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.
I'm generally opposed to broad based student loan forgiveness, but curious if you know whether its feasible for the president to forgive payments sufficient to cap interest rates at 3%?
It depends on whether you believe the president has the authority the unilaterally forgive student debt — if you believe they do then it shouldn't be hard to design a program that accomplishes that goal
So is having the federal government create by fiat a "market" for unsecured student debt. The root of the problem lies in that initial bonkers decision.
Frankly, make it all dischargeable in bankruptcy and watch the market light up like the Fourth of July.
That'll burn the whole fucking mess straight to the waterline and send it plunging to the bottom.
Then we can have an honest debate about how to build another damned ship.
The universities will have no choice but to have an honest conversation with all stakeholders about how to pay for tertiary education and *what exactly* should be within that scope.
Pretty much. "Send everyone to college" has led us down the route of having universities employ huge numbers of their alumni in makework bullshit positions to prop up employment numbers, while also sending a bunch of ill-prepared, heavily indebted kids reeling into the job market with no future.
And as politically impossible as it is to bail the latter group out, it's really not (or at least barely) their fault.
Fucking Vietnam, man. Everything since is mostly the fault of our little "adventure" there.
Culture wars, weird "chaos is liberty" hippy bullshit, bifurcation between college-educated and not, desperate attempts to avoid public service and fair share of burdens by the elite, failure to get a functioning universal healthcare system in place, Reaganite backlash to utter defeat...
I think you're being a bit too charitable. Lenders won't lend into this market at all for anything less than high double-digit interest rates if the debts are actually dischargeable in bankruptcy.
You're right that they won't lend to a lot of programs at all, but even the ones they will lend to will be at positively usurious rates, and there will be few or no takers as interest will start accruing from August of freshman year without federal subsidy.
I think that would be just perfect. Suck *all* of the cash out of this so-called "market" and leave the universities to founder and amputate their administrative bloat to survive.
We can then, after a few years of Darwinian winnowing, come back and decide how much of the money we spent on interest subsidies we now want to spend on grants to needy students, if any.
University education is one of the few areas which genuinely needs to be subject to "starve the beast" style tactics to get cost disease under control.
My thinking is that if you are a high earning college graduate, you can probably get your student loans refinanced at under 3%. On the other hand, if you left school without graduating or haven't been able to find a great job than reducing your interest rates from 6-7% to 3% is probably pretty helpful.
People don't get these degrees thinking they are useless. If changing the interest rate from 7% interest on their loans vs 3% would have an impact, we wouldn't need to be doing it in the first place because no one would be getting them in the first place.
Yet they would/will continue to do so, right? So it seems kind of pointless to try to appease them with this. (Especially when there's so so so so many other things that young Dem-leaning college students value.)
I mentioned it late last night in the last open thread, but since it happened late there wasn't much discussion.
One point I'll add is that while Matt was "(b)egging Democrats to speak to one (1) person who did not attend college", I think there will also be massive resentment from those who did go to college and already paid off their loans, who could feel that they got screwed for playing by the rules. Elizabeth Warren took some flak for that a few years ago when someone asked her what student loan forgiveness would mean to that group of people.
Not to mention those who forwent expensive private schools, worked through school, applied to every scholarship in sight, etc. to avoid taking on excessive debts.
I've come to think student loan forgiveness should *only* be on the table as a part of a package deal alongside burning the current lending system to the ground, exiling the admin-eoisie to minimum wage fast food work, stripping the amenities and cushy shit to near-nothing, and then offering universal tertiary education or job training on a model similar to high school.
Then we can offer, in good faith, a reset button for those screwed by the old system's over-promising, under-delivering crap.
And even that button probably needs to be means tested.
what about people who haven't gone to college yet? Forgiving student loans is a recognition that college shouldn't cost money, it logically needs to be paired with free college going forward otherwise it makes absolutely no sense...
There are many programs that are implemented that are unfair to people who might have previously been eligible, this always happens. It is much less common for a policy to only help a very specific cohort and screw over both those who came before AND those who come after for no particular reason.
Boom. The thing I noticed about these Twitter threads is most of Matt’s followers are progressive therefore the majority or pro student loan forgiveness. So these people read these threads and get the skewed idea about how popular it is. Twitter bubbles
In a sense, Khanna is doing his job as a member of Congress representing his constituents, since he represents a Silicon Valley district where 60% have at least a bachelor's degree. But, of course, what California's 17th CD wants isn't always what Americans as a whole want in the aggregate.
The Democrats increasingly don't want or at least don't care much about skilled immigration.
