There has been some pushback from progressive pundits — most notably Larry Summers, but he is not alone — against President Joe Biden’s proposal for a very large COVID relief package. Before I get into the reasons I believe this pushback is misguided, let me say that it is refreshing to discuss good-faith criticism coming from people who actually have some idea what they are talking about, as opposed to the cynical, know-nothing obstructionism that has become the Republican norm.
Nonetheless, the critics are wrong. No, the Biden plan isn’t too big. While the pundits’ concern that the size of the package might produce some economic stresses isn’t silly, it is probably overwrought. And they have the implications of an expansive plan for the future completely backward: Going big now will enhance, not reduce, our ability to do more later.
To see where the criticism goes wrong, we first need to be clear about what the Biden administration and its allies in Congress are trying to accomplish.
Right from the beginning some of us tried to explain that the pandemic slump isn’t a conventional recession, and the required policy response isn’t conventional stimulus. What we are dealing with is more like a natural disaster than a normal recession, and the appropriate policy response is mainly a kind of disaster relief.
After all these months, however, this remains a peculiarly hard point to get across. Even some sophisticated economists sometimes fall into the trap of assessing policy in traditional stimulus terms.
So maybe it will help to use a different parable: What policymakers are trying to do here is like fighting a war — a war both against the pandemic itself and against the human fallout from the pandemic slump.
And when you are fighting a war, you don’t decide how much to spend by asking “How much stimulus do we need to achieve full employment?” You spend what you need to spend to win the war.
Winning, in this case, means providing the resources for a huge vaccination program and for reopening schools safely, while limiting the economic misery of families whose breadwinners can’t work and avoiding gratuitous cuts in public services provided by fiscally constrained state and local governments.
And that is what the American Rescue Plan mostly involves. It is, as Biden’s economists say, a bottom-up plan that starts with estimated needs.
Although discussion is weirdly dominated by those proposed $1,400 checks, they are only a fraction of the total. Medical spending, school aid, aid to the unemployed, and help for state and local governments dominate the plan. And there is a good case for those checks, too; more about that later.
Now, thinking about this as a war budget doesn’t mean that we can ignore macroeconomics. Emergency spending may not be intended as stimulus, but it nonetheless has a stimulative effect. And wartime surges in spending have often been accompanied by bursts of inflation, because they can lead to an overheated economy. So is that something that might happen this time?
Yes, it might. But we don’t know for sure that it will. And to the extent that inflation is a risk, that is an argument for seeking ways to limit that risk, not for skimping on COVID relief.
How big is the inflation risk? Critics point out that Biden’s proposed spending is much bigger than the Congressional Budget Office’s estimate of the “output gap” — the difference between the economy’s actual production and the amount it could produce without getting into inflationary territory. This, they argue, suggests that the rescue plan would produce serious overheating.
There are, however, three reasons not to get too worked up about the package-gap comparison.
First, nobody knows how big the output gap really is. CBO says that the economy was running 1 percent above capacity in 2019, but if that was true, where was the inflation? In fact, the big lesson of prepandemic economics was that we could safely run the U.S. economy hotter than almost anyone thought, and that the only way to find out what we are capable of is to test our limits rather than preemptively rein the economy in.
Second, the Biden plan is probably less stimulative than the topline number might suggest. The experience of the CARES Act last spring suggests that a large part of those $1,400 checks will be saved rather than spent — which does not mean that they are a bad idea, as I will explain. Some have argued that the proposed aid to state and local governments is bigger than their needs, but if so, they will bank most of the excess.
Finally, there is an easy answer if inflation should start to rise: The Federal Reserve can tighten monetary policy. I have seen suggestions that this won’t work — either that the Fed will lack the will to tighten or that it can’t tighten without causing a recession. But when was the last time the Fed was too hesitant about tightening? I think you have to go back to Arthur Burns in the 1970s; its bias has gone the other way ever since.
And no model I am aware of says that monetary tightening to offset fiscal expansion must cause a recession. Where is that coming from? There is a faint but disturbing echo here of the debate over austerity a decade ago, when advocates of fiscal tightening despite high unemployment kept inventing new theories on the fly to justify their position.
So we shouldn’t dismiss concerns about overheating, but we shouldn’t let them get in the way of giving Americans the aid they need.
But what about the argument that there are big elements of the Biden plan that aren’t essential relief?
Skepticism about the substance of the Biden plan, as opposed to its size per se, mainly centers on the idea of sending cash to the great majority of American adults — the so-called stimulus checks, although they aren’t stimulus and they aren’t checks. There are other elements; as I mentioned, some believe that aid to state and local governments will be bigger than necessary. But the stimulus checks are the big question mark. So let’s focus on them, and with them the broader question of how to set the stage for future policy.
There is no question that many people receiving stimulus checks will be people who haven’t taken a serious hit to their income and don’t need special help. In that sense the checks will be poorly targeted, certainly as compared with enhanced unemployment benefits.
However, we know that a substantial number of people experiencing significant income losses won’t be helped by unemployment benefits — for example, those who are still working but at reduced hours or wages. Universal basic payments will give such people much-needed help. True, they are a leaky bucket, and you wouldn’t want them to be the main element of a rescue plan — but they aren’t! They are a supplement that will do some good.
And they are also hugely popular, which isn’t an irrelevant consideration.
Actually, every major element in the Biden plan has strong public approval. But support for stimulus checks is through the roof.
Now, policy shouldn’t be driven entirely by opinion polls. But if you care about setting the stage for policy beyond the pandemic, delivering the goods to voters in the first round will be crucial.
Of all the arguments made by critics of a big rescue plan, the one that really has me rubbing my eyes is the suggestion that we should scale the plan back to make room for later policies, like investment in infrastructure. Wasn’t the overwhelming lesson from the Obama years that that is not how it works? The effective constraint on good policy is not financial, it is political — and as a result underpowered policy in the short run ends up killing the chance of good policy in the years ahead.
A trip down memory lane: Back in 2009, I was more or less frantically warning that the Obama stimulus was too small, and a key part of that warning was my fear that going small would undermine future policy prospects. Here is what I wrote in January 2009:
“I see the following scenario: a weak stimulus plan, perhaps even weaker than what we’re talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9% and coming down only slowly. And then Mitch McConnell says ‘See, government spending doesn’t work.’
“Let’s hope I’ve got this wrong.”
Alas, I didn’t have it wrong.
Circumstances are different now, but the basic logic is the same. If you want effective policy on infrastructure, on the environment, on children and more, Biden has to deliver big, tangible benefits with his rescue plan. Otherwise he will squander political capital and probably lose any chance to do significantly more.
So this plan really needs to go big. The risks, economic and political, of falling short are huge, and should be dispositive.
Paul Krugman | The New York Times (CREDIT: Fred R. Conrad)
Paul Krugman, winner of the Nobel Memorial Prize in Economic Science, is an Op-Ed columnist for The New York Times.
