The chance of getting too massive for the economic system is actual – however getting too small could possibly be riskier

President Joe Biden's $ 1.9 trillion relief plan for Covid-19 is under review. Larry Summers, who served as Secretary of the Treasury under Bill Clinton and director of the National Economic Council under Barack Obama, commented on Biden's proposal in the Washington Post, published Thursday, in his "ambition, his opposition to austerity orthodoxy and his commitment to reducing economic equality." are all admirable. "

Still, he wonders if Biden might be overdoing it. Summer of course played an important role in shaping the federal government's response to the Great Recession of 2009 – a response that most Democrats, including Summers himself, are now not ambitious enough to agree with.

"We need to make sure it is implemented in a way that does not jeopardize future inflation and financial stability, or our ability to rebuild better through public investment," he wrote this week. In other words, he is concerned about the risk of the economy overheating and that once Congress passes a Covid-19 bill – especially one the size of Biden's proposal – it will reduce the appetite for others.

To be clear, many economists have said that Biden's original pitch is much more in line with what it takes to steer the country forward, and Biden himself was pretty clear that he was making big swings in the economy and some Want to make deficit spending with it so low interest rates. Many Democrats are also on board with this plan.

Speaking to reporters in the Oval Office on Friday, Biden remembered how difficult it was to get the Restoration Act passed under Obama, and he seems determined not to repeat that mistake. "One thing we've learned is that we can't do too much here," said the president. “We can do too little. We can do too little and stutter. "

He also set 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, living people hurt, and we can fix that."

It's not clear how much influence Summers has on the White House – Politico reported that his comment was circulated in the West Wing, but presumably if Summers had significant private access to Biden, he might not have to speak his opinions quite as publicly. It's also unclear whether this could scare some Democrats, especially moderate Senate Democrats, whom the caucus must keep on board to pass laws.

A strong economic situation in the USA can still be seen in the background: After shedding 140,000 jobs in December, the economy only created 50,000 new jobs in January. The country still has 10 million jobs, of which it was before the pandemic, and around 4 million workers have retired. In this context, it is difficult to gauge how much to worry when the answer is exceeded.

Jared Bernstein, a longtime economic advisor to Biden, made this point during a press conference Friday. "This morning's employment report revealed a deadlock in the American job creation machine and underscored the precariousness of a situation our economy is in," he said. "Lack of job growth is the result of our failure to act appropriately in response to this immense double crisis, and our economies and families cannot afford not to act again."

The risk of getting too big for the economy is real, but the risk of getting too small is worse.

The risk of getting too big is briefly explained

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

He admits that economists agree that the economy would have been better off if the Obama administration had increased fiscal stimulus in 2009. With that recognition, however, he argues that it is now getting too big by having Congressional Budget Office estimates of the hole that the economy has to fill (estimates of which may differ). His claim: Biden's proposal would be three times what is needed, and that is a bad thing.

Summers' first argument about what is getting too big is that it would "create inflationary pressures like we have not seen in a generation". Inflation has been quite low for years, and if it should appear the Federal Reserve could always fight it with rate hikes.

Biden's team says it is unaware of the risk of inflation. It's not as concerned about it as other risks. This is an assessment recently confirmed by Fed Chairman Jerome Powell at a press conference. "I'm much more concerned that I haven't fully recovered and lost the careers and lives of the people who built them because they couldn't get back to work on time," Powell said. "I am more concerned about this and the damage it will do not only to their lives but to the US economy as well."

The second – and perhaps more interesting – part of Summers' case is that too much incentive now reduces the likelihood of later legislation. Biden has devised a two-part plan for the economy – first "rescue" (that $ 1.9 trillion plan) and then "recovery," a series of broader proposals to make the economy work better and offset the recovery across income status becomes. This would likely create problems like infrastructure and green energy.

"After the coronavirus crisis is resolved, how will political and economic space be found for the public investment that should be the country's top priority?" Summers wrote. “Is the thought that deficits can prudently be expanded for longer and further? Or that new income will be generated? If so, will this be politically feasible? "

He reiterated his concerns in an interview with Vox on Friday afternoon. “I certainly agree with the principle that the dangers of doing too little are greater than the dangers of doing too much, and one should stand on the side of doing enough. However, this argument does not justify any incentive. "

In order to find out what to do in business, it is necessary to weigh the risks

At the White House press conference on Friday, Bernstein responded to Summer's concerns that the Biden administration was growing too big. "I disagree with that claim," he said. "This is risk management, this is risk balancing, and we believe the risks of doing too little are far greater than the risks of doing too much."

Bernstein said the government would have to "hit back hard" to finally put the Covid-19 pandemic and the economic pain it causes in the rearview mirror.

It is impossible to know how exactly the right number is for economic relief and recovery. Greg Daco, chief US economist at Oxford Economics, said in a recent interview with Vox that the country needs a bridge to get into a world after Covid, but “we don't know how long or how strong it takes a bridge because we don't know when we'll get to the other side.

The Brookings Institution recently released a report on the impact of Biden's $ 1.9 trillion proposal and estimated it would boost economic activity by about 4 percent by the end of this year. Economists Wendy Edelberg and Louise Sheiner estimated that without tax support, the economy would remain below pre-pandemic levels for several years. They nodded at the risk that Summers raised the alarm about.

