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The risks of going too big on stimulus are real — but going too small could be riskier

The debate over how big to go on the economic recovery, explained.

A face mask hangs on a fence in front of the New York Stock Exchange.
Johannes Eisele/AFP/Getty Images
Emily Stewart covered business and economics for Vox and wrote the newsletter The Big Squeeze, examining the ways ordinary people are being squeezed under capitalism. Before joining Vox, she worked for TheStreet.

America has badly fumbled the response to the pandemic so far, and it’s hard to imagine the country is on the brink of severely overshooting it. Still, some economists are starting to raise concerns that it’s possible to overshoot the response.

President Joe Biden’s $1.9 trillion Covid-19 relief plan is getting new scrutiny. Larry Summers, who served as treasury secretary under Bill Clinton and as National Economic Council director under Barack Obama, wrote an op-ed in the Washington Post published on February 4. In it, he argues that Biden’s proposal, in its “ambition, its rejection of austerity orthodoxy, and its commitment to reducing economic inequality are all admirable.”

Still, he wonders if Biden might be overdoing it. Summers, of course, played an important role in shaping the federal government’s response to the Great Recession in 2009 — a response that most Democrats, including Summers himself, now agree wasn’t ambitious enough.

“We must make sure that it is enacted in a way that neither threatens future inflation and financial stability nor our ability to build back better through public investment,” he wrote this week. In other words, he’s worried about the risk of overheating the economy, and that once Congress passes one Covid-19 bill — especially one the size of Biden’s proposal — there’s going to be a reduced appetite for others.

To be clear, many economists have been saying Biden’s original pitch is much more in line with what is necessary to steer the country forward, and multiple economists, including from Obamaworld, have pushed against Summers’s assertions. Biden himself has been quite clear that he wants to take big swings on the economy and do some deficit spending with such low interest rates. Many Democrats are on board with that plan, too.

Speaking with reporters in the Oval Office on Friday, Biden recalled how hard it was to get the recovery bill passed under Obama, and he appears determined not to repeat that mistake. “One thing we learned is, you know, we can’t do too much here,” the president said. “We can do too little. We can do too little and sputter.”

He also laid out the stakes: “It’s not just the macroeconomic impact on the economy and our ability to compete internationally; it’s people’s lives. Real, live people are hurting, and we can fix it.”

It’s not clear how much sway Summers has over the White House — Politico reported that his op-ed is being circulated in the West Wing, but presumably, if Summers had a significant amount of private access to Biden, he might not need to be voicing his opinions quite so publicly. It’s also unclear whether this might spook some Democrats, especially moderate Senate Democrats the caucus has to keep on board to get legislation passed.

In the background is a continuing stark economic situation in the US: After shedding 140,000 jobs in December, the economy added back just 50,000 jobs in January. The country is still short 10 million jobs from where it was pre-pandemic, and some 4 million workers have dropped out of the workforce. In that context, it’s hard to gauge just how much to worry about overshooting it on the response.

Jared Bernstein, a longtime economic adviser to Biden, made that argument during a press briefing on Friday. “This morning’s employment report revealed a stall in the American job creation machine and underscores how precarious of a situation our economy is in,” he said. “Lack of job growth is a result of our failure to act appropriately in response to this immense dual crisis, and our economy and our families can’t afford for us to fail to act once again.”

The risks of going too big on the economy are real, but the risks of going too small are worse.

The risk of too much stimulus, briefly explained

Summers’s argument is part math, part economics, and part politics.

He acknowledges a consensus among economists that the economy would have been better off had the Obama administration gone bigger on fiscal stimulus in 2009. But he uses that acknowledgment to make an argument against going too big now, using estimates from the Congressional Budget Office on the hole that needs filling in the economy (the estimates of which can be off). His contention: Biden’s proposal would be three times the size of what’s needed, and that is something bad.

The first plank of Summers’s argument in terms of what going too big means is that it would “set off inflationary pressures of a kind we have not seen in a generation.” Inflation has been quite low for years now, and if it were to appear, the Federal Reserve could always combat it with interest rate hikes.

Biden’s team says it’s not oblivious to the inflationary risk; it just isn’t as worried about it as other risks. It’s a sentiment recently echoed by Fed Chair Jerome Powell at a recent press conference. “I’m much more worried about falling short of a complete recovery and losing people’s careers and lives that they built because they don’t get back to work in time,” Powell said. “I’m more concerned about that and the damage that will do, not just to their lives but to the United States economy.”

