FOR SUBSCRIBERS ONLY: Why þe Worries About Biden's $1.9 Trillion? (Project Syndicate)
A draft of my next Project Syndicate column...
Forthcoming at: <https://www.project-syndicate.org/columnist/j-bradford-delong>
Back in 1992, Larry Summers and I warned that pushing the U.S. inflation target down from 4% per year—a level that then did not seem to be causing any discontent whatsoever—to 2% risked causing big problems. Monetary policy might then hit the zero lower bound. And then what would we do? Alan Greenspan then pushed the U.S. inflation target down to 2%. And ever since we have had big problems.
I have long thought—and I have long thought that this was general near-consensus—that many of our problems would go away if we could re-jigger asset market Markets so that a federal funds rate of 5% was not too high to be consistent with full employment in the late stage of a business cycle. There would be three ways to accomplish this: (1) raise the inflation target back from the 2% of Greenspan to the 4% of Volker, (2) boost investment demand so that a late-cycle federal-funds rate of 5% is consistent with strong investment, or (3) flood the market with safe Treasury assets so that the safe-asset price premium U.S. Treasury rate falls and the warranted late-cycle federal-funds rate rises.
When Joe Biden won the election and proposed his $1.9 trillion relief, rescue, support, and stimulus spending proposal, I saw it as a very good thing: a substantial chunk of the money would go to people who could really use it in this this plague year, it would ensure that the economy rapidly reattained full employment, and it would help with (3) as well. What’s not to like? It was true that I would greatly prefer if a much larger chunk of the $1.9 trillion were to go public investment. But unless and until I could be confident that ten Repubian senators would work on and support such a public-investment push, making the unattainable best the enemy of the attainable good would simply be a complete waste of time, at best.
Yet now I see a lot of people whom I greatly respect and admire making noises of opposition, or at least discontent, with respect to the $1.9 Biden relief, rescue, support, and stimulus. Now I am not talking about the professional Republicans. And I am not talking about the Bourbons of economics—those who take great care to learn nothing, and never mark their beliefs to market. But there are many others: right now in my tickler-to-review file I see Olivier Blanchard and Larry Summers fearing that the Federal Reserve will not be able to contain inflationary pressures without causing recession; I see Harold James, Markus Brunnermeier, and Jean-Pierre Landau worrying about a “new and dangerous worldwide inflationary consensus”; I see Michael Strain—perhaps the last honorable economist still calling himself a Republican—saying that Federal Reserve interest rate increases should be avoided because “confidence in the Fed’s ability to fine-tune the economy is misplaced. When the unemployment rate goes up a little, it tends to go up a lot…”
But when I translate this, it is: we fear that the Federal Reserve will have to raise the federal funds rate back into the range that we used to consider normal in order to keep the lid on inflationary pressures generated by Biden’s $1.9 trillion. But that is a possibility, not a certainty. I think it is at least as likely that we will be glad that $1.9 trillion was spent to fill in holes in aggregatre demand. And if the past fifteen years of discussion on “secular stagnation” and “global savings gluts” have led otherwise than to the conclusion that a higher warranted federal funds rate would be a good thing, I have not understood it at all.
Thus I find myself very puzzled at the opposition, and the discontent, from other than the usual suspects. Is it that they do not trust the Federal Reserve to raise interest rates when necessary, and so wish to keep the warranted federal funds rate at the zero lower bound always for fear that someday, sometime the warranted rate will exceed the market rate? But that makes no sense to me.
