The United States has never seen a president impeached twice — the big news this week. But neither has it ever encountered an economy so uniquely wounded as today’s situation amid the pandemic.
Into this crisis President Joe Biden wants to “go big” with a $1.9 trillion relief plan. It’s more than 50% larger than the 2009 stimulus proposed by President Barack Obama to address the Great Recession. This is no accident.
The Obama plan was inadequate to return the economy to health rapidly. Republicans gained control of Congress in the 2010 election and forced Obama into six years of “austerity” that caused a needlessly slow recovery. Biden doesn’t intend to repeat that mistake.
If enacted, Biden’s stimulus would come atop a bipartisan $900 billion relief deal enacted in December. And a $2.2 trillion stimulus passed by a Democratic-controlled House and Republican-controlled Senate, and signed by President Donald Trump in late March 2020.
To update a quote that’s rightly or wrongly attributed to the late Republican Senate leader Everett Dirksen: A trillion here, a trillion there, and pretty soon you’re talking real money.
Some of today’s Republicans are proposing a $618 billion plan, just one third of Biden’s. I’m sure they are concerned about those billions, but a political calculus inevitably comes into play. If Biden is forced into “going small” and the plan fails, GOP chances of regaining Congress in 2022 rise substantially.
Debt and deficit hawks don’t just include Republicans, who have no problem with red ink when they are in charge and giving tax cuts to the rich and corporations. Efraim Berkovich, an economic modeler at Penn’s Wharton School, argues that a big addition to the national debt would buy only a modest short-term gain. A big problem, he says, is that sectors shut by the pandemic that won’t be helped until the pandemic goes away.
The Brookings Institution’s study offered, with some qualifications, a very different take. With Biden’s plan, it said, the economy can dig out of its hole faster.
Opponents also latched on to criticism of Biden’s plan from Clinton Treasury Secretary Lawrence Summers — in other words Democratic-leaning — in a Washington Post op-ed earlier this month. While admiring its “ambition, its rejection of austerity orthodoxy and its commitment to reducing economic inequality,” Summers raised the risk of an overheated economy and inflation as an unintended consequence.
Biden responded, “The one thing we learned is we can’t do too much here. We can do too little. We can do too little and sputter.” The reference is to the Obama stumble in 2009.
Treasury Secretary Janet Yellen argues that the chance of runaway inflation is low. (And Federal Reserve Chair Jay Powell agrees). Rather, the danger is digging too slowly out of what she calls a “deep hole” of lost jobs — still 10 million below pre-pandemic levels — and leaving permanent damage in people’s lives.
A former chair of the Fed, Yellen has the stronger standing here. A distinguished economist, she also served on the central bank during its unorthodox but successful fight to prevent Depression-like deflation during the Great Recession.
The Biden stimulus can be passed with Vice President Kamala Harris breaking a tie in the Senate. Biden would rather have some Republican votes, too, and is willing to make some deals for it to happen. But he knows better than to repeat the too-small stimulus of the Obama years.
Such is the state of play as I write.
It’s an unprecedented challenge. The economy didn’t shut down during the much deadlier 1918-1919 “Spanish Flu.” A downturn followed that some modern economic historians consider a depression. But it was brief, likely caused more by the drop in wartime demand (World War I ended in November 1918), and America entered the Roaring Twenties boom.
What would John Maynard Keynes do inthe present situation? The famous British economist, to risk oversimplification, urged government spending to make up for the drop in demand during recessions. His theory was put to the test in the Great Depression — an economic collapse without a global pandemic.
President Franklin Roosevelt was an instinctive budget balancer and didn’t particularly like Keynes. But he did follow Keynes’ prescription, and unemployment went down during his terms of the 1930s (the exception: 1937, when FDR pulled back the stimulus, resulting in a recession). As for Keynes, he thought Roosevelt did too little, but this revolutionary template for government action during downturns was set.
By the 1960s, even conservative economist Milton Friedman admitted, “We are all Keynesians now.” To be fair, Keynes advocated (again I’m simplifying) slowing government spending once the crisis was solidly past and tax receipts increased.
Thus, it’s easy to see how Keynes would support going big. (At the risk of going off topic, he might have blanched at a $700 billion-plus defense budget happening at the same time.)
Much is being made of the size of checks going to Americans. Biden endorses a House Democratic proposal to send $1,400 to individuals earning less than $75,000 and $2,800 to married couples earning less than $150,000. Some Republicans want $1,000.
It’s impossible to know how much of this would be spent and how much saved. Spending would stimulate the economy more immediately and help Americans who are hurting. Many more are savers, with overall U.S. household finances in fairly good shape.
Either way, Biden’s plan is popular. A Pew Research Center poll found 79% of respondents said another round of stimulus would be needed after the December package was passed. A Quinnipiac survey early this month found nearly 70% support for the Biden stimulus.
No wonder. Biden’s plan would also bolster unemployment insurance, fund school reopening, aid small businesses, provide $440 billion to states and localities, and renew paid leave from the December package. Most important: It provides extra funding to speed vaccines.
Who doesn’t support it, besides most Republicans? Apparently big business. The president held a summit of CEOs recently but none, including JPMorgan Chase chief and Democrat Jamie Dimon, immediately issued support. Many are against a parallel plan to increase the national minimum wage to $15 an hour.
They’re wrong. Big is the way to go. And time is wasting.