Author: Phillip Inman
Source: The Guardian
Date: 13 Mar 2021
The president’s $1.9tn stimulus package should lift US GDP by up to 4% – and thus buoy up the whole of the global economy
US president Joe Biden did the world a favour last Thursday when he signed a bill handing $1.9 trillion (£1.4tn) of rescue funds to state and federal agencies, millions of students and workers and the US vaccination programme.
The money will appear first as cheques landing on household doormats as early as this week, softening the blow of the pandemic for those in work and for the many who remain out of work and under severe financial strain.
Over the rest of the year, the funds are expected to lift US national income by between 3% and 4%, and put the economy back on the trajectory it would have been on had the pandemic never happened.
More than that, the effect on trade from rising US imports and exports will power the global economy ahead by an extra percentage point, adding almost another quarter to its 2021 growth rate, according to the latest forecast from the Organisation for Economic Co-operation and Development. The Paris-based thinktank estimates that the world economy will expand by 5.6% this year from its pandemic-induced low – an increase on its 4.2% forecast, made last December.
With so much riding on this, some Democrats were surprised the vote was close-run in both houses of Congress. Victory followed a 220-211 vote in the House of Representatives, and a single vote, cast by the vice-president Kamala Harris, to carry the day in the Senate.
It was far from being a close debate among the public at large, however. A Pew Research Center poll last week found 70% of Americans favouring the stimulus package.
David Blanchflower, a renowned labour market economist at the Ivy League college Dartmouth, said Republicans would regret their sniping and their efforts to derail the plan.
“It’s just what the US economy needs at the moment” he said. “Going into the pandemic, the economy was weaker than they understood, with significant numbers of people underemployed or not participating in the labour market. The situation is so much worse now that millions of people need help.”
Blanchflower, who spent three years on the Bank of England’s monetary policy committee before and after the 2008 banking crash, said the US economy had more slack in it than was shown in official figures, meaning that even a major stimulus the size of Biden’s could fail to put the US economy on a permanent path to growth.
This month, the Bureau of Labor Statistics reported that, as of the middle of February, the economy was still 9.5 million jobs below where it was in February 2020. Elise Gould, economist at the Economic Policy Institute, said this translated into a 11.9 million job shortfall “when using a reasonable counterfactual of job growth if the recession hadn’t occurred”.
As a rescue measure, the Biden package is a blunderbuss, spraying money across a wide range of targets. It will provide $350bn for state, local and tribal governments, preventing a repeat of the 2008 crisis, when many of these organisations, which have to balance their books, were forced to make severe spending cuts.
There will be $30bn for transport authorities to cover the loss of passengers and $130bn for primary and secondary schools. Much like in the UK, there will be assistance for those unable to make mortgage repayments, though renters, who are excluded from help in the UK, are also part of the deal.
Students will be forgiven tax payments on loans and federal unemployment payments of $300 a week will be extended to September. Most significantly, it provides another round of direct payments to households, sending cheques of up to $1,400 to individuals making up to $80,000, single parents earning $120,000 or less and couples with household incomes of no more than $160,000.
Barry Naisbitt, an expert on the US economy at the UK’s National Institute for Economic and Social Research, said parts of the package could fall short: “There is a question mark over whether the $350bn for states and local areas will be enough when they are dealing with so much of the pandemic spending.”
Economists at the Washington-based Brookings Institution said that while $700bn of direct payments would lift consumer spending, the one-year spree could result in a hangover. “While our estimates show a soft landing, with a temporary and shallow decline in GDP after the fourth quarter of 2021, the slowdown could be more abrupt and painful than our projections suggest,” said senior fellows Wendy Edelberg and Louise Sheiner.
Biden faced a two-pronged attack on the package. On one side were Republicans who, despite pushing through a $2.2tn boost last year, said they feared the latest version would increase the national debt to dangerous levels.
Within the Democrat camp, some economists – notably Larry Summers, the former Bill Clinton adviser and president of Harvard – said it was overkill, fearing that anything above $1tn would overheat the economy and unleash spiralling inflation.
US inflation expectations show investors expect a rise from February’s 1.7% annual reading, but only as high as 2.9% between April and June, before easing to 2.5% over the rest of the year and to 2.2% in 2022.
US Federal Reserve chief Jerome Powell said last week that a rise in inflation above the 2% target level would be temporary and for that reason could be ignored. If anything, he added, the US economy needed a bit of inflation after more than 10 years without any.
Modestly rising prices were an indication of economic health and to be welcomed, he added, which is a central banker’s way of applauding the package and telling people not to panic about some of the spillover effects, such as rising interest rates, the corollary of rising inflation.
In more constrained parts of the world, the prospect of overheating is a distant dream. European Union countries have struggled to boost their vaccination programmes and a €740bn (£635bn) stimulus will take effect there more slowly, probably over two years.
Even the UK, which is matching the US for vaccination rates and expects to see a rapid recovery from June, has allowed fears of high debts and inflation to dull its stimulus plans.
Luckily, the Biden plan, like many of his policies, extends beyond US borders and will lift all boats.