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Olivier Blanchard: In Defense of Concerns Over the $1.9 Trillion Relief Plan <https://www.piie.com/blogs/realtime-economic-issues-watch/defense-concerns-over-19-trillion-relief-plan>
Joseph Gagnon: Inflation Fears & the Biden Stimulus: Look to the Korean War, not Vietnam: ‘Olivier J. Blanchard and Lawrence H. Summers raise concerns that... the Federal Reserve may not be able to contain inflation without creating a financial crisis or tipping the economy into recession. Paul Krugman and Wendy Edelberg and Louise Sheiner are less concerned... [but] ignore the possibility that a successful vaccination campaign that reopens important service industries might unlock a flood of spending from the large backlog of household savings last year… LINK: <https://www.piie.com/blogs/realtime-economic-issues-watch/inflation-fears-and-biden-stimulus-look-korean-war-not-vietnam>
Joseph Gagnon: Inflation Fears & the Biden Stimulus: Look to the Korean War, not Vietnam: ‘Inflation may surge temporarily. But, as long as the spending boom is viewed as a temporary readjustment and the Federal Reserve maintains its commitment to controlling inflation over the longer run, inflation should drop quickly. To demonstrate its anti-inflationary resolve, the Fed would need to raise interest rates quickly and significantly. But the increase need not be commensurate with the increase in inflation, nor need it be high enough to cause a recession… LINK: <https://www.piie.com/blogs/realtime-economic-issues-watch/inflation-fears-and-biden-stimulus-look-korean-war-not-vietnam>
Harold James, Markus Brunnermeier & Jean-Pierre Landau: Who’s Right on Inflation?: ‘As in the 1970s, a severe economic shock has forced governments to pursue massive fiscal and monetary expansion, thereby sowing fears of future inflation. But not all shocks are the same, and the key question now is whether we can be confident that the current state of exception will end.... Some EU member states—especially in the “frugal north”—are beginning to worry about a new and dangerous worldwide inflationary consensus. And some Americans... have begun to voice similar concerns.... The key question is whether we can be confident that the state of exception will end. If we can clearly identify that moment, we need not worry about inflation. But if one exception begets more exceptions... expectations will shift, and inflation will increasingly factor into our vision of the future. That will create political uncertainty and acute polarization between countries run by fearful hawks and those run by self-confident doves… LINK: <https://www.project-syndicate.org/commentary/threat-of-unanchored-inflation-expectations-by-harold-james-et-al-2021-03>
Dion Rabouin: Top Central Bankers Turn Their Backs on Inflation Fears: ‘"I don’t think we are worrying about reflation and it’s going to be a while before we worry about inflation," European Central Bank president Christine Lagarde said in a webcast interview. "If you consider how far we are from our goal…we are very far away." "As we look forward, we will probably see an increase in [inflation] readings. That is not going to mean very much. It will not be larger or persistent," Fed chair Jerome Powell said during a separate webcast interview hours later… LINK: <https://www.axios.com/inflation-central-banks-fears-stance-9691c621-9734-49b1-b842-ccfd453a9a5c.html>
Michael Strain: Biden Stimulus Proposal Risks Shortening the Recovery: ‘In the face of this... trend inflation above target, occasional spikes in monthly inflation data, and... bubbles... the Fed could quickly begin to feel that it had fallen behind the curve. In this situation, the Fed might try to slow the pace of the expansion without ending it. But confidence in the Fed’s ability to fine tune the economy is misplaced. When the unemployment rate goes up a little, it tends to go up a lot… LINK: <https://www.nationalreview.com/corner/bidens-stimulus-risks-shortening-the-recovery/>
Lawrence Summers: Biden’s Covid Stimulus Plan Is Big & Bold but Has Risks, too <https://www.washingtonpost.com/opinions/2021/02/04/larry-summers-biden-covid-stimulus/>
The UK Chancellor of the Exchequer is already hinting about raising rates to balance the budget and reduce debt. In the US, I listened to the Kruman vs Summers debate. Krugman believes any spending is mostly disaster relief and will not necessarily increase employment or spending. Republicans, predictably, are against raising the debt and will want to cut government expenditure.
On another note, while you may enjoy a solid cost of living increase with inflation, those relying on social security have been getting well below inflation rate increases (where inflation is measured by seniors expenditures - housing, medical, and food).
My concern is that Republicans will get their way and get the benefit cuts they want, no tax increases on the wealthy and corporations, and thus a further increase in inequality.
I'm not an economist by any stretch, but I fear that the nominal cost of this will exhaust any political will to spend money on the energy-transition, without which we will miss climate goals.