Oh no. More economics? don't worry -- hillarity resumes Tuesday. In the meantime...
Larry Summers column in The Washington Post last Thursday challenged the thinking behind the Biden stimulus, and might have led some to second thoughts about it. Is the $1.9 trillion Biden stimulus too big, too risky, and does it, as Larry says, “threaten future inflation and financial stability …(and)…our ability to build back better?”
No, it doesn’t; Larry is wrong. The stimulus is not too big, and the risks of curtailing it are much greater than the risks of not doing so. We’ll throw some numbers around later, but it boils down to this -- Larry is treating the current situation as if it were a math problem to be solved instead of a national crisis that reaches the roots of our society. We’re not just trying to fix the economy, we’re trying to take steps to avert a colossal shitshow, a true existential crisis. Failure means a virus that’s uncontained and mutating, more economic dislocation, and even greater social strains that lead to dangerous, if ludicrous, behavior from shaming mask wearers and attacking science to picking up assault rifles to kidnap the Governor or storming the Capitol. The “right” level of effort is not one that uses past recessions as a guide, but one that overwhelms the crisis we face, the economic equivalent of shock and awe. Besides, the economy’s growth has disappointed us for coming on two decades – is the risk of “too strong” an economy really keeping you up at night?
Let’s start with some of technical stuff. Larry’s argument is that we’re going too big, much bigger than the problem. He gets to that by focusing on the “gap between actual and potential output,” which he says is $50 billion a month and declining. While our child’s “potential” is unlimited, “potential” output is more like an actual limit – it means the economy could be producing $50 billion more stuff – goods and services – if everybody had a job and all the factories were humming and so on. Sure, it’s not a hard number like your age or the temperature, it’s an “estimate,” a good guess. But let’s accept it for the time being, because it’s ultimately not that important.
Larry writes the Biden stimulus would be in the neighborhood of $150 billion a month, which is “three times the size of the output shortfall,” as if we were shoveling three shovelfuls of dirt into a one-shovelful hole, which understandably sounds silly. And he then goes further, noting that “wage and salary incomes are now running $30 billion below “pre-COVID-19 forecasts” and so the $150 billion a month stimulus appears to be five times as big as needed, which sounds really silly.
But it’s the comparisons that are silly. If consumers were simply cutting back on their purchases while hoping to find work, instead of quarantining at home, fearful for their lives with stores and workplaces disrupted, the comparison would be less jejune. We’re not trying to fill a hole here -- we’re trying to build a dike. And the “right” height for the dike is based on how high the water is.
That is, ordinarily, you combat a recession by adding purchasing power to the economy. But here, we’re after much bigger game – we’re trying to do things that must be done if we’re going to get through this. A good way to understand the difference is by looking at what’s in the package that adds to $1.9 trillion. Here’s the list, lifted from an article published by Brookings.
1. COVID-19 containment and vaccination, aid to state and local governments, and increased federal spending ($750 billion): this category includes both the direct $350 billion in state and local aid, as well as money for vaccination, testing and tracing, and reopening schools;
2. Direct aid to families ($600 billion): this category includes the $1400 per person rebate checks and the child tax credit expansion;
3. Aid to financially vulnerable households ($400 billion): this category includes the additional $400 per week in unemployment benefits and the extension of the pandemic unemployment programs; and
4. Aid to businesses ($150 billion): this category includes loans and grants to small businesses and paid sick leave.
So, is this three times or five times what’s needed? Would you cut this stuff by two-thirds because of the “output gap?” Go through the list. There’s $350 billion in aid to state and local governments, which are going broke and will be laying off copious people while cutting basic services if left to their own devices – remember, they were assigned both the job and the bill for managing the crisis. Instead, this aid preserves the basic services state and local governments provide, and then more for vaccinations, testing and tracing, and everybody’s darling, reopening schools. And Larry should be excited about this part of the program, because it doesn’t add output so much as replace the output state and local governments are about strip away through cutbacks. We can’t afford not to take these steps.
And let’s say what is often left unsaid – aside from wanting to screw over predominantly Democratic officials and people of color in urban centers, the Republicans who oppose this aid also likely want to leverage the situation to break public sector workers’ pension systems. Aid to state and local governments would not only help preserve them as active partners in the campaign to stop the pandemic, but would also help defeat that sad agenda.
