Biden’s ‘Morning in America’ moment sparks a furious debate

Congress is set to approve the largest injection of federal cash into a growing economy in U.S. history. The nearly $2 trillion stimulus package headed to President Joe Biden’s desk Wednesday comes after lawmakers approved nearly $4 trillion last year as the economy cratered under the coronavirus pandemic.

And the White House still wants trillions more in stimulus spending this year through a sweeping infrastructure package.

What comes next is now the subject of fevered economic debate among economists, budget experts and policymakers in Washington and across the nation.

It could be a Morning in America moment that further turbocharges an economy already primed to pop, reduces economic inequality and lofts Biden to the kind of economic hero status enjoyed by the likes of Franklin Delano Roosevelt after the Depression and Ronald Reagan in the boom-time 1980s.

Or it could be a fiery accelerant for global markets as gas prices surge, home prices jump, speculative assets soar and investors increasingly fear the kind of sharp inflation spike that can hit with remarkable speed if the government pours too much gasoline on an already warming economy.

It will be a moment of glory for Biden when he signs the new relief act in the coming days, the centerpiece of his early agenda. But a sunny ending is not fully guaranteed, with the nation taking an almost entirely new path on managing the economy.

“If it works out well, Biden will be viewed as a hero and he’ll deserve it,” said Len Burman, a Syracuse University economist and co-founder of the Tax Policy Center. “This is the first time that we’ve ever really provided enough stimulus and the risk is that it will be too much. And inflation is a real risk. But if it works out badly, at least we’ll know the result of a grand experiment like this.”

The imminent enactment of Biden’s American Rescue Plan comes as the economy is already showing signs of reviving with Covid vaccinations accelerating and states lifting more restrictions.

The economy created a surprisingly high 379,000 jobs in February, with expectations for much higher numbers ahead as bars and restaurants reopen and Americans begin to travel again in far higher numbers.

Chief executive confidence recently hit a 17-year high as companies prepare for a return to something close to a normal economy later this year. Small business confidence is also rising though at a more cautious pace. Consumers in the world’s largest economies are also sitting on nearly $3 trillion in extra cash piled up during the virus lockdowns, meaning demand for everything from travel to cars to new merchandise is likely to rise even further.

Signs of inflation are already popping up around the country with gas prices soaring and likely to go higher. New and used car prices are also spiking as are home prices in many markets, creating worry among policy makers about people getting priced out.

And then there are the long-lofty equity markets and largely speculative assets like Bitcoin that continue to rocket amid record low interest rates and giant infusions of cash into the system from the Federal Reserve and Congress.

The Nasdaq raced ahead over 400 points on Tuesday, or nearly 4 percent, in the latest fit of market euphoria. GameStop, the “meme stock” propelled by chatroom traders, rose nearly 27 percent and electric car maker Tesla soared nearly 20 percent.

Millions of Americans soon will be getting thousands of dollars in stimulus payments along with expanded unemployment benefits, an enormous expansion of child tax credits, far more generous health care subsidies and targeted relief for smaller businesses, particularly those owned by people of color and women.

Progressives cheer all of these things as major advances that will both boost the economy in the near term and possibly make a dent in economic inequality that only grew worse during Covid.

And many economists also note that the need among huge swaths of Americans for more relief is still very much alive. The nation remains around 11 million short of the number of jobs that would have existed absent the Covid lockdowns. The jobless rate remains elevated at 6.2 percent and would be closer to 10 percent if the millions who left the workforce during Covid — a figure dominated by women — were included.

While Republicans almost uniformly complain the Covid package is far too large and wasteful, economists mostly take a more measured tone.

There is certainly a chance it is too large, they say, and could lead to sharp price spikes and quicker Fed interest-rate hikes. Tech stocks, meme shares and crypto assets all could take hits. But that might not necessarily be a bad thing if bubbles deflate slowly and not all at once.

“There really is no choice but to provide this kind of support, and we’ve been living with sub-optimal inflation for almost two decades,” said Mark Zandi, chief economist at Moody’s Analytics. “Bring on the inflation. Let’s see it before we worry about it. And interest rates are too low, anyway. Investors are not at all prepared for higher rates and inflation.”