When you claim to be the champion of the poor and oppressed it's a very quick leap to contort yourself into only wanting the poor and oppressed to be permitted in, especially because it's oh so coincidentally aligned with the economic interests of the professional classes to exclude foreign professionals from their "pro-immigrant" stance.
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.
I agree that getting it just right > overshoot > undershoot but the magnitude of the miss matters — you'd rather undershoot by $500 than overshoot by $500 billion. And per CFRB, we knew that ARP was going to overshoot big time when it was being written.
I think this second bit will be very clear by 2025 or so, when (I expect) we're pretty much fully recovered and inflation is at 3% or less.
Whereas in 2013 we were still wildly under potential growth rates, let alone actual output, wide swathes of the country were still effectively in recession, and workers were profoundly fed up with the economic status quo, especially after the various budget crises that year brought.
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 think the critical mistake there was letting the House pass gimmick accounting version of BBB. Really made it seem like they weren't dealing in good faith
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.
The point is, if the Fed is doing its thing, (right think of wrong thing, it doe not matter as long as it is following a policy) that implies that it is offsetting what the Treasury does.
Maybe that is never 100.0000% the case, but is a good way to think about fiscal policy. It probably was not such a good way in 2009 when (I think) Ben wanted too do a larger QR and couldn't get the board to go along, but if Congress's "relief" package had been bigger, the Fed would not have off set it. In that case there could have been a real stimulus on the margin. But we ought not to be and I think seldom are in that situation].
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)
With regards to (1) and (2) I think it depends on how the Fed reacts to inflation. Under FAIT my understanding is that the Fed will allow some degree of overshoot beyond 2% but won't seek to balance that with an undershoot, which is a little confusing. I think in 2020 the Fed made the right call by keeping policy loose during March/April when things looked pretty dire, but in hindsight I think they should've began tightening earlier. But this is something I want to look into in a future piece.
Yes. But not wholly in hindsight. Already in September TIPS was signaling that monetary policy was too loose and in December that the November announcement of correction was not enough. This is where an NGDP target might have helped, except that we don't have a real time NGDP expectations market as we do for inflation, something the Fed or Treasury could correct.
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).
“Markets can stay irrational longer than you can stay solvent" is generally thought to refer to the stock market, but it also can apply to politics. This inflation may be transitory, but it can last longer than the Democratic party can absorb before getting crushed at the polls.
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.
1. The size of the miss matters in addition to the direction — undershooting by $500 is preferable to overshooting by $500 billion. Per CRFB, we were very close to closing the output gap after the December package, we knew ARP would overshoot by a ton.
2. This is something that Joseph Gagnon at the Peterson Institute told me that got cut for length, but one of the ways that Covid acts as a supply shock is by making some people less willing to work. That raises the natural rate of unemployment (by ~1pp per Gagnon) with the upshot being that a 3.6% unemployment rate today reflects a much tighter labor market than it did in 2018/2019. The natural rate of unemployment is adjusting back down to pre-pandemic levels but it's not clear how long that will take or how far back down it will go, but that should make us realize that we shouldn't shoot for the exact same unemployment rate than we had pre-virus to get the same tightness in the labor market.
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.
I think the White House should simply allow student loan payments to resume rather than continue to extend the pause.
I'm generally opposed to broad based student loan forgiveness, but curious if you know whether its feasible for the president to forgive payments sufficient to cap interest rates at 3%?
It depends on whether you believe the president has the authority the unilaterally forgive student debt — if you believe they do then it shouldn't be hard to design a program that accomplishes that goal
So is having the federal government create by fiat a "market" for unsecured student debt. The root of the problem lies in that initial bonkers decision.
Frankly, make it all dischargeable in bankruptcy and watch the market light up like the Fourth of July.
That'll burn the whole fucking mess straight to the waterline and send it plunging to the bottom.
Then we can have an honest debate about how to build another damned ship.
The universities will have no choice but to have an honest conversation with all stakeholders about how to pay for tertiary education and *what exactly* should be within that scope.
Pretty much. "Send everyone to college" has led us down the route of having universities employ huge numbers of their alumni in makework bullshit positions to prop up employment numbers, while also sending a bunch of ill-prepared, heavily indebted kids reeling into the job market with no future.
And as politically impossible as it is to bail the latter group out, it's really not (or at least barely) their fault.
Fucking Vietnam, man. Everything since is mostly the fault of our little "adventure" there.
Culture wars, weird "chaos is liberty" hippy bullshit, bifurcation between college-educated and not, desperate attempts to avoid public service and fair share of burdens by the elite, failure to get a functioning universal healthcare system in place, Reaganite backlash to utter defeat...