The second — and perhaps more interesting — part of Summers’s case is that doing too big of a stimulus now will diminish the likelihood of follow-up legislation later. Biden has laid out a two-part plan for the economy: first “rescue” (this $1.9 trillion plan) and then “recovery,” a set of broader proposals to make the economy work better and even out the recovery across income status. It would likely entail issues like infrastructure and green energy.

“After resolving the coronavirus crisis, how will political and economic space be found for the public investments that should be the nation’s highest priority?” Summers wrote. “Is the thinking that deficits can prudently be expanded longer and further? Or that new revenue will be raised? If so, will this be politically feasible?”

He reiterated his concerns in an interview with Vox on Friday afternoon. “I certainly subscribe to the principle that the dangers of doing too little are greater than the dangers of doing too much, and one should err on the side of doing enough. But that argument doesn’t justify any level of stimulus.”

Some economists have echoed Summers’s concerns. In a series of tweets over the weekend, former International Monetary Fund economist Olivier Blanchard said he believes Biden’s proposal is too much. “We should spend what we need to save people from poverty and fund the needed response to the pandemic,” he wrote. “I think we do not need to spend $1.9 trillion for that, and we should have a smaller program.”

Figuring out what to do on the economy is all about weighing risks

At the White House press briefing on Friday, Bernstein responded to Summers’s concerns that the Biden administration risks going too big. “I disagree with that contention,” he said. “This is risk management, this is balancing risks, and in our view, the risks of doing too little are far greater than the risks of doing too much.”

Bernstein said the administration has to “hit back hard” to finally put the Covid-19 pandemic and the economic pain it’s caused in the rearview mirror.

It’s impossible to know what exactly the correct number for economic relief and recovery is. As Greg Daco, chief US economist at Oxford Economics, recently put it in an interview with Vox, the country needs a bridge to get to a post-Covid world, but “we don’t know how long or how strong of a bridge we need, because we don’t know when we’ll get” to the other side.

Over the weekend, Nobel Prize-winning economist and New York Times columnist Paul Krugman compared fighting the pandemic to fighting a war. “You spend what you need to spend to win the war,” he wrote in a Times op-ed.

The Brookings Institution recently released a report looking at the implications of Biden’s $1.9 trillion proposal and estimating it would boost economic activity by about 4 percent at the end of this year. The economists behind the report, Wendy Edelberg and Louise Sheiner, estimated that without fiscal support, the economy would remain below pre-pandemic levels for several years. They did nod at the risk Summers has sounded the alarm about.

“A risk worth noting is that the return of GDP back to its maximum sustainable level may create a difficult economic period after 2021. While our estimates show a ‘soft landing,’ with a temporary and shallow decline in GDP after the fourth quarter of 2021, the slowdown could be more abrupt and painful than our projections suggest,” they wrote.

Mark Zandi, chief economist at Moody’s Analytics, said that Summers’s arithmetic adds up. If it were up to him, Biden would do a $1 trillion rescue package and then a $1 trillion deficit-financed support package to get back to full employment. “The economy needs about $2 trillion of additional deficit financed fiscal support to get back to full employment in, say, a couple years, a reasonable amount of time,” he said.

Zandi, who has released his own estimates that the Biden proposal will boost the economy, said he shares concerns that there’s a risk of overdoing it. “It becomes a question of sustainability,” he said. “You want a strong economy, low unemployment that’s sustainable.” But a bit of inflation? He’s not so concerned: “If that really becomes an issue, then interest rates rise sooner and faster than people are expecting.”

Again, the Biden administration is aware of these worries — but it’s all a balancing act of risks and priorities. What are the costs of going conservative now, not only for the topline economic numbers but also in ordinary people’s lives? The stimulus passed so far has helped in terms of keeping families fed, the unemployed afloat, and businesses alive as the country fights the pandemic. Indeed, how well it’s worked has emboldened some policymakers and economists to go bigger and replicate some of its bottom-up approach to really help those most in need.

“For decades, we’ve essentially been running an economy significantly below capacity. There’s a growing consensus it’s had tremendous costs to the well-being of the American people,” said Mark Paul, a political economist at the New College of Florida and a Roosevelt Institute fellow.

Paul is one of the authors of a paper commissioned by the progressive economic group the Groundwork Collaborative arguing the economy needs at least a $3 trillion injection. His take: The US has spent so much time worrying about the economy becoming too hot, but given the effects of running it cold for so long, why not try it? “We know that a cold economy results in stagnant wages and unemployment, particularly unemployment that falls on Black and brown communities and those least able to deal with economic hardship,” he said.