“Markets are frothy,” Zandi added. “And it would not be bad to take some starch out of them sooner rather than later before these bubbles can inflate much further.”

That is the most sanguine view of the new shower of cash about to cascade down on America: A gentle readjustment in markets, slightly higher interest rates in the economy and much lower unemployment alongside a sharp reduction in economic inequality. It’s the Biden dream scenario.

The more worrisome outlook is that a massive glut of consumer savings — padded with yet more stimulus checks and a concluding pandemic — will create a massive demand spike with nowhere near enough supply to meet it. That would mean sharp price increases that could force the Fed into multiple rate hikes sooner than anticipated.

Such a campaign of hikes would make borrowing costs far more expensive for consumers at the same time as their purchasing power declines. It would also make the cost of servicing the ballooning national debt much higher and possibly stomp on Biden’s hopes for a multitrillion-dollar stimulus package, one that already faces some tough opposition from Republicans.

“Our debt is clearly on a totally unsustainable path and we simply don’t know that rates are going to stay this low forever,” said Burman. “If markets got the idea that the U.S. was no longer that safe of a haven, rates could go up very quickly. That is not a ‘right now’ problem. And it makes sense to invest in smart things right now. But it can become a problem.”

Even before new stimulus, economists expected very robust growth in 2021 as the nation — hopefully — escapes the Covid tractor beam. Adding the new stimulus has estimates for gross domestic product growth for the year around 7 percent or even higher, figures not seen since the 1980s.

That growth could lift people out of poverty, drive up wages in a non-inflationary way and vault Biden to economic hero status. Or it could spark the kind of inflation that vaporizes consumers’ buying power and invites crushing rates hikes from the Fed.

“There are clearly policy makers — in particular those on the left — who have forgotten how damaging inflation can be,” Steven Ricchiuto, U.S. chief Economist for Mizuho Securities, said in a note to clients. He added that he was not all that worried about it — at least for now.

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  • 1 день, 14 часов назад 16.05.2021Economy

    The Biden administration is taking pains to explain to Americans where the country is headed as the economy spits out anxiety-inducing data on prices and jobs. But it’s struggling to find a clear message.

    Treasury Secretary Janet Yellen spooked markets this month when she said interest rates could rise if the economy heated up too much — then clarified a few hours later that it wasn’t a prediction. President Joe Biden held a press conference to discuss a disappointing jobs report, then circled back three days later to address the issue again, suggesting to some that he was concerned about public reaction. And the president has called for his multi-trillion-dollar infrastructure package to be paid for with tax hikes, which indicates that he’s worried about too much spending even as the administration downplays both inflation and deficit fears.

    The inconsistent messages the administration is sending on economic policy have drawn angst from some political allies, who say it muddles the argument for their agenda.

    “When you have a messaging campaign where you’re reacting to the latest data point, that sows confusion and it makes it look like they don’t really have a plan,” said Claudia Sahm, a former Federal Reserve economist who is now a senior fellow at the Jain Family Institute. “This is exactly the moment where you’ve got to really get a hold of the narrative and hang on.”

    Growing concern over the direction of the post-pandemic recovery and the administration’s response is opening up new lines of attack for Republicans, who see the early missteps as their best hope yet to help stall Biden’s tax-and-spend agenda and thwart Democrats in the 2022 midterms. Over the last week, GOP officials and party committees have seized on a series of unfavorable economic headlines to warn that further spending will send the economy into free-fall — with the Republican National Committee already comparing Biden to Jimmy Carter.

    “There are a lot of flashing red lights on the economic dashboard,” said Republican strategist Scott Jennings, a former adviser to Senate Minority Leader Mitch McConnell and deputy political director in the George W. Bush White House.

    “The economy is the big issue,” Jennings said, pointing to everything from temporary gasoline shortages spurred by the pipeline hack on the East Coast, to potentially longer-term headaches for Biden such as inflation and the unexpectedly poor April jobs report. “All of it — that will drive whether the GOP can move him down.”

    Government data over the past week showed higher-than-expected price surges as well as the slowdown in the pace that the economy is adding jobs, sharp changes that caught forecasters both inside and outside the administration by surprise.

