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The US should now be encouraging spending

President Biden’s fiscal stimulus is not only big news for Americans, but it also presents opportunities for the globe. This is the most significant shift back to fiscal policy as a way of stimulating economic activity, away from from the monetary policy strategy of the 2007-8 recession. Importantly, this package adds to the $4 trillion Congress has already approved to support the US economy: the aid in total amounts to over a quarter of US gross domestic product in 2019. To break down the stimulus plan a little further, it includes: a cheque of $1,400 for most Americans, a boost to unemployment benefit and aid to state and local governments. Above all, economic relief for those who have lost employment through no fault of their own is the most significant and moral part of this American Rescue Plan.

However, Republicans are right when they voice concerns over the amount of money being spent, considering economists such as Obama adviser Larry Summers, have argued that Biden’s fiscal stimulus will bring destabilising inflationary pressures. But his has been exaggerated. Firstly, nearly 40% of the funding is for local and state governments to fund mass inoculations: this seems unlikely to significantly boost GDP. It is important to remember that subsidises for individuals are not the same as public sector investment nor tax cuts, it is simply a one-off windfall amount. This is unlikely to cause such inflationary pressures.

Indeed, the previous economic relief from the Trump administration had limited impact on inflation: people saved these windfall amounts rather than spent them. What’s more, delving a little deeper into recent US economic history provides more confidence. Trump’s more permanent tax cuts in 2017, amounting to $1.5 trillion worth of relief, did little to change inflationary pressure. Investors in the bond market agree. The US break-even curve shows that investors think inflation from the stimulus will in fact be short-lived.

Instead, the issue we should be discussing is how to get people to spend rather than ‘sit’ on their cash. Predictions on the 21-top richest countries suggest that an additional $3 trillion is being saved rather than spent. It is perhaps obvious but nonetheless important to remember that the recession ravaging the world is unlike previous ones. In a usual recession, people experience falling incomes, but ‘pandemic governments’ have instead helped to keep businesses and individuals afloat through furloughs and funding. Lockdown has additionally reduced opportunities to spend. Of course, getting jabs into arms should be the priority, but after mass inoculations, the focus must be on how to boost consumer spending.

Admittedly, America is perhaps in a better position compared to the rest of the rich world in terms of its post-lockdown economic health. American fiscal stimulus has meant low-income Americans have saved more than the rich relative to incomes; this is unusual. As lower-income households tend to have a higher propensity to consume, this should provide some small assistance to Biden.

Image: US dollars via Pixabay

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