And that’s what the American Rescue Plan mostly involves; it is, as Biden’s economists say, a bottom-up plan that starts with estimated needs. Using numbers from the Committee for a Responsible Federal Budget, here’s the composition of the proposed package:
Although discussion is weirdly dominated by those proposed $1400 checks, they’re 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’s 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’s 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 one percent above capacity in 2019, but if that was true, where was the inflation? In fact, the big lesson of pre-pandemic 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’re 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 $1400 checks will be saved rather than spent — which does not mean that they’re a bad idea, as I’ll explain. Some have argued that the proposed aid to state and local governments is bigger than their needs, but if so, they’ll bank most of the excess.
Finally, there’s an easy answer if inflation should start to rise: the Federal Reserve can tighten monetary policy. I’ve 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.