    Still, top officials such as Yellen and Fed Chair Jerome Powell have been forecasting somewhat higher inflation for months, saying the reasons behind it — supply bottlenecks, worker shortages and an unusually high enthusiasm for spending as businesses reopen — should only persist temporarily as the economy emerges from the coronavirus pandemic.

    White House officials, meanwhile, say the deadly pandemic was bound to cause bumps in the economic recovery but that they are focused on larger trend lines and not fixating on potentially ephemeral one-off reports.

    “We know that the mismatch between different parts of the economy will show up in unexpected ways until the economy more fully recovers,” said Cecilia Rouse, chair of the Council of Economic Advisers, at a briefing Friday. “As the president urged earlier this week, we must be patient.”

    Taken together, however, Republicans see an opportunity to damage the president in ways they’ve largely been unable to do, particularly after putting up what many in the party acknowledge was a feeble attempt at scuttling the Biden administration’s successful passage of a $1.9 trillion Covid relief plan, which remains popular with the American public.

    “[Biden’s] lack of leadership in the face of this serious threat is hurting people every day,” said Sen. Rick Scott (R-Fla.), who chairs the National Republican Senatorial Committee. “Every increase in food, gas and household good prices, even increases of just a few cents, negatively impact families. There is no question whether inflation is happening.”

    The dire warnings are also giving Republicans the chance to take a second run at the massive Covid package, arguing that it was too much, too fast — a point Biden’s advisers are sensitive about given the critiques of left-of-center economists such as Larry Summers.

    “I really believe that the economy was improving on its own,” said Sen. Rob Portman (R-Ohio), adding that some of those concerns were shared by Democrats. “We really should not have been pumping up the economy and priming the pump with additional cash including the $1.9 trillion Covid package, and I think we’re seeing the results of that.”

    “I think we need to be careful and allow the economy to improve as it was slated to do anyway,” he said, “without unnecessarily priming the pump and creating more inflation.”

    White House officials say they’re most focused on communicating with the American people about what they’re seeing in their everyday lives, rather than engaging with politically motivated arguments from Republicans, and want to keep the focus on their economic message of rescue and then recovery.

    Yet the response from the right has been swift, a contrast to the policy-light culture war du jour Republicans were focused on the first few months of the new administration, which so far has failed to dent Biden’s overall approval numbers — or many of his comparatively high marks on handling Covid and the economy. Biden aides and allies pointed to the polling.

    “The big problem for the Republicans is that their economic critique of Biden is premised on their opposition to the American Rescue Plan, which is a losing proposition for them,” said Geoff Garin, the veteran Democratic pollster. “The American Rescue Plan continues to be very popular, and the unanimous opposition to it by Republicans continues to be a bad look for them.”

    Others pushed back on the GOP response as a predictable tactic they hope will help stop Democrats from enacting their agenda.

    “They’re putting forward arguments that are self-contradictory, without irony, like saying, to raise taxes will harm the economy and slow it down so you should not pass Biden’s plan, while simultaneously saying that the economy is overheating — so we cannot afford to spend more money because that will make us grow too fast and generate inflation,” said Austan Goolsbee, who chaired the Council of Economic Advisers during the Obama administration. “So those two points are contradictory, but they are simultaneously making both of them.”

    Many economists on Wall Street share the view of the administration and the Fed that higher inflation fueled by temporary factors will likely be mostly worked out in a matter of months, though some in the financial industry have privately pointed out the potential for confusion with officials such as Yellen speaking extensively about what might happen with inflation, an issue for which the Fed is generally given responsibility.

    White House officials say they consider inflation as part of a broad range of economic indicators they track as shepherds of the economy. They also argue that the Treasury chief was misinterpreted in her comments about how rates could rise if inflation picks up, saying she was merely commenting that the Fed would have the tools to respond to any concerning longer-term pickup in prices.

    For their part, Fed officials craft disciplined public messaging around what is happening with inflation and what type of price increases might trigger them to pull back support for the economy; namely, they think it would slow down the recovery for them to overreact to transient inflation, but they’ll take policy action if there are signs that price increases are spiraling.

    “The Fed has an incredibly difficult challenge right now to communicate its intent to see through this period of inflation,” said Tony Fratto, a former Treasury and White House official in the Bush administration. “Communicating its intent, in fact, is how the Fed executes policy. I think it would be best if Treasury officials didn’t complicate that challenge.”