“A risk worth mentioning is that the return of GDP to its maximum sustainable level after 2021 could lead to a difficult economic period. While our estimates show a 'soft landing' with a temporary and small 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, an economist at Moody & # 39; s Analytics, said that Summers' arithmetic adds up. If it were up to him, Biden would launch a $ 1 trillion bailout and then a $ 1 trillion deficit bailout to get back to full employment. "The economy needs about $ 2 trillion in additional deficit financial assistance to get back to full employment in a reasonable time, for example, in a few years," he said.

Zandi, who has released his own estimates that the Biden proposal will boost the economy, shares concerns that there is a risk of exaggeration. "It will be a sustainability issue," he said. "They want a strong economy, low unemployment that is sustainable." But a little inflation? He is not so concerned: "If this really becomes a problem, interest rates will rise sooner and faster than expected."

Here, too, the Biden administration is aware of these concerns – but it's all a balancing act between risks and priorities. What does it cost to become conservative now, not only for economic figures but also for ordinary people's lives? The incentive that has passed so far has really helped keep families, the unemployed afoot, and businesses alive as the country battles the pandemic. In fact, how it works has encouraged some policymakers and economists to grow bigger and repeat part of their bottom-up approach to really help those most in need.

“For decades we have essentially operated an economy that is well below capacity. There is a growing consensus that this has caused a tremendous cost to the well-being of the American people, "said Mark Paul, political economist at New College of Florida and a Roosevelt Institute fellow.

Paul is one of the authors of a paper commissioned by the progressive business group Groundwork Collaborative, which argues that the economy needs at least $ 3 trillion. His Opinion: The US spent so much time worrying about the economy getting too hot, but given the effects of such a long cold, why not try? "We know that a cold economy leads to stagnant wages and unemployment, especially unemployment that can be traced back to black and brown communities that are least able to cope with economic difficulties," he said.

Summers told Vox he was certain the White House had a "very thoughtful approach" to incentives and that "reasonable people may disagree".

"I think my post carefully said that there are tremendous benefits to the program, but I thought there are risks that need to be carefully considered and managed in the future, both in terms of the inflation problem and the issues whether there is room for vital public investment, ”he said. "I am pleased that the White House shares these concerns, as I expect as a responsible policy maker."

On inflation, he noted that the Fed has sent "strong signals" that it has no plans to hike interest rates anytime soon and if it did it could hurt the economy. "Some of the possible concerns have probably not been adequately addressed in the debate," he said. “It's been a long time since we learned the lesson, but if we trigger a significant acceleration in inflation and then force a response from the Fed, the process is unlikely to be controllable and a recession is very likely, along with one sharp rise in mortgage rates. Many of the people most at risk will be middle class families. "

The question of how much effort must go to help people goes beyond the economy – it is ultimately about trying to do exactly what is right, especially in such an unequal society. "Growth, in which a relatively small fraction of the population gets all of the profits from that growth, is not the idea of ​​a healthy, fair, or just society," said Darrick Hamilton, now professor of economics and urban policy at the New School. in an interview with Vox in 2019. "Growth in and of itself says nothing about morality, shared humanity or sustainability."

There's the economics of the stimulus and then the politics of the stimulus

In addition to the economic dispute about how much incentive is needed, there is also the question of the politics of the situation. And that's complicated.

The White House appears to be at least trying to get its $ 1.9 trillion proposal, or some sort of sizeable bipartisan proposal passed by regular order with 60 votes. It could be difficult to get 10 Republicans on board. A group of 10 Senate Republicans has tabled a counteroffer of $ 600 billion for incentives. The Biden administration appears ready to listen to the GOP, but is unlikely to come up with a proposal that is a third of its own size.

At the same time, the Democrats got the ball rolling for the budget vote – a process exempt from filibuster threshold legislation, which primarily deals with taxes and spending. In this scenario, the legislation could be passed with 50 Democratic Senate votes plus Vice President Kamala Harris as a tiebreaker. Democrats have the votes – provided they all take part. That means keeping moderate Democrats like Sens. Joe Manchin from West Virginia and Kyrsten Sinema from Arizona on board.

While Summers' remarks and warnings that incentives should be lower don't make too much of a difference in the way the White House thinks, there is concern that those arguments might find a more receptive audience in moderate cases. As my colleague Ella Nilsen pointed out recently, Manchin's “red line” appears to be less about tax responsibility than about bipartisan contributions to the process, and he appears to be okay with the $ 1.9 trillion for Biden's plan or something close to it to be. However, he probably wouldn't be angry if it was at least smaller.

How exactly do senators follow the Washington Post's opinion section? It's hard to tell, especially on Friday after an overnight vote to get the budget process going. When I went to a Democratic bureau for comment on the Summers, one of the staff first asked what I was talking about.

"I don't think our members will take this seriously. He even says the criticism of what was done in 2009 was right. If so, admit that you did something wrong. Why should you Are we listening to you now? "said a Democratic adviser in an email." In a broader sense, I think the broad consensus in the caucus is that the risk of getting too small than too big is much greater mean, look at the process we have to go through to hand that one bill. We were all out by 5:00 AM! You wouldn't be able to do this again if it turned out you needed a lot more relief. "

Ella Nilsen contributed to the coverage.

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