Was our pandemic stimulus too big? Paul Krugman says yes, but doubts it would have made much difference if it had been smaller.
I'm not sure I agree. Total stimulus amounted to roughly $6 trillion. The Obama stimulus package during the Great Recession was around $1 trillion. I think it's safe to say that the Obama stimulus was considerably too small while the COVID stimulus was probably too big. However, the part that was too big wasn't the Biden stimulus that roused the wrath of Larry Summers. It was the initial $3.5 trillion stimulus from the CARES Act passed in March 2020:
Right after this stimulus we went through a manic expansion: three quarters out of five above 6% GDP growth and total growth for the period of 5.4% (annualized). It was this growth that sparked the big inflationary bubble in 2021-22.
And there's evidence that this level of stimulus wasn't necessary. The targeted programs were probably fine (mostly), but the broad check-writing and excessive unemployment benefits probably weren't. The two together likely could have been cut by half a trillion dollars without doing any real damage to workers affected by the pandemic. State and local aid was probably also excessive, as demonstrated by their overflowing coffers in 2021. Finally, business aid could have been more carefully rolled out. Altogether, the CARES Act probably could have been $700-800 billion less with no damage done and an economy growing at 3-4% instead of 5+%.
That's my amateur take, anyway. A smaller CARES Act would have still been as helpful as it needed to be, but would have stimulated more normal growth and a bit less inflation. How much less? I don't know. Maybe 2-3 percentage points?
It's hard to draw firm conclusions because pandemic inflation is fundamentally different than ordinary inflation. Still, even though the supply side of things was unusual (caused by product shortages due to COVID), we still wouldn't have had any inflation if we'd skipped the stimulus entirely and allowed incomes and consumption to decline. It was our determination to keep people whole that produced stable consumption desires in the face of product shortages, leading to inflationary pressure.
My guess is that a stimulus sufficient to address a recession is almost always going to produce some unwanted inflation. We just don't have the capability to fine tune things precisely enough to avoid it, and it's better to err on the side of maintaining growth even if that risks more inflation than we'd like. I like the tradeoff we made for COVID (strong growth, too much inflation) way more than the tradeoff we made for the Great Recession (slow growth, normal inflation).
Hard disagree with your amateur and, again, calloused/privileged take. We had to make sure that people kept their incomes and we had to do it quickly. That meant not trying to target it more to the people who truly needed it and just getting checks out the door.
Also still don't think that consumer demand had much or anything to do with inflation that hit a full year after that high GDP growth, especially since wages didn't do anything special during that time - and were declining during the inflationary period.
Inflation was initially about legitimate supply shortages, but the price shocks there showed our oligopolies how much they could profit from simple price gouging. And they followed through as soon as they thought they could get away with it.
Yes, I'm with you on the first part. The significant problem was that the help absolutely had to reach the people that needed it* and the only way we can do this without some completely radical shift in taxation systems is to do blanket coverage.
*my personal takeaway from the Covid experience is that we learned the difference between essential and non-essential workers, and we also learned that for some reason it's the non-essential workers that seem to be paid massively more. And also that, having learned this, we have done absolutely nothing about it. Just like we haven't tackled the taxation system. Can't imagine why. {/s}
Given how little we (global 'we') know about economics and how terrible we are at economic projections, there is literally no way to know how things would have turned out if the stimulus measures had been different.
Kevins guess that we could have shaved off $800B with no damage done is just that, a wild guess. Like any wild guess, its possible that he's right. Or wrong.
A few hits from web searching on “drum stimulus site:motherjones.com”
https://www.motherjones.com/kevin-drum/2020/07/we-need-new-stimulus-now/
https://www.motherjones.com/kevin-drum/2020/03/other-countries-are-spending-more-than-us-on-coronavirus-rescue-packages/
https://www.motherjones.com/kevin-drum/2020/12/chart-of-the-day-stimulus-today-vs-stimulus-in-2009/
https://www.motherjones.com/kevin-drum/2020/06/stimulus-we-desperately-need-it-for-state-and-local-governments/
Et al …
Now, now--this is Kevin's attempt at Monday morning quarterbacking.
Recall at the time I suggested that the money should be means-tested/capped -- you can see my comment in that first link rick_jones provided.
Yes, in a perfect world we would have means-tested the stimulus $$ and thus could have saved the $800Billion Kevin says we could have saved. BUT, putting a means-testing regimen in place for programs that didn’t exist before (such as the PPP, in which a LOT of businesses that didn’t need squat got $$ and there was also a lot of fraud) would have meant a long delay before the money could get to those in need.
We did what a compassionate society should have done: err on the side of helping too much than helping too little. That was the right call.
I don't think that's a valid argument.
All one needs to do is to have the IRS report on who is qualified, which is not all that different than what happened in 2001 and 2008.
It was an insurance policy.
It is always better to have too much insurance rather than too little.
Was $3.5T the right number? You are probably correct. Maybe the right number was $2.5T. But if we had the choice between $2.5T and $3.5T, THE CORRECT NUMBER TO SPEND WAS $3.5T.