  • 1 неделя, 1 день назад 09.05.2021Economy

    It’s not one specific thing related to Covid-19 that is keeping the economy down, but everything related to the pandemic, the president of the Federal Reserve Bank of Minneapolis said on Sunday.

    Speaking on CBS News’ “Face the Nation,” Neel Kashkari said it was a complex series of factors that led to Friday’s disappointing jobs report, which showed that only 266,000 jobs were created in April, far below expectations.

    “This is unlike any other economic shock in any of our lifetimes,” he told host John Dickerson.

    A variety of theories have been put forth as to why April’s numbers were not better, including the idea that people were fine with sitting home and collecting enhanced unemployment benefits, as well as concerns about continued Covid risks, a lack of decent child care and fear of using crowded public transportation.

    Kashkari saw merit in all those arguments, given the unique circumstances of the pandemic.

    “It wasn’t simply the lockdowns from the government that put a damper on the economy,” he said. “It was each of us, each of your viewers, each family taking actions to protect themselves. Yesterday, for the first time in over a year, I got back on an airplane because my wife and I had been vaccinated and we felt comfortable. But it’s going to take time for that psychology to change.”

    He added: “Now, the good news is over the next three or four months, each of those factors should get better.”

    Kashkari also cautioned against reading too much into one set of numbers.

    “We shouldn’t overreact to any one report — either the really good report that came out the month prior or last week’s report, as well,” he said. “But I think the bottom line is we are still somewhere between 8 and 10 million jobs below where we were before the pandemic. Roughly 8 to 10 million Americans ought to be working right now if the Covid crisis had not happened.”

  • 2 недели, 5 дней назад 28.04.2021Economy

    OTTAWA — Mark Carney says it will take a few budgets for the Trudeau government’s recovery plan to deliver the growth Canada needs as it emerges from Covid-19’s economic crisis.

    The assessment by the former governor of the Bank of England and Bank of Canada comes amid criticism that Deputy Prime Minister Chrystia Freeland’s budget last week lacks a robust post-pandemic growth plan.

    Carney was asked during an interview on The Herle Burly podcast, posted Wednesday, if Freeland’s plan was the growth budget Canada needed.

    “There were elements of growth in the balance from what I can see and understand,” Carney said in a long response that didn’t directly answer the question. “It will take a few budgets to have the type of growth strategy that meets the imperative of what we’re going through and the opportunities that come.”

    Politics and punditry: Carney’s remarks on the budget follow the political splash he made earlier this month by proclaiming his allegiance to Prime Minister Justin Trudeau’s Liberal Party.

    Critics have challenged the recovery plan in Freeland’s budget for coming up short on a blueprint to truly bolster economic growth, even though it will cost taxpayers a record-breaking C$101 billion over three years.

    The budget contained major commitments to invest in a greener economy, digitization and child care. Freeland says the child-care plan will, if it comes together, permanently boost GDP by 1.2 percent by increasing women’s participation in the labor force and creating jobs in the sector.

    In his response on Wednesday’s podcast, Carney also told interviewer David Herle that there are times when there are “big shifts and where events accelerate big shifts.”

    “Covid has absolutely accelerated both the digital and sustainable revolutions — and it is not an overstatement to say that those are revolutions,” Carney said. “We need to meet the challenges at that level. And I think the budget did some things in that direction, which are welcome, but it’s going to take more than one budget and I don’t think the government would pretend otherwise — that this is ‘job done.’”

    The concerns: Budget watchers have expressed doubts about the overall plan.

    Robert Asselin, a former budget director for Freeland’s predecessor Bill Morneau, wrote an item last week in The Hub under the title “The federal budget has no answers on the question of growth.”

    Asselin, senior vice president of policy at the Business Council of Canada, wrote that it’s “hard to find a coherent growth plan” in the 739-page budget. He did credit the plan’s proposed investments in child care, skills, life biosciences and clean technology.

    In particular, he noted that the budget itself shows real GDP growth is on track to fade over the budget’s forecast horizon to around 2 percent, which would be a return to long-run growth rates.

    “After doubling our federal debt in only six years, and spending close to a trillion dollars, not moving the needle on long-term growth would be the worst possible legacy of this budget,” he wrote.

