United States: A Poorly Calibrated Financial Stimulus

If there is no debate on the principle of the stimulus plan that Joe Biden wants, its scope, and the timing of the intervention, risk overheating the economy.

Is perfection the enemy of the good? That is the question with regard to the stimulus plan for the American economy that the Senate will vote on in the coming days.* The new president of the United States, Democrat Joe Biden, has decided to give the economy a jolt by spending $1.9 trillion to repair the damage caused by the COVID-19 pandemic. If there is no debate on the principle of this budget stimulus, its scope, and the timing of the intervention, risk overheating the economy.

The stimulus bill is unprecedented in peace time. By adding to the $900 billion already released in 2020, the plan will bring the United States’ budget deficit to 18% of the gross domestic product, four points less than it was at the end of World War II. Larry Summers, though close to Biden on policy as former treasury secretary under Bill Clinton and a former adviser to Barack Obama, deems this plan disproportionate to the losses sustained by the American economy.

The cost of the stimulus measures taken is equivalent to 13% of GDP, while the GDP only contracted by 3.5% in 2020. The Democrats are haunted by the criticism directed at the Obama administration during the financial crisis of 2018. Accused at the time of having not done enough, this time the Democrats have decided not to scrimp.

The Return to Growth Is Coming More Quickly

Even if it is legitimate to come to the aid of the unemployed and those on the brink who have been severely affected by the pandemic, the efforts on behalf of the middle class seem less justified. Many American households, unable to spend during lockdown, find themselves with substantial savings at their disposal, to which will be added government assistance that will artificially boost consumption.

Doubts about the efficacy of this stimulus plan are even more justifiable given a more rapid return to growth than expected. Even if the 9.5 million jobs lost since the beginning of the pandemic never return, the positive job market numbers released on March 5 suggest that the easing of safety measures and the acceleration of vaccinations will facilitate an earlier than expected return to normal.

Rise of Interest Rates

With a recovery on the horizon, we must certainly dress the wounds of the pandemic. But it is just as essential to look to the future with a recovery plan (rather than just a demand for support) capable of transforming the profile of the American economy when it comes to infrastructure, education, or energy transition. Once the $1.9 trillion is spent, the Biden administration will have a hard time going back to Congress before the midterm elections to borrow more.

This plan, poorly calibrated in the current monetary and budgetary expansion, more importantly runs the risk of an economic overheating that could end with the return of inflation. The rise in prices seems to be under control for the short term, but bond market predictions are not to be taken lightly. The announcement on Friday of positive job figures was immediately greeted by a sharp rise in interest rates, a foretaste of pressures that will intensify, ensuring that the Federal Reserve will tighten monetary policy. If, by the effect of contagion, rates were to rise in Europe, they would weaken a recovery already more sluggish than in the United States.

*Editor’s note: President Joe Biden signed the $1.9 trillion COVID-19 stimulus relief bill into law on March 11, after it was passed by Congress.