[ad_1]
Wwelcome at Capital Note, a newsletter on business, finance and economics. On the menu today: Biden’s economic plan, Yellen’s debt dilemma, and deficits in a zero-interest world. To subscribe to Capital Note, follow this link.
CARES Act Redux
We published an editorial this morning on Biden’s stimulus package, which looks more like a structural economic reform package than an emergency spending bill.
The proposal includes, among others:
-
$ 1,400 checks to households, bringing the second round total to Trump’s preferred whole number of $ 2,000.
-
370 billion dollars in public and local aid.
-
170 billion dollars in public subsidies to education (essentially a backdoor supplement on public and local aid).
-
A weekly unemployment insurance supplement of $ 400, extended until September, after the current March deadline.
-
$ 160 billion in public health spending, with specific allocations for vaccine distribution, testing and emergency response teams.
-
An increase in the national minimum wage to $ 15 an hour.
The most striking thing about the proposal is its similarity to the CARES law of last March. All of its important articles – direct checks, rising unemployment, loan relief – were used by policymakers at the start of the pandemic almost a year ago. Congress implemented these measures to provide relief during a deep economic contraction and to try to keep Americans safe at home. But as our editorial points out, “Now that the vaccines are being administered, policymakers face a different challenge: not to keep Americans indoors, but to get them back to work as quickly as possible. Against this backdrop, President-elect Biden’s $ 1.9 trillion stimulus package misses the mark. “
As Robert Barro wrote for us in March:
One of the main policy responses to the coronavirus pandemic has been to curb economic activity in order to reduce the spread of contagion. I would characterize this policy decision to reduce US and global GDP in the near term by about 20%. It is essentially a deliberately implemented negative supply shock, akin to a sudden loss of productivity.
Policies such as improving unemployment insurance and direct controls could be interpreted as stimulus measures to the extent that they increased GDP growth, but they were also deliberately contractual. Congress has discouraged employment so workers can stay at home. When you want to reduce the supply of labor, it makes sense to strengthen UI and send money to households.
Now we want Americans to get back to work, and the only way to do that is to step up the pace of vaccination. The Biden plan gives only a superficial nod to public health measures, throwing a few billion in hospitals and testing centers and hoping the problem will go away. But public health efforts should be at the heart of Biden’s economics team.
And money alone won’t do. Much of the botched vaccine rollout is the result of convoluted eligibility rules. While the president-elect has expressed support for more lax eligibility criteria, it is hoped that his administration will be more ambitious in reducing bureaucratic barriers to vaccination.
Once the economy is opened, demand side measures will not be enough to stimulate GDP growth. Mainly because Biden is likely to limit production with tax hikes.
On the Web
Once a deficit hawk, Janet Yellen will soon manage a burgeoning federal debt:
When Ms Yellen served in the Clinton administration as chair of the White House Council of Economic Advisers, she was among those who pushed for a balanced budget. Today she has cautiously joined an emerging consensus focused on the left that more short-term borrowing is needed to help the economy, even without concrete repayment plans. At the heart of this view is the hope that interest rates will remain low for the foreseeable future, making debt financing more affordable.
the New York Times’ Nellie Bowles explores the exodus from San Francisco:
“I miss San Francisco. I miss the life I lived there, ”said John Gardner, 35, founder and CEO of Kickoff, a remote personal training start-up, which has packed his things and left in a motorhome. to travel America. “But right now it’s like: What can God, the world, and the government find to make the place less livable?”
A few months later, Mr. Gardner wrote, “Greetings from the sun from Miami Beach! This is about the 40th location where I have set up a temporary headquarters for Kickoff. “
Random walk
On the topic of big spending, I extract part of Olivier Blanchard’s presidential address to the American Economic Association of 2019, which explains how low interest rates can lower the fiscal cost of public debt:
Not only are current interest rates low, they are lower than growth rates. For example, the 10-year forecast for nominal growth rates in the United States is roughly 1% higher than that for nominal interest rates on US government bonds. The difference is even greater in the other major advanced economies: 2.3% for the United Kingdom, 2% for the euro area and 1.3% for Japan. If this inequality persists in the future, the debt has no budgetary cost. In other words, higher debt does not have to mean higher taxes. The government can simply roll over the debt, issue new debt to pay the interest, and the debt will grow at the interest rate. But output will increase at the rate of growth, and if the rate of growth exceeds the interest rate, the debt-to-GDP ratio will decrease over time without ever having to raise taxes.
Second, the social costs are probably low.
The fact that such debt renewal is feasible does not imply that it is desirable. Higher debt crowds out capital accumulation, which reduces future potential output. The problem is, what does it do for future consumption? This is an old question of macroeconomics, explored, among others, by Paul Samuelson and Peter Diamond. The standard answer is that whether consumption increases or decreases depends on the dynamic efficiency of the economy. This condition in turn depends on the relationship between the interest rate and the growth rate. If the interest rate is lower than the growth rate, then the economy is dynamically inefficient, and as capital accumulation and production decline, consumption actually increases. The question in the real world, however, is what “interest rate” should be used for this comparison. Should it be the average rate of return on capital, which is significantly higher than the growth rate? Or, because people are risk-averse, should it be the risk-adjusted rate of return on capital, which is simply the safe rate and is less than the growth rate?
– DT
To subscribe to Capital Note, follow this link.
Learn more about National Review
[ad_2]
Source link