    Focusing on the growth: Later in the interview, Carney described Freeland’s plan as a “hybrid budget.”

    “It had to conquer Covid, it was doing important things on the social side and it had the start of the growth,” Carney said. “What we’re seeing in some other jurisdictions is that the focus is more squarely on the growth.”

    He said a tighter focus on growth would mean more of the spending would come in the form of direct government investments. Carney said it would also likely include tax changes and other measures to encourage private investment and the expansion of jobs and incomes that will be needed down the road.

  • 4 недели назад 20.04.2021Economy

    The federal Liberals have set an ambitious new target for Canada to reduce its greenhouse gas emissions as part of a sweeping set of big-ticket budget measures aimed at fighting climate change while giving Canada’s pandemic-hit economy a green lift.

    In her budget speech, Finance Minister Chrystia Freeland said Canada’s new goal is to reduce emissions by 36 percent below 2005 levels by 2030, up from the 30 percent reduction target first set by the previous Conservative government.

    But with U.S. President Joe Biden set to host a virtual climate summit of 40 world leaders later this week, where some believe he may announce a reduction target of 50 percent, it’s not clear Canada’s upgraded plan will be ambitious enough.

    The backdrop: Since coming to power in 2015, Prime Minister Justin Trudeau has stressed his government’s commitment to tackling climate change. With Canada’s economy slowly rebounding from the effects of Covid-19 amid a renewed global interest in climate issues, the government’s first budget in two years seeks to harness the recovery to its environmental policies.

    “[The federal budget is] a plan that embraces this moment of global transformation to a green, clean economy,” said Freeland in her budget speech. “In 2021, job growth means green growth.”

    Another senior official summed up the government’s thinking: “Climate change is now an innovation and a jobs opportunity.”

    Here’s how the Trudeau government plans to meet its climate goals.

    Direct spending: As part of the government’s stated goal of cutting Canada’s carbon dioxide emissions to net zero by 2050, while also pursuing a more activist role in guiding the economy, Ottawa is pumping C$5 billion over seven years into the Net Zero Accelerator.

    The program, announced in December with an initial C$3 billion in funding, aims to cajole Canadian companies in traditional sectors to reduce their carbon footprints, whether that’s by incentivizing large emitters like oil and steel producers to decarbonize, or spurring auto and aerospace manufacturers to adopt clean technologies.

    In the same vein of steering private industries to pursue actions the Liberal government deems worthy, Ottawa will also make C$1 billion available over five years “to help draw in private sector investment” to Canada’s clean technology sector.

    One of the biggest-ticket new items among the budget’s environmental initiatives aims to fulfill a Liberal promise from the October 2019 election to conserve 25 percent of Canada’s oceans and lands by 2025. The federal government plans to spend C$2.3 billion over five years to conserve up to one million square kilometers of land and inland waterways. The government also vows to create “thousands of jobs” through its “historic investments in Canada’s natural legacy” but offers no specifics.

    Tax cuts: In a budget big on maximizing tax revenue, one group will see a smaller tax bill, at least temporarily — manufacturers of zero-emission technologies. It’s a wide umbrella that includes manufacturers of wind turbines, solar panels, electric vehicles, batteries and fuel cells as well as biofuel and green hydrogen producers.

    Companies that earn at least 10 percent of their total gross revenue in Canada from eligible zero-emission efforts can get a 50 percent on their corporate and small business income tax rates, though the tax break will start to phase out in 2029 and will be eliminated by 2032.

    Home is where the green is: Building on a program announced in the 2020 Fall Economic Statement to encourage homeowners and landlords to carry out energy-efficient upgrades, Ottawa plans to dole out C$4.4 billion in interest free loans of up to C$40,000 each to homeowners to conduct “deep retrofits” like replacing oil furnaces, drafty windows and poor insulation.

    Other measures: As expected, Canada plans to tap into the growing demand among global investors for fixed income securities that finance green infrastructure projects and other sustainability initiatives. Canada hopes to raise C$5 billion by issuing green bonds in fiscal 2021-22, which the budget said will “be the first of many green bond issuances.”

    With the federal carbon tax passing its last legal hurdle with a thumbs up from the Supreme Court last month, rebate payments to consumers will start to become more visible next year. At the moment, Canadians receive payments as a refundable credit when filing their taxes, but starting in 2022 the money will go out each quarter as regular benefits.

