You sure you haven’t been to college yet? Good article Milan.
I’m curious as to your final prescription to end college loan forbearance. I actually think it’s right, but wow the backlash.
I also think that the switch from services to goods should be mentioned every time we talk about Covid and inflation.
On a related point, the migration of people from cities to suburban areas probably Exacerbates this. If u live in an apartment you have less room for stuff. You use more services. In suburbs we have entire garages and rooms to fill with stuff. Lawn mowers. Spare beds. 65 Mustangs. Etc.
I also wonder what this whole thing says about Yangs Basic Income proposal. Doomed I expect.
1. We can never truly know ahead of time how much stimulus would be “just right” to preserve the economic status quo.
2. Economic cycles create healthy pressure on companies and states, “creative destruction” much like natural forest fires. The real problem is the impact on individuals.
Therefore my takeaway from living through both 2008 and 2020 is that in the future I’d rather see the government do massive direct cash assistance to individuals and choose to risk overshoot rather than undershoot, but don’t do things like bail out states (2020) or banks (2008). We have tools to gently or even aggressively correct excess demand if needed. Underemployment is harder to fix, takes longer to fix, and does more harm.
The stimulus was bigger than necessary, but the Fed could have corrected for that, the good thing is that we aren't stuck at the zero lower bound unable to stimulate the economy for a decade. If the fed raises rates and gets inflation under control we will look back at this and say it was fine. The inability to pass BBB is just a baffling inability of Joe Biden and Joe Manchin to work something out.
I disagree with the economics of this analysis. Neither was the “stimulus” of 2009 ”too small” nor was the “stimulus” of 2021 "too large." What was too small in 2008 was the Fed’s management of the inflation rate (or maybe better for MY) the NGDP. And what was as it turned out in 2021 was the Fed’s management of the inflation rate (or NGDP). [Time will tell, but I doubt the Fed will continue to allow inflation to exceed its target for a decade as it allowed it to fall short of its target for more thana decade in2008-2020.]
Rather than try to second guess the Fed’s management of inflation (or NGDP) Congress in 2021 should have focused on relief of the hardship from the recession (especially by creating a system of unemployment insurance that was more generous and more automatic), taken advantage of the low borrowing costs to invest in projects with high net present values, and raised taxes enough to reduce the structural deficit and fund new transfer programs like the Child Tax credit to the extent politically feasible. [In 2009, mutatis mutandis.]
My guess is that if Congress had focused on relief and investment, the deficit in 2009 would have been larger and in 2021 smaller. And I blame Larry Summers, who should have know better, (not him alone, of course), both times, for talking in terms of "stimulus" package size rather than relief, investment and Fed policy.
1. Isn't monetary stability ("inflation") ultimately the responsibility of the Fed?, and
2. Consequently, isn't the actual problem with fiscal stimulus _qua stimulus_ that it will always be offset if the Fed is competent and doing its job? So it's just... useless spending?
(3. But fiscal spending _as investment_, or _as social insurance_, could be justified -- a la some of your suggestions)
Isn’t a big part of this the fact that covid has continued to rage contradicting expectations at the time the stimulus was passed? This helped continue pushing spending onto goods vs services and continued to cause disruption as people had to leave work for illness and many workers continued to hold out of the labor market or left entirely (older workers for instance). Then that piled into a war and now massive disruptions in China.
It isn’t at all clear that we would have gotten nearly as much inflation if COVID had effectively gone away last summer (ie no delta or omicron).
This is not relevant to the contents of the article, but in the accompanying photo Chuck Schumer is wearing his mask all wrong, like he's wearing it as an inverse-MAGA instead of as a tool to reduce his risk of getting Covid.
Trump's fault. But he was pro-stimulus the whole of 2020 and basically right on the economy. Pelosi was trying to wrangle too much money the entire year and playing politics. It's politics and she played the game well, but she wasn't advocating for what the country needed.