It could have been a cataclysmic disaster if we didn't spend enough and triggered a worldwide depression like the 30's. What are the odds? Maybe 5%?
Do you want to risk a 5% chance of a depression if the cost of avoiding it was a total of 5% inflation over a period of 3 years?
We ain't geniuses. We don't have 20-20 hindsight let alone the ability to see the future with 20-20 vision.
I thought the stimulus was too big but I was very much in favor of it because the cost of being wrong on the small side was potentially a million times worse than being wrong on the large side.
+1
I would rather have a little manageable inflation than risk more people falling through the cracks in the pandemic. And I certainly don't think unemployment should have been less.
Some of those supply issues would have hit us anyway, and it's not worth a big recession to avoid those supply shortages.
This is a good example of why Democrats struggle to win elections. When when they have big policy successes, they spend a lot of time and effort describing those successes as failures that should have been executed better.
Obamacare was one example, but the covid stimuluses are even more extreme.
Imagine the home team media always describing the Super Bowl winner in terms of all the poorly executed plays, the missed tackles, the bad play calls. Add in the opposing team media focusing on those same items and you might forget what the score was. Who won again?
+1
It's always hard to argue counterfactuals.
In this case, though, the CARES act was done under Trump--even if Democrats supported it. For Trump, he thought handing out checks with his name on it would buy him an election.
Here's a different take by renowned economist Joseph Stiglitz:
https://www.cnbc.com/2023/09/01/bad-economics-stiglitz-explains-how-the-fed-went-wrong-on-inflation.html
Key takeaway: it was supply-chain shortages, esp. of semiconductors, and *not* the stimulus packages. You can't just go by GDP as Kevin does here. You have to look at savings and spending figures in that context -- the velocity of money. It cratered in 2020 and has only been inching up again over the past year or so, and is still a long way from being where it was at in 2019. (https://fred.stlouisfed.org/series/M2V).
If everyone had been running around in 2020-21 blowing their over-generous stimulus checks on consumer goods or whatever, we'd have seen it in the money velocity figures.
Interestinly, Stiglitz also points out in that interview that while the Fed got the last inflationary spike wrong, raising interest rates now may actually help dampen future inflationary pressures from the -- ironically named, it seems -- IRA, which has spurred far more business investment around the country than the Treasury initially anticipated. *This* actually has the potential to drive some old-fashioned, demand-based inflation.
The right hand fighting the left one?
One of the issues now is that the Biden administration is trying to push the IRA money out as fast as possible so Congress can't take it back.
There's some direct spending, but what's really taken off is private industry's response to the tax credits, loans, and other incentives in the bill to encourage re-shoring manufacturing, investment in green energy, new technologies, etc. Too much of that at once, however, and you start putting upward pressure on building materials, labor, land values, which is what Stiglitz was talking about.
Arguments over the size of the ‘stimulus’ packages that don’t try to estimate the losses of personal and business income, that the government checks were intended to offset, are unmoored. It is not even justified to label the payments as ‘stimulus’ if the total doesn’t net out positive over losses.
+1 and then some
Screw THIS noise.
The extended and generous unemployment benefits under CARES were the jewel in the goddamn crown. Now only were the unemployment benefits not "excessive," the numbers in the CARES Act can, and should, be the new baseline for unemployment benefits. Like all the time, forever.
Excessive my eye.
+1
Absolutely! Percent income replaced by regular unemployment insurance in the US lags many other OECD countries. The Covid supplemental UI got us closer to where we should be.
If we knew the initial stimulus was too large then its hard to justify the additional later stimulus.
Steve
I remained fully employed throughout and don’t have dependent children so I was unstimulated. I thought the child tax credit was excessive, but not really a big deal. Since no one really cared that it went away, I judge it was nice to have, but not critical.
There was apparently tons of fraud, though. Oh well.
Lots of people with children needing child care cared that it went away.
If we know now it does not follow we knew when the decisions were made.
Inflation was inevitable because of supply shortages. Producer price inflation was over 20% from mid 2021 to June 2022.
https://fred.stlouisfed.org/graph/fredgraph.png?g=17Mbn
Supply prices were rising at well over twice the rate of consumer prices. This had nothing to do with uppity workers' wage demands and probably little to do with stimulus. The drop in headline inflation in June 2022 had nothing to do with interest rates - how could they have reduced supply prices? As Krugman says, prices in some areas had to go up to get production to increase, although it was also an opportunity for monopolistic companies to price-gouge.
Whether any part of the stimulus was too great is not something that Larry Summers (or any economist) can determine off the top of his head, or even with models (which don't really answer questions of this type), but as Krugman says it probably made little difference to inflation.
Re: your last paragraph, this from Krugman:
It is very easy to say that the stimulus was too big. Not so easy to do. I stipulate that an "appropriately small" stimulus could not have been designed would feature a) minimal necessary expense and still b) cover the whole population including the poor. Any attempt to do so would in practice have thrown the poor under the bus, which is a bad thing to happen in itself but which in this case would also have led to even faster spread of the disease and more casualties than we already had.
I'd say the stimulus was just about right considering it from the social justice angle. We should be more careful about social justice in general in this country but even more in emergency situations.