    To be determined: A few important components of Ottawa’s climate-related budget measures that could have an outsized impact on Canada’s ability to meet its climate goals still have yet to be nailed down.

    There have been many calls from industry, particularly in the oil and gas sector, for Ottawa to introduce a tax credit to encourage carbon capture, utilization and storage (CCUS). Ottawa says an investment tax credit for capital invested in CCUS projects is coming, and that the measure could reduce CO2 emissions by at least 15 megatonnes annually.

    However no dollar figure was attached in the budget, which said the final cost is pending a 90-day consultation period with no official start date.

    Lastly, with nations around the world implementing different types of carbon pricing, and some countries applying no price on pollution at all on their domestic industries, the government is looking to level the playing field for Canadian businesses. It’s exploring a border carbon adjustment scheme that would apply appropriate levies on imports and exports, though the government says this too will require “a consultation process.”

  • 1 месяц, 2 недели назад 02.04.2021Economy

    President Joe Biden is pitching his $2 trillion infrastructure proposal as the “largest American jobs investment since World War Two,” a plan that will put millions of people back to work as the country emerges from the coronavirus crisis.

    The economy, meanwhile, is showing signs of recovering on its own.

    More than 916,000 Americans returned to work in March, the Labor Department reported on Friday, far surpassing consensus expectations and marking the biggest jump in employment since the summer as Americans get vaccinated and more states and cities allow businesses to reopen. The overall unemployment rate ticked down to 6 percent.

    And that in turn has blunted one of the central pillars of the Biden administration’s argument as to why the sprawling infrastructure plan is so sorely needed, even after $1.9 trillion in relief money passed just last month — that “it’s about jobs,” as White House press secretary Jen Psaki put it this week, and “the first part of his plan toward recovery.”

    Most lawmakers in both parties agree, however, that a major investment in the country’s infrastructure would be well worth it, a step Presidents Barack Obama and Donald Trump both tried and failed to take. But pitching trillions more in spending as necessary to bring back jobs could become a harder argument to make as the economy looks poised to get there on its own.

    “Spending at a much smaller level, but better targeted, would have better bang for the buck,” said Rep. Kevin Brady of Texas, the top Republican on the House Ways and Means Committee. “We are wasting far too much of these dollars in areas that frankly aren’t related to the recovery.”

    The White House’s argument could ring hollow in particular to Republicans and possibly even some centrist Democrats who have begun to try to tap the brakes over the eye-popping levels of cash being pumped into the economy. Congress passed roughly $5.4 trillion in emergency aid measures in less than a year, and the White House is putting another $2 trillion to $4 trillion on the table now.

    “I don’t see much of a stimulus or jobs argument going very far, even as some try to make it,” said Brian Riedl, a senior fellow at the right-leaning Manhattan Institute. “The economic outlook is strong for the second half of the year. And it would have been strong without the next stimulus bill.”

    The infrastructure package’s supporters maintain that while some further stimulus would still benefit the economy — no one in the administration wants to repeat the sluggish “jobless recovery” that followed the Great Recession — the broader objective is to strengthen the country’s infrastructure, making it more resilient against the effects of climate change while expanding access to clean water and broadband.

    And that goal is worth pursuing even in spite of the record levels of cash Congress has already appropriated in the last 12 months, proponents say — especially given the current low interest rate environment.

    “We’re not going to go fix 10,000 bridges just to put people to work. We’re going to fix them because those 10,000 bridges need to be fixed,” said Rep. Don Beyer (D-Va.), who leads the Joint Economic Committee.

    “Even if there were no stimulus argument to be made, there’s a very powerful argument to be made that the American Jobs Plan is necessary,” he said. “Maybe you could call it something else — you’d just call it the Infrastructure Plan.”

    Some economists argue that the infrastructure initiatives are so important that policymakers should be wary of allowing spending fatigue and the strengthening economy to become the reasons it doesn’t get done this year.

    Diane Swonk, the chief economist at Grant Thornton, said it would “be a shame” if the earlier relief measures crowded out the infrastructure plans.

