Yellen, Summers Spar on the risk of overheating in the incentive plan

Photographer: Stefani Reynolds / The New York Times / Bloomberg

When President Joe Biden and his acolytes advocated a massive $ 1.9 trillion economic aid package, they had insisted that economists across the board agreed that now is the time to get big in the fight against the pandemic.

Well, so much for that. A number of prominent economists and former policymakers – from Democrat Lawrence Summers to Republican Douglas Holtz-Eakin – have raised questions over the past week about the scope of the package. This also applies to a number of economics watchers in the financial markets.

While they do not disagree that the US needs additional assistance, they have emphasized the potential costs of much more: economically, there is the risk of much faster inflation and a stock market bubble. And politically, it could diminish Congress’s interest in future fiscal measures to address longer-term priorities such as infrastructure spending and the fight against climate change.

Biden doubled up on his pitch for a big package on Friday.

“Some in Congress think we have already done enough to deal with the crisis in the country. Others think that things are getting better and that we can afford to sit back and do little or nothing at all, ”he told reporters in the White House. That’s not what I see. I see enormous pain. “

There are about 10 million Americans out of work because of the effects of the Covid-19 virus. Nearly 40% of the unemployed have been unemployed for 27 weeks or more, and uncertainty about the virus or vaccine rollout continues to hamper hiring and activity.

Behind some of the skepticism about the scope of the president’s plan lies simple arithmetic. The output gap – the difference between where the economy is and where it should be if there hadn’t been a pandemic – stood at a deficit of about $ 665 billion in the fourth quarter of last year, according to the Congressional Budget Office figures. The stimulus Biden is looking for is about three times that.

Perhaps the most surprising economist to ask questions about the package is Summers, the Harvard University professor who has been a fixture in the Democratic make policy ranks for decades. He served as Secretary of the Treasury under President Bill Clinton and as senior economic adviser to Barack Obama.

Summers, Yellen

In In appearances on Bloomberg Television and in commentary for the Washington Post, Summers agreed with Biden officials that the risks of doing too little were greater than those of doing too much. And he to admitthe economy would have fared much better if the Obama administration had pushed for – and won – a much larger fiscal package in 2009, instead of the $ 787 billion program he played a key role in formulating.

But Summers, who is a paid contributor to Bloomberg, argued that the Biden team should be aware of the risks they are taking with their ambitious plan.

“There is a chance that macroeconomic stimulus measures on a scale closer to World War II levels than normal recession levels will create inflationary pressures that we have not seen in a generation,” he wrote for The Post. “I am concerned that controlling an inflationary outbreak without triggering a recession may be even more difficult now than in the past.”

In a Interview with CNN’s “State of the Union” television program on Sunday, Treasury Secretary Janet Yellen acknowledged that too rapid inflation is a risk that should be considered. But she argued that policymakers have the tools to deal with that danger should it arise.

“As the finance minister, I have to worry about all the risks to the economy,” said Yellen. “And the main risk is that we will leave workers and communities with scars from the pandemic and the economic toll it has taken, that we are not doing enough to address the pandemic and public health problems, that we are not having our children. back to school.”

Read more: Yellen sees full employment next year with Biden’s incentive plan

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