Nah, I'm fine with lower unemployment in exchange for higher inflation, especially since if you look at the month-by-month, things are already returning to normal, slowly but surely. Yes, the Rescue Plan could've been arranged differently, so much of it wasn't a slush fund for Republican governors, but better to overspend the money now, instead of the reality that we're going to have no chance to spend the extra money when we "need" too down the line.
Especially when I think even if we had spent the "right" amount to make sure the right number of millions of people were unemployed to make sure nobody had to pay a dime higher for food, we would be losing the House & Senate anyway.
If the choice is 3.5% unemployment & GOP Governors get to give tax cuts and teacher raises or 5.5% unemployment and no giveaways, I'll still take the former, especially when it's pretty likely the slush fund would still exist, there'd just be no CTC at all in this new rescue bill.
This sort of analysis always acts as if the recession was caused by a normal source of falling demand and the question really was output gaps.
But that wasn’t the actual problem. The problem was a massive pandemic had put people out of work and left businesses with reduced hours. Whether a policy would be inflationary depended heavily on how long that was expected to last and which industries would come online when.
I actually do not think the spending was too big. although I would much prefer if the transfers had been off set by taxes. Politically, however, the problem was putting what I think are low priority items in the BBB. A CTC is almost a pure transfer with only the slight deadweight loss of less effort (if any) by the high income taxpayers who would pay for it. Child care credit, on the other hand does skew child care from informal to formal channels. And the continued failure to create a generous automatic VAT-financed unemployment insurance system is a mystery and a shame.
I would have really liked to see some international comparisons for inflation. i.e. I'm convinced that in retrospect we can say the American Rescue Plan was too big, but how much of our current inflation is caused by by this? Is it most of our current inflation? Some? Almost all? I don't know, but it seems important to nail down for future policy decisions.
You sure you haven’t been to college yet? Good article Milan.
I’m curious as to your final prescription to end college loan forbearance. I actually think it’s right, but wow the backlash.
I also think that the switch from services to goods should be mentioned every time we talk about Covid and inflation.
On a related point, the migration of people from cities to suburban areas probably Exacerbates this. If u live in an apartment you have less room for stuff. You use more services. In suburbs we have entire garages and rooms to fill with stuff. Lawn mowers. Spare beds. 65 Mustangs. Etc.
I also wonder what this whole thing says about Yangs Basic Income proposal. Doomed I expect.
Anyone else see great twitter battle between Matty and Rep Ro Khanna
Good article.
Oversimplifying, but here’s roughly how I see it:
1. We can never truly know ahead of time how much stimulus would be “just right” to preserve the economic status quo.
2. Economic cycles create healthy pressure on companies and states, “creative destruction” much like natural forest fires. The real problem is the impact on individuals.
Therefore my takeaway from living through both 2008 and 2020 is that in the future I’d rather see the government do massive direct cash assistance to individuals and choose to risk overshoot rather than undershoot, but don’t do things like bail out states (2020) or banks (2008). We have tools to gently or even aggressively correct excess demand if needed. Underemployment is harder to fix, takes longer to fix, and does more harm.
The stimulus was bigger than necessary, but the Fed could have corrected for that, the good thing is that we aren't stuck at the zero lower bound unable to stimulate the economy for a decade. If the fed raises rates and gets inflation under control we will look back at this and say it was fine. The inability to pass BBB is just a baffling inability of Joe Biden and Joe Manchin to work something out.
I disagree with the economics of this analysis. Neither was the “stimulus” of 2009 ”too small” nor was the “stimulus” of 2021 "too large." What was too small in 2008 was the Fed’s management of the inflation rate (or maybe better for MY) the NGDP. And what was as it turned out in 2021 was the Fed’s management of the inflation rate (or NGDP). [Time will tell, but I doubt the Fed will continue to allow inflation to exceed its target for a decade as it allowed it to fall short of its target for more thana decade in2008-2020.]