It’s worth noting that Summers does not speak for Obamaworld. On February 3, the day before Summers’s op-ed, Austan Goolsbee, another Obama economic alum, published an op-ed in the New York Times warning that the country risks a double-dip recession. He wrote that a “wait and see” approach on a relief program “has been proved to be deeply wrong since the pandemic began,” and noted that the virus has caused people to withdraw from the economy. “Much damage has already been done — and it is evident not only in lost jobs but in lost income and lost companies,” he wrote. “This harm could have been prevented. It definitely should not be repeated now.”

Summers told Vox he’s sure the White House has a “very thoughtful approach” to stimulus and that “reasonable people can disagree.”

“I think my piece was careful to say I thought there were enormous benefits to the program, but I thought there were risks that were going to have to be carefully considered and managed going forward, both with respect to the inflation issue and with respect to the questions about making sure there was space for fundamentally important public investments,” he said. “I welcome that the White House shares those concerns, as I expect, being responsible policymakers, that they would.”

On inflation, he noted the Fed has sent “strong signals” that it doesn’t plan to hike interest rates anytime soon, and if it did, that could harm the economy. “Some of the possible concerns have probably not gotten sufficient airing in the debate,” he said. “It’s been a long time since we learned the lesson, but if we set off a significant acceleration of inflation and it then forces a response by the Fed, the process is unlikely to be controllable, and recession is very likely along with big increases in mortgage rates. Many of those who will be most threatened will be middle-class families.”

It is a real risk for inflation to happen, but as Krugman wrote, it’s not certain that it will. “And to the extent that inflation is a risk, that’s an argument for seeking ways to limit that risk, not for skimping on Covid relief,” he wrote.

The question of how big to go to try to help people goes beyond the economy — ultimately, it entails an attempt to just do what’s right, especially in such an unequal society. “Growth where a relatively small portion of the population reaps all the gains from that growth, that’s not the idea of a healthy, fair, or just society,” said Darrick Hamilton, now a professor of economics and urban policy at the New School, in a 2019 interview with Vox. “Growth in and of itself says nothing about morality, common humanity, or sustainability.”

There’s the economics of the stimulus, and then there’s the politics of the stimulus

Beyond the economic argument about how much stimulus is needed, there’s also the question of the politics of the situation. And that’s, well, complicated.

The White House appears to at least want to try to get its $1.9 trillion proposal, or some sort of a sizable bipartisan proposal, passed through regular order, meaning 60 votes. Getting 10 Republicans on board might be tough. A group of 10 Senate Republicans has put forth a counteroffer of $600 billion in stimulus. The Biden administration appears willing to hear out the GOP, but it’s not likely to go for a proposal that’s a third of the size of its own.

At the same time, Democrats have gotten the ball rolling on budget reconciliation — a process that exempts from the filibuster threshold legislation that primarily deals with taxes and spending. Under that scenario, legislation could pass with 50 Senate Democratic votes plus Vice President Kamala Harris as a tiebreaker. Democrats have the votes for that — assuming all of them go along. That means keeping moderate Democrats, such as Sens. Joe Manchin of West Virginia and Kyrsten Sinema of Arizona, on board.

While Summers’s op-ed and warnings that stimulus should be smaller may not make too much of a difference in how the White House is thinking, there is concern that in moderates, those arguments could find a more receptive audience. As my colleague Ella Nilsen recently outlined, Manchin’s “red line” appears to be less about fiscal responsibility and more about having bipartisan input on the process, and he seems to be okay with the $1.9 trillion on Biden’s plan or something close. However, he probably wouldn’t be mad if it were smaller, at the very least.

How closely are senators following the Washington Post’s opinion section? It’s hard to say, especially on the Friday after an overnight vote-a-rama to get the budget process moving. When I reached out to one Democratic office to ask for a take on the Summers op-ed, a staffer first asked what I was talking about.

“I don’t think our members will take this seriously. He even says the criticisms of what was done in 2009 were correct. If that’s the case, you’re admitting you got it wrong. So why should we listen to you now,” a Democratic aide said in an email. “More broadly, I think the broad consensus in the caucus is there is much greater risk in going too small than too big. I mean look at the process we need to go through to pass this one bill. We were all up until 5 am! You wouldn’t be able to do that again if it turns out you need a lot more relief.”

Ella Nilsen contributed reporting.

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