The second component is direct aid to families. There’s been a push to limit this in two grounds. First, families with incomes as high as $290,000 would receive a check, albeit a very small one. Now, where to draw the line is a reasonable thing to discuss within limits, but the Republican starting point is $100,000 is even more divorced from reality than the $300,000 found in the proposal. (Remember, a $100,000 “limit” means benefits start phasing out at half that amount.)
We also hear that families who receive this money appear eager to save it if they can, and therefore don't need it. Oh, please. When we cut taxes for wealthy families in 2017, that money was saved – come on, they’re rich people, what else are they going to buy? – and I don’t recall complaints. But more crucially, if families can save that money, that’s good, too. Again, this isn’t about promoting spending – it’s about giving families better ability to make choices, to give them a cushion in case – let’s make up something crazy here – a mutant variant of the virus throws the whole vaccination strategy into a cocked hat. I’d go out on a limb and say families that have some resources will be less willing to protest mask wearing or restrictions on bars and restaurants or even taking masked pictures with their guns. Again, it’s not a math problem – it’s a response to a social crisis rarely experienced in our history.
The third item on the list — unemployment benefits -- is one Larry and every attempted targeter – from William Tell to Bill Burroughs – should support. An expanded unemployment benefits program is completely targeted -- if you’re working you don’t get it, it goes away.
But Larry is still uncomfortable with it. He says, “…a family of four making $1,000 a week would take home $22,000 over the next six months. Under the Biden program, if…laid off, the family’s income…would likely exceed $30,000.” I suppose the good news is that if the pandemidc ends and the economy improves we can stop worrying about overpaying working families! But nobody’s produced evidence of workers goldbricking to get lush unemployment bennies – working people understand the way to have a job tomorrow is to have a job today. More important, strong unemployment benefits make it possible for families to get by if pandemic-related restrictions deprive them of work. No one thinks everyone protesting mask mandates and business closings is going to change their mind if they’re offered better benefits. But they are just responding to the Trump dictum that our two choices are “get sick or go to work.” That approach fed an insurrection. The Biden program sets up a third alternative. It’s not “excessive” – it’s vital.
And then there’s finally aid to businesses. This isn’t a “stimulus” so much as it attempts to put those businesses crushed by the pandemic into the economic equivalent of a “medically-induced coma,” keeping them alive until their underlying disease passes. And it’s worked -- small businesses failures were actually dramatically lower in 2020 than in 2019, although I've heard no complaints about the absence of targeting in this case. And of all the components of the plan, it’s the one guaranteed a seat on the bus – Republicans want less vaccination money, less open schools money, and so on, but actually want more money than Biden does here. So, it’s moot.
All of these details support a central argument – defeating the virus means more than producing as much vaccine as is possible or increasing consumer purchasing power. It means supporting Americans as they try to navigate the crisis and get to the other side. The compelling risk here is not that we miss our “target,” but we fail.
Sure, there are risks. An overheated economy risks inflation, but we’ve been under the Fed’s inflation target for coming on two decades now – even Larry admits “an overheated economy…(that pushes)…up wages would be a very positive thing.” And Larry is worried that “economic space be found for the public investments that should be the nation’s highest priority.” But the best way to tee up those investments – added infrastructure, universal broadband, a climate program -- is to end the pandemic and move those items to the top of the agenda. You’re not going to get a carbon tax or user fees for highways with the economy contracting and 20,000 people dying every week.
Ending the pandemic and its economic effects means not just producing and distributing vaccine, but allowing state and local governments to continue to deliver services, supporting our families so they don’t fear the disruptions that are part of pandemic response, and keeping in mind the greatest sacrifices have been made by low-income people and people of color, and so the greatest efforts must be made to assist them. Failing to do so means not just hundreds of thousands of additional deaths and an economic calamity, but a society in a dangerous stand-off.
The Biden program is not too small. It responds to a danger of massive proportions and is therefore massive. History will measure its success not by comparing it to an “output gap,” but by whether it succeeded in bringing our country back. That is the right “target.”
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