    “It’s beyond a crisis point, and just because we’re coming out of a pandemic doesn’t mean we shouldn’t do it,” she said. “All the more reason to do it. Because we already know a rising tide does not lift all boats, and you don’t want to mistake the surge associated with unleashing the pent-up demand from the pandemic with long-term sustainability.”

    Those long-term benefits are the most important reason to pass the infrastructure plan, supporters say, given that it would invest in projects that will pay for themselves within 15 years and benefit the country for decades after that.

    And that extended timeline is the reason most economists have shrugged off any concerns that another multitrillion-dollar influx of cash could be too much, too fast for the broader economy. Much of the money as proposed under Biden’s plan would not be spent for at least a few years after it is signed into law, and it will be doled out over eight years. Biden is proposing paying for it, though over a longer timeline than it will initially be spent, with tax hikes on corporations.

    “I don’t think that it exacerbates the overheating concern that I’ve expressed in an important way,” said former Treasury Secretary Larry Summers, a vocal critic of the administration’s $1.9 trillion relief plan, which he warned could funnel too much money into the economy, spark inflation and crowd out other progressive priorities.

    But the infrastructure proposal, he said, is not about “short-term injecting money into the economy — but creating the infrastructures and the institutions that success in the 21st century requires.”

  • 1 месяц, 3 недели назад 25.03.2021Economy

    President Joe Biden is charging ahead with plans for a $3 trillion federal spending spree just after pumping nearly $2 trillion into an already growing economy.

    Even some supporters of the effort are watching nervously for unintended consequences on the road to getting a deal.

    The unprecedented flood of federal dollars — should it materialize — is starting to worry a contingent of Democrats, economists and investors who fear that at least some long-held economic views around federal spending will reassert themselves and trigger painful costs.

    Among them is the long-held fear that massive spending — coupled with persistent easy-money policies from the Federal Reserve — in an already firming economy could spark a wave of inflation, a disorienting spike in interest rates and a painful pullback in a broad range of currently high-flying assets, from home prices to tech stocks to the newer fad of “non-fungible tokens” and Special Purpose Acquisition Companies (SPACs) that saw a flood of investor interest in recent months.

    “History shows us that when money is effectively free, crazy things happen,” said Rep. Jim Himes (D-Conn.). “And we are starting to see lots of crazy things in the equity market, the high-yield bond market, SPACs and tokens. Oftentimes this kind of thing does not end well at all.”

    Himes and other Democrats are quick to note that previous warnings about the need for fiscal restraint proved hollow and severely limited the effectiveness of President Barack Obama’s economic rescue efforts following the 2008 financial crisis.

    And so far, despite some unrest in bond markets, investors in government debt have shown only limited concern about Biden’s spending plans despite soaring federal debt and annual deficits.

    But the long road to securing the next package is quickly getting littered with warnings that could become ‘I-told-you-so’ moments even before Biden can strike a deal in Congress.

    Among the most critical questions is whether pumping trillions more dollars into the economy, one that’s already catapulting out of the worst of the Covid-19 epidemic, could lead to the kind of overheated conditions that trigger a new era of too much inflation — the kind that historically has required the Fed to hit the brakes, even if it means triggering recession.

    “My concern is that this is taking us further into substantial risk territory,” Larry Summers, the former top Obama and Clinton administration economic official, who has emerged as the most prominent Democrat warning of unintended consequences. “We either do what we did during Vietnam, which is explain inflation away and attribute it to transitory factors until we wake up one morning and we have 4 percent inflation expectations, or we aggressively try to contain it like we did after the Korean War and we have a recession. Both of those are substantial risks along with the risks to the dollar and of asset price bubbles.”

    Jared Bernstein, a member of Biden’s White House Council of Economic Advisers, said administration officials were not at all “dismissive” of concerns about inflation or overheating the economy — but that on balance they view the risks of doing too little as far greater than doing too much.

    He suggested that some significant portion of the next $3 trillion would be offset by proposed increases to corporate taxes and individual rates on the wealthy.

    “We recognize that corporations and the wealthy have disproportionately benefited from growth for many years now including over the pandemic,” he said. “Overall, this is a very concentrated package that hits a critical set of goals including knocking out the virus and putting it behind us and then an investment agenda to push back on structural inequalities that have long persisted, and doing so while injecting some much needed equity and fairness into the tax code.”

