package should be tailored to the needs of the economy, targeted thoughtfully, and not cut off too early. It makes little sense to pass a large relief package and still leave a payment cliff for unemployed workers in August.
Below is a collection of prominent economists, budget analysts and media outlets that have questioned the size of the latest COVID relief proposal, called for better targeting, or spreading relief out more over time:
Larry Summers, former Treasury Secretary and National Economic Council director: “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.”
In a follow-up question-and-answer, Summers reiterates that he supports helping people through the pandemic;”But a substantial part of the program should be directed at promoting sustainable and inclusive economic growth for the remainder of the decade and beyond, not simply supporting incomes this year and next. An approach of this kind, spending out more slowly, will reduce possible inflation pressures and also increase the economy’s capacity.”
Ben Ritz, director of the Progressive Policy Institute’s Center for Funding America’s Future: “Alternatively, the parties should consider agreeing to a $1.2-$1.4 trillion package. This is likely the amount our economy actually needs, and it also happens to split the difference between the GOP and White House proposals. Economist Mark Zandi has estimated that a package of this size would be the right amount of stimulus for our economy, and the new projections from CBO suggest that it would be enough to fill the output gap through 2023 even if the true output gap is bigger than CBO believes.”
Bipartisan Policy Center: “The Bipartisan Policy Center urges Congress to seize the opportunity for consensus on a roughly $1 trillion package to: 1) accelerate vaccination, testing, and other means to combat the virus, 2) ensure our citizens are not homeless and hungry, and 3) provide the basic support people need to either remain working or get back to work.” [emphasis added]
The Economist: “Republicans—and some moderate Democrats—are right to argue that $1.9trn is excessive today. Mr. Biden may be willing to trim his proposal. A figure of around $950bn would allow for unemployment insurance, a smaller amount of catch-all universal cheques, Mr. Biden’s assault on child poverty and extra spending on vaccines.”
Jason Furman, former chair of the Council of Economic Advisers: “The plan”is *very* large. Together with the December legislation it would be around $2.8T, which is about $300b per month for the nine months it is in effect. For context in November GDP was about $80b below pre-crisis trend and compensation was about $20b below pre-crisis trend.”
Olivier Blanchard, former International Monetary Fund chief economist: “I am known as a dove. I believe that the absolute priority is to protect people and firms affected by covid. Still, I agree with Summers. The 1.9 trillion program could overheat the economy so badly as to be counterproductive. Protection can be achieved with less.”
In a follow-up, Blanchard tweeted, “Let me be clear. We should spend what we need to save people from poverty and fund the needed response to the pandemic. I think we do not need to spend 1.9 trillion for that, and we should have a smaller program. But suppose we did need to spend that. Why couldn’t we finance it partly by an increase in taxes, say an exceptional tax on capital gains, given that the stock market has done so well in the recent past? This would be fair, deliver protection and limit overheating. Wouldn’t this be a better way?”
Doug Holtz-Eakin, former Congressional Budget Office director: “Based on any reasonable economic theory of stimulus, $1.9 trillion is far too large. In analyzing the impact of the Cares Act, the CBO found that a $1 change in checks, unemployment insurance, and state-local aid had cumulative multiplier effects ranging from 0.38 to 2.50, with the low end reflecting little progress in defeating the virus. So, the $1.9 trillion request for Covid-19 funding only makes sense if the vaccine program is expected to fail. Otherwise, it is far too large to be consistent with the administration’s stated thinking.”
Washington Post editorial board: “The White House plan calls for $1.9 trillion in spending, after a year of COVID-19 emergency funding that has already added more than $2 trillion to a spiraling national debt. There’s room to scale this back, particularly in light of a new Congressional Budget Office report that predicts a better-than-expected economic recovery.”
Steve Pearlstein, Washington Post columnist: “In fact, much of the [relief] money has wound up in household bank accounts, which are now at least $1.6 trillion higher than they were at the start of the pandemic. The problem isn’t so much that households in the aggregate don’t have enough money to spend or are too scared to spend it. It’s that because of the pandemic, they can’t spend it on many of the things they’d like to. Another big slug of fiscal stimulus won’t change that…
That doesn’t mean that we shouldn’t spend what it takes to end the pandemic while providing financial support to the minority of households that have lost jobs and income. Another relief bill is necessary. But it does mean that the economy can recover and grow at pre-pandemic rates by borrowing and spending something less than $1.9 trillion.”
Michael Strain, American Enterprise Institute Director of Economic Policy Studies: “Uncertainty about the future path of GDP, the output gap, and inflation suggests that Congress should be prudent and cautious in both directions. Additional economic relief, recovery, and stimulus spending is reasonable and advisable. But the amount of that package should be based on an objective assessment of the economy’s underlying need, and of how that spending will affect overall economic output. By that measure, the President’s $1.9 trillion proposal is clearly much too large.”
Charles Lane, Washington Post columnist: “Today, as President Biden pushes for a $1.9 trillion economic package, the second-biggest item in which is $350 billion in cash for states (after $465 billion for direct payments to households), he faces a more benign situation than Hogan and Cuomo anticipated.
Yes, for the fiscal year that ended June 30, 2020, total collections fell 3.4 percent short of what states had planned before the pandemic, according to the National Association of State Budget Officers (NASBO), but this was less than many had forecast, and early revenue reports for the second half of 2020 suggest the worst is probably over for most states.”
Steve Rattner, former counselor to the Treasury secretary in the Obama administration: “We don’t necessarily need (at least not now) as much stimulus as [President Biden] is offering. And some of the most expensive provisions are the least well targeted to help the neediest.
Topping that list: $1,400 checks to qualifying adult Americans, in addition to the $600 checks approved by Congress in December….In the past, some research has suggested that Americans have more often used checks like this to increase savings or pay down debts….At least for now, merely putting cash into Americans’ pockets is not what’s needed for the overall economy; solving the public health crisis will unlock much deferred spending.”
Paul Krugman, New York Times columnist (before the December relief bill was enacted): “my sense is that many analysts have overlearned the lessons from the 2008 financial crisis… This time, however, households entered the pandemic slump with much lower debt. Net worth took a brief hit but quickly recovered. And there’s probably a lot of pent-up demand: Americans who remained employed did a huge amount of saving in quarantine, accumulating a lot of liquid assets. All of this suggests to me that spending will surge once the pandemic subsides and people feel safe to go out and about, just as spending surged in 1982 when the Federal Reserve slashed interest rates. And this in turn suggests that Joe Biden will eventually preside over a soaring, ‘morning in America’-type recovery.” (Krugman now supports the plan)
Wall Street Journal economists survey: “More than half of the respondents said the amount of fiscal aid the economy needs to recover from the coronavirus shock was less than $1 trillion, while only one said that more than $2 trillion was required.”
