Concern is growing among some economists about President Joe Biden’s rash of federal spending proposals intended to bolster the pandemic-hit economy.
Biden’s $1.9 trillion relief package put $1,400 checks in the pockets of most people, and while the president has touted federal spending as a major factor that is pulling the United States out of its recession, some experts perceive that notion to be overblown. They contend that because the economy is improving more rapidly than expected, it is unwise to keep pushing for massive federal spending.
In addition to the $1.9 trillion, the administration has proposed a $2.3 trillion American Jobs Plan infrastructure package and a $1.8 trillion American Families Plan. The combined $6 trillion figure is more than double the amount of federal spending introduced during former President Bill Clinton’s first 100 days ($2.6 trillion) and more than both former President George W. Bush ($2.3 trillion) and former President Barack Obama ($937 billion).
“It’s pretty interesting that we see President Biden really giving a lot of credit to government programs and the trillions of dollars of spending … but that is really a misnomer,” said Joel Griffith, a research fellow at the Heritage Foundation. He placed more credit for the growth to states that have been lifting COVID-19 restrictions and pointed out that states that have lifted more restrictions have seen exploding growth, while other states that still have restrictions imposed have seen less.
The economy has been beating expectations. U.S. gross domestic product grew at a strong 6.4% annualized rate in the first quarter of 2021, a number that grabbed headlines. The Federal Reserve Bank of Atlanta also predicted on Friday that GDP growth for the second quarter will be even higher, at 10.4%.
The jobs reports for both February and March also exceeded the expectations of analysts, and the Federal Reserve’s economic outlook for the future continues to be increasingly positive. U.S. personal incomes also rocketed up in March and posted a 21.1% surge, the highest monthly gain in records back to 1946, according to a Friday report from the Bureau of Economic Analysis, priming households for continued spending.
Griffith said that “many other economists from across the spectrum” have predicted that the trillions of dollars in actual and proposed federal spending is “likely” to backfire.
The backfire he is warning of largely has to do with inflationary concerns. The Fed, which has continued its controversial stance of keeping interest rates at near zero, is targeting sustained 2% inflation and full employment. While it predicts that inflation will breach the 2% mark this year, it believes that it will sink back down in 2022.
Larry Summers, who served as treasury secretary under Clinton and director of the National Economic Council under Obama, has emerged as one of the more vocal critics of the Biden spending spree. He told the Washington Post that while the U.S. is still grappling with the effects of the pandemic, the spending and proposed spending has been overkill and could lead to too-high inflation.
“I know the bathtub has been too empty,” Summers said. “But one has to think about what the capacity of the bathtub is and how much water we’re trying to flow into it.”
Summers said during a forum at the Council on Foreign Relations that inflation indicators were “flashing red alarm” and that “all the signs are for inflation starting to break out.”
“We were providing demand well in excess over the next couple of years of any plausible estimate of the economy’s potential to produce, and that meant substantial price increases,” he said during the forum.
Olivier Blanchard, another prominent economist and the former chief economist for the International Monetary Fund, said he shared Summers’s concerns about inflation and that Biden’s lofty spending goals could overheat the quickly warming economy.
“Larry (and I) are now arguing that there is a limit to how expansionary fiscal policy should be, and that the Biden plan could be too much of a good thing. We may be right; or we may be wrong (indeed, I hope so). Time will tell. But there is no logical inconsistency here,” Blanchard tweeted.
Economist Brian Wesbury appeared on Fox Business on Friday and predicted that inflation has the potential to soar up to 4% as the country moves into 2022.
“This is new demand. We’re actually borrowing from our children so that we can spend today. And then, at the same time, we’re not fully open so we don’t have as much supply, so you have demand exceeding supply. That’s causing an explosion in prices. Now, that will temper off as the stimulus wears off, as supply catches up, but underneath it all is a massive increase in the money supply,” he said.
The White House has justified the pricey spending plans as not just being a stimulus because of the pandemic but as measures to boost long-term productive capacity. They also claim that, if implemented as proposed, the plans would be paid for through the proposed changes to the tax structure. Still, some Democrats have expressed that they don’t want to pay for the huge packages by increasing taxes to the proposed extent.
The Senate is split 50-50, with Vice President Kamala Harris serving as the tiebreaker, so Democrats can’t afford to lose even a single vote, making the proposals a heavy lift.
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