I think you're being a bit too charitable. Lenders won't lend into this market at all for anything less than high double-digit interest rates if the debts are actually dischargeable in bankruptcy.
You're right that they won't lend to a lot of programs at all, but even the ones they will lend to will be at positively usurious rates, and there will be few or no takers as interest will start accruing from August of freshman year without federal subsidy.
I think that would be just perfect. Suck *all* of the cash out of this so-called "market" and leave the universities to founder and amputate their administrative bloat to survive.
We can then, after a few years of Darwinian winnowing, come back and decide how much of the money we spent on interest subsidies we now want to spend on grants to needy students, if any.
University education is one of the few areas which genuinely needs to be subject to "starve the beast" style tactics to get cost disease under control.
My thinking is that if you are a high earning college graduate, you can probably get your student loans refinanced at under 3%. On the other hand, if you left school without graduating or haven't been able to find a great job than reducing your interest rates from 6-7% to 3% is probably pretty helpful.
People don't get these degrees thinking they are useless. If changing the interest rate from 7% interest on their loans vs 3% would have an impact, we wouldn't need to be doing it in the first place because no one would be getting them in the first place.
Because they vote disproportionately for Democrats. This isn't complicated.
Yet they would/will continue to do so, right? So it seems kind of pointless to try to appease them with this. (Especially when there's so so so so many other things that young Dem-leaning college students value.)
Anyone else see great twitter battle between Matty and Rep Ro Khanna
I mentioned it late last night in the last open thread, but since it happened late there wasn't much discussion.
One point I'll add is that while Matt was "(b)egging Democrats to speak to one (1) person who did not attend college", I think there will also be massive resentment from those who did go to college and already paid off their loans, who could feel that they got screwed for playing by the rules. Elizabeth Warren took some flak for that a few years ago when someone asked her what student loan forgiveness would mean to that group of people.
Not to mention those who forwent expensive private schools, worked through school, applied to every scholarship in sight, etc. to avoid taking on excessive debts.
I've come to think student loan forgiveness should *only* be on the table as a part of a package deal alongside burning the current lending system to the ground, exiling the admin-eoisie to minimum wage fast food work, stripping the amenities and cushy shit to near-nothing, and then offering universal tertiary education or job training on a model similar to high school.
Then we can offer, in good faith, a reset button for those screwed by the old system's over-promising, under-delivering crap.
And even that button probably needs to be means tested.
And Matt seems to be at least on the same wavelength as you with his latest tweet:
https://twitter.com/mattyglesias/status/1514635840894427146
what about people who haven't gone to college yet? Forgiving student loans is a recognition that college shouldn't cost money, it logically needs to be paired with free college going forward otherwise it makes absolutely no sense...
There are many programs that are implemented that are unfair to people who might have previously been eligible, this always happens. It is much less common for a policy to only help a very specific cohort and screw over both those who came before AND those who come after for no particular reason.
Boom. The thing I noticed about these Twitter threads is most of Matt’s followers are progressive therefore the majority or pro student loan forgiveness. So these people read these threads and get the skewed idea about how popular it is. Twitter bubbles
In a sense, Khanna is doing his job as a member of Congress representing his constituents, since he represents a Silicon Valley district where 60% have at least a bachelor's degree. But, of course, what California's 17th CD wants isn't always what Americans as a whole want in the aggregate.
No. Going to look now.
Exactly... came across as extremely anti-immigration for a Dem.
The Democrats increasingly don't want or at least don't care much about skilled immigration.
When you claim to be the champion of the poor and oppressed it's a very quick leap to contort yourself into only wanting the poor and oppressed to be permitted in, especially because it's oh so coincidentally aligned with the economic interests of the professional classes to exclude foreign professionals from their "pro-immigrant" stance.
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.
I agree that getting it just right > overshoot > undershoot but the magnitude of the miss matters — you'd rather undershoot by $500 than overshoot by $500 billion. And per CFRB, we knew that ARP was going to overshoot big time when it was being written.
I think this second bit will be very clear by 2025 or so, when (I expect) we're pretty much fully recovered and inflation is at 3% or less.
Whereas in 2013 we were still wildly under potential growth rates, let alone actual output, wide swathes of the country were still effectively in recession, and workers were profoundly fed up with the economic status quo, especially after the various budget crises that year brought.
I agree if we compare actual 2013 to what you just made up about 2025, 2025 sounds way better!
I mean… ok?
We should prefer 1982 to 2013, IMO.
But there’s essentially no chance that we get to 1982, and we all know that.