    Biden himself is expected to start facing questions about his new spending plans at a press conference on Thursday and at other events in the coming weeks. The president has already reiterated his campaign pledge that he’d like to reverse some of President Donald Trump’s tax hikes, pushing the corporate rate higher and raising individual rates on those making over $400,00 per year.

    Getting those kinds of tax hikes through would require the White House and Democrats in Congress to once again use the budget reconciliation process they employed to win passage of the $1.9 trillion Covid relief package. The process requires only a simple majority in the Senate, meaning every Democrat plus Vice President Kamala Harris casting the deciding vote.

    White House officials expect more details to come next Wednesday when Biden travels to Pittsburgh as part of the “Help is Here” tour touting the stimulus plan.

    The $3 trillion in further spending would include much more of Biden’s “Build Back Better” campaign agenda, including big investments in infrastructure and renewable energy, a White House official said. A second package could include other campaign promises on expanding free access to community college, universal kindergarten and more paid leave, all aimed at fighting economic inequality.

    Support for making these kinds of big investments, even without any GOP support, is fairly wide among Democrats who largely no longer care about debt and deficits. Covering the cost of these programs — which Biden highlighted as a priority on the campaign trail — is much less of a concern for the party than it was in recent decades.

    The growing concern on Wall Street is not just driven by Democrats’ spending plans. It also centers on Fed Chair Jerome Powell and his colleagues remaining strongly committed to keeping interest rates low for a long period of time and expressing little to no concern about the potential for higher inflation to take hold — particularly as the economy recovers from the pandemic and households prepare to deploy significant savings and stimulus checks on an expected wave of spending later this year and next year.

    To some investors and economists, inflation is already growing troublesome in higher housing and commodity prices even if the commonly used national gauges of inflation remain tame. Fears in the bond market about rising inflation, which reduces the value of current holdings, drove up yields on Treasury debt for several weeks, creating jitters across financial markets until Treasury yields moderated recently.

    Some Wall Street analysts still fear market turbulence ahead — particularly after record gains in the past year since the coronavirus crisis struck — that dents business confidence and slows an otherwise bright economic path.

    “Powell’s goal is to drive broad unemployment down and he wants to keep maximum liquidity in the system and to not adjust policy anytime soon,” said Andrew Slimmon, managing director at Morgan Stanley Investment Management. “The net result of highly pumped up liquidity is you start to create asset bubbles in many places.”

    Slimmon, like many on Wall Street, is not at all sure when the combination of massive federal spending and Fed easy-money policies will spark inflation that could lead to many of these bubbles bursting. “I don’t know why it hasn’t happened. But it could happen,” he said.

    Powell and the Fed, meanwhile, continue to suggest that somewhat higher inflation would be welcome after years in which price increases ran below the central bank’s 2 percent target.

    The central bank instead is trying to convince markets that it will not blink at the first sign of trouble and will let price levels rise slightly higher. Without that change in mindset, the Fed fears being stuck in a world where inflation runs below its target and rates are low forever.

    Closely tied to this is the Fed’s prediction (as well as that of Treasury Secretary Janet Yellen) that inflation later this year won’t be long-lasting.

    Progressive Democrats make similar arguments about Fed policy, suggesting fears of too much inflation are unfounded and that healing the labor market is far more important. They mostly say the same about concerns about the impact of rising debt and deficits.

    In previous Democratic regimes, including those of Clinton and Obama, White House officials including Summers often worried about bond market “vigilantes” exacting their toll on the economy.

    The fear was that deficits and debt would reach the point that bond investors would resist buying Treasury debt over fears about long-run sustainability. That would then lead to sharp spikes in interest rates, denting the economy.

    But those risks never materialized in a debilitating way. And so it should no longer be a concern, many progressives say.

    Critics of this view suggest that just because it hasn’t happened in recent years does not mean it can’t happen, especially if Congress and the White House are pumping $5 trillion more into the economy only partly offset by higher taxes or spending cuts elsewhere.

    “People have forgotten that prior to [former Fed Chair] Paul Volcker’s disinflation, the basic story of the American business cycle was that the economy overheated, generated inflation and then the Fed hit the brakes hard and the economy skidded into recession,” said Summers.

    Victoria Guida contributed to this report.

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