Stimulus Misgivings

President Biden said publicly last week:

... There is a consensus among economists left, right, and center that is over -- and including the IMF and in Europe, that overwhelming consensus is, in order to grow the economy a year, two, three, and four down the line, we can’t spend too much.

Put bluntly, this lie is Trump-worthy in scale. 

My view is that there is a consensus amongst politicians that they like having an excuse to spend more money.

Check out this piece from Olivier Blanchard. He's a macroeconomist from MIT who most definitely is not on the right of the political spectrum. It's entitled "In Defense of Concerns Over the $1.9T Relief Plan".

Blanchard does some "back of the envelope" calculations. His high end estimate of the size of the output gap for the U.S. at $900B. He also notes that the current Biden proposal of $1,900B comes on top of December's stimulus package of $900B. If $2,800B is what is needed to fill a $900B output gap, this implies a multiplier of less than a third. Blanchard does not find that credible, and thus concludes that the Biden plan will overstimulate the economy.

The side effect of overstimulation is inflation. Blanchard predicts it will go up if Biden's plan is passed. 

Having said all that, he does understand the politics involved:

There are the political realities: a window of opportunity that may close in the future, the advantage of a hot economy during the midterm election season, the notion that sending Americans anything less than $1,400 dollar checks would be reneging on a promise; and there are other economic issues I have not discussed: what private demand would have been in the absence of the package, the timing of state and local government spending, the room the stimulus leaves for an infrastructure program, the ability of the Fed to control incipient inflation, and so on. All these issues are relevant and need to be discussed.

Even so, he concludes: "In the end, if the full package passes, it may be that everything turns out fine, but this is not my central scenario."

Blanchard is not the only economist on the left that is worried about the Biden proposal. Larry Summers and Jason Furman have also voiced their concerns.