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 think the critical mistake there was letting the House pass gimmick accounting version of BBB. Really made it seem like they weren't dealing in good faith
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.
I understand the "spending as disaster relief" mindset (https://noahpinion.substack.com/p/covid-relief-isnt-stimulus-its-social?s=r), but the thing Marc Goldwein says is that even disaster relief has stimulatory effects whether you want it to or not.
The point is, if the Fed is doing its thing, (right think of wrong thing, it doe not matter as long as it is following a policy) that implies that it is offsetting what the Treasury does.
Maybe that is never 100.0000% the case, but is a good way to think about fiscal policy. It probably was not such a good way in 2009 when (I think) Ben wanted too do a larger QR and couldn't get the board to go along, but if Congress's "relief" package had been bigger, the Fed would not have off set it. In that case there could have been a real stimulus on the margin. But we ought not to be and I think seldom are in that situation].
It was too big and wasteful only if the the investments were unproductive and the transfers unpaid for. But that does not depend on 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)
With regards to (1) and (2) I think it depends on how the Fed reacts to inflation. Under FAIT my understanding is that the Fed will allow some degree of overshoot beyond 2% but won't seek to balance that with an undershoot, which is a little confusing. I think in 2020 the Fed made the right call by keeping policy loose during March/April when things looked pretty dire, but in hindsight I think they should've began tightening earlier. But this is something I want to look into in a future piece.
Yes. But not wholly in hindsight. Already in September TIPS was signaling that monetary policy was too loose and in December that the November announcement of correction was not enough. This is where an NGDP target might have helped, except that we don't have a real time NGDP expectations market as we do for inflation, something the Fed or Treasury could correct.
Yes
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).
Yes, if Covid disappeared that would fix a big part of the supply side issue
If this is true, shouldn’t the inflation work its way out of system?
“Markets can stay irrational longer than you can stay solvent" is generally thought to refer to the stock market, but it also can apply to politics. This inflation may be transitory, but it can last longer than the Democratic party can absorb before getting crushed at the polls.
It was always most likely to get crushed at the polls.
American politics just see-saws between the parties, there’s not a substantial logic to it.
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.
I think Schumer got vaccinated in December, the picture is presumably shortly after ARP passed Congress in early March
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.
Trump's big idea on the economy was to repeal the ACA and cut taxes for the rich so I wouldn't go so far as saying he was "basically right"
I thought his big idea was that the Fed should have an easy money policy? The other two seem like him accepting the default Republican position...
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.
Two things:
1. The size of the miss matters in addition to the direction — undershooting by $500 is preferable to overshooting by $500 billion. Per CRFB, we were very close to closing the output gap after the December package, we knew ARP would overshoot by a ton.
2. This is something that Joseph Gagnon at the Peterson Institute told me that got cut for length, but one of the ways that Covid acts as a supply shock is by making some people less willing to work. That raises the natural rate of unemployment (by ~1pp per Gagnon) with the upshot being that a 3.6% unemployment rate today reflects a much tighter labor market than it did in 2018/2019. The natural rate of unemployment is adjusting back down to pre-pandemic levels but it's not clear how long that will take or how far back down it will go, but that should make us realize that we shouldn't shoot for the exact same unemployment rate than we had pre-virus to get the same tightness in the labor market.
Re 1. I saw that this was asked elsewhere, but this makes me curious where you'd be indifferent to the tradeoff.
Which of the following would you prefer:
1. 500 billion overshoot or 500 dollar undershoot?
2. 500 billion overshoot or 500 thousand undershoot
3. 500 billion overshoot or 500 million undershoot
4. 500 billion overshoot or 5 billion undershoot
5. 500 billion overshoot or 50 billion undershoot
6. 500 billion overshoot or 250 billion undershoot
7. 500 billion overshoot or 500 billion undershoot
And where's your line?
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.
This sort of analysis also ignores non-fiscal aspects of public policy. (Or pretends they don’t matter much when it comes to economic growth.)
Yeah… the Fed really should try to predict and react to Federal outlays.
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 don’t think it’s much of a mystery — people don’t like paying higher taxes.
“Child care credit, on the other hand does skew child care from informal to formal channels”
Thereby making it less cost effective.
That was my point. I think a child tax credit is better than a child care tax credit or subsidy or direct provision
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.
SF Fed says fiscal stimulus (CARES + ARP) raised the inflation rate by ~3pp: https://www.frbsf.org/economic-research/publications/economic-letter/2022/march/why-is-us-inflation-higher-than-in-other-countries/
Extremely useful context!
Based Milan.