No one can accuse the Canadian and U.S. governments of erring on the side of caution in rolling out aid packages to counter the economic devastation wrought by COVID-19.
Since the onset of the pandemic, governments on both sides of the border ramped up spending at a level unseen outside of wartime, far outpacing their counterparts in typically spendthrift European countries. While no one disputes providing support to those in need, aggregate aid doled out has exceeded income lost because of the pandemic. Combined with the ballooning savings of still-hesitant consumers, North America is awash in cash that is likely to be spent or invested once vaccination efforts allow for a return to semi-normal times.
Even so, U.S. President Joe Biden remains intent on pushing ahead with a US$1.9-trillion relief package that would send US$1,400 cheques to most U.S. households, on top of the US$600 cheques that went out in December. It is a purely political move. Former president Donald Trump had called for US$2,000 cheques while he was still in office, but Senate Republicans balked. And so, Democrats campaigning in Georgia promised to make up the shortfall if their party took control of the Senate following the state’s two runoff elections in January.
Those Democratic victories paved the way for the supersized stimulus package now working its way through Congress. The package last week passed a procedural vote in the Senate, with Vice-President Kamala Harris casting her vote to break a 50-50 tie. Democrats intend to pass the final package in coming days using a procedural measure known as reconciliation, which requires a simple majority to pass, rather than a filibuster-proof 60 votes.
A group of moderate Republican senators had extended an olive branch to Mr. Biden, by offering to back a smaller US$600-billion stimulus package. But the White House, egged on by progressive Democrats, rejected the offer.
What could go wrong?
Plenty, warns former Bill Clinton-era treasury secretary Lawrence Summers, who was the architect of Barack Obama’s 2009 stimulus package at the height of the Great Recession. Mr. Summers argues that Mr. Biden is asking for trouble by overstimulating the economy just as growth is poised to take off as more Americans are vaccinated and the pandemic ebbs.
The US$1.9-trillion stimulus, combined with December’s US$900-billion aid package and last April’s US$2-trillion coronavirus relief bill, would bring total pandemic-related spending to about 25 per cent of prepandemic gross domestic product. With economists already projecting economic growth of more than 5 per cent this year, the additional spending risks igniting inflationary pressures that the U.S. Federal Reserve could have a hard time quashing.
“Can and will the Fed control the situation if inflation starts to rise? History is not encouraging,” Mr. Summers insisted in a Sunday op-ed in The Washington Post. “And given the Fed’s guidance about keeping [interest] rates low, the economy’s high degree of leverage, and pressures on the dollar, I worry that containing an inflationary outbreak without triggering a recession may be even more difficult than in the past.”
Supporters of Mr. Biden’s stimulus dismiss warnings about inflation, noting that years of accommodative monetary policy have not led to a surge in the consumer price index. But with the Fed already having ramped up quantitative easing and abandoned its 2-per-cent inflation target since the pandemic began – saying it is willing to tolerate periods of higher inflation in the future – additional stimulus spending could be that match that sets off an inflationary fire.
“I can tell you, we have the tools to deal with that [inflation] risk if it materializes,” Treasury Secretary Janet Yellen, herself a former Fed chair, insisted on CNN on Sunday. “But we face a huge economic challenge and tremendous suffering in the country. We have to address that.”
The problem is that much of the proposed stimulus spending will pad the pockets of middle-class Americans with jobs, with US$1,400-per-person cheques going out to households earning as much as US$150,000. Yet, research by Harvard University economist Raj Chetty shows that households earning more than US$75,000 spent less than US$45 of the US$600 they received under the December stimulus bill. What’s more, under the Biden package’s expanded federal unemployment benefits, many jobless will pocket more than they did when they were working.
And while enhanced child tax credits are defensible, and would help reduce poverty, such aid should be targeted toward low-income households, rather than be extended across the board.
Mr. Summers said the relief package should be reconfigured to promote “sustainable and inclusive economic growth for the remainder of the decade and beyond, not simply [to support] incomes this year and next.”
As Fed chair, Ms. Yellen might have agreed. But she is now a politician facing pressure from progressive Democrats to seize on the current crisis to push through a series of income support measures championed by the left. And Mr. Biden, who straddled the centre throughout his career leading up to the presidency, does not want to pick a fight with progressives right out of the gate.
Presidents must choose their battles, but Mr. Biden may regret not choosing this one.
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