Rather than try to second guess the Fed’s management of inflation (or NGDP) Congress in 2021 should have focused on relief of the hardship from the recession (especially by creating a system of unemployment insurance that was more generous and more automatic), taken advantage of the low borrowing costs to invest in projects with high net present values, and raised taxes enough to reduce the structural deficit and fund new transfer programs like the Child Tax credit to the extent politically feasible. [In 2009, mutatis mutandis.]
My guess is that if Congress had focused on relief and investment, the deficit in 2009 would have been larger and in 2021 smaller. And I blame Larry Summers, who should have know better, (not him alone, of course), both times, for talking in terms of "stimulus" package size rather than relief, investment and Fed policy.
Based, and interesting alternative-ARP, but:
1. Isn't monetary stability ("inflation") ultimately the responsibility of the Fed?, and
2. Consequently, isn't the actual problem with fiscal stimulus _qua stimulus_ that it will always be offset if the Fed is competent and doing its job? So it's just... useless spending?
(3. But fiscal spending _as investment_, or _as social insurance_, could be justified -- a la some of your suggestions)
Isn’t a big part of this the fact that covid has continued to rage contradicting expectations at the time the stimulus was passed? This helped continue pushing spending onto goods vs services and continued to cause disruption as people had to leave work for illness and many workers continued to hold out of the labor market or left entirely (older workers for instance). Then that piled into a war and now massive disruptions in China.
It isn’t at all clear that we would have gotten nearly as much inflation if COVID had effectively gone away last summer (ie no delta or omicron).
If this is true, shouldn’t the inflation work its way out of system?
This is not relevant to the contents of the article, but in the accompanying photo Chuck Schumer is wearing his mask all wrong, like he's wearing it as an inverse-MAGA instead of as a tool to reduce his risk of getting Covid.
Trump's fault. But he was pro-stimulus the whole of 2020 and basically right on the economy. Pelosi was trying to wrangle too much money the entire year and playing politics. It's politics and she played the game well, but she wasn't advocating for what the country needed.
Nah, I'm fine with lower unemployment in exchange for higher inflation, especially since if you look at the month-by-month, things are already returning to normal, slowly but surely. Yes, the Rescue Plan could've been arranged differently, so much of it wasn't a slush fund for Republican governors, but better to overspend the money now, instead of the reality that we're going to have no chance to spend the extra money when we "need" too down the line.
Especially when I think even if we had spent the "right" amount to make sure the right number of millions of people were unemployed to make sure nobody had to pay a dime higher for food, we would be losing the House & Senate anyway.
If the choice is 3.5% unemployment & GOP Governors get to give tax cuts and teacher raises or 5.5% unemployment and no giveaways, I'll still take the former, especially when it's pretty likely the slush fund would still exist, there'd just be no CTC at all in this new rescue bill.
This sort of analysis always acts as if the recession was caused by a normal source of falling demand and the question really was output gaps.
But that wasn’t the actual problem. The problem was a massive pandemic had put people out of work and left businesses with reduced hours. Whether a policy would be inflationary depended heavily on how long that was expected to last and which industries would come online when.
Shor and Summer pilled.
I actually do not think the spending was too big. although I would much prefer if the transfers had been off set by taxes. Politically, however, the problem was putting what I think are low priority items in the BBB. A CTC is almost a pure transfer with only the slight deadweight loss of less effort (if any) by the high income taxpayers who would pay for it. Child care credit, on the other hand does skew child care from informal to formal channels. And the continued failure to create a generous automatic VAT-financed unemployment insurance system is a mystery and a shame.
I would have really liked to see some international comparisons for inflation. i.e. I'm convinced that in retrospect we can say the American Rescue Plan was too big, but how much of our current inflation is caused by by this? Is it most of our current inflation? Some? Almost all? I don't know, but it seems important to nail down for future policy decisions.
Based Milan.