{"id":46602,"date":"2020-12-30T12:35:19","date_gmt":"2020-12-30T02:35:19","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=46602"},"modified":"2020-12-30T12:35:19","modified_gmt":"2020-12-30T02:35:19","slug":"is-the-us900-billion-stimulus-in-the-us-likely-to-overheat-the-economy-part-1","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=46602","title":{"rendered":"Is the $US900 billion stimulus in the US likely to overheat the economy – Part 1?"},"content":{"rendered":"

\t\t\t\tComments made last week by the former Clinton, Obama and now Biden economist Lawrence Summers contesting whether it was sensible for the US government to provide a $US2,000 once-off, means-tested payments was met with widespread derision and ridicule from progressive commentators. There were Tweets about eviction rates, bankruptcy rates, poverty rates, and more asserting that the widespread social problems in the US clearly meant that Summers was wrong and a monster parading as a progressive voice in the US debate. I didn’t see one response that really addressed the points Summers was making. They were mostly addressing a different point. In fact, the Summers statement makes for an excellent educational case study in how to conduct macroeconomic reasoning and how we need to carefully distinguish macro considerations from distributional considerations, even though the two are inextricably linked, a link that mainstream macroeconomics has long ignored. So while Summers might have been correct on the macro issues (we will see) he certainly wasn’t voicing progressive concern about the distributional issues and should not be part of the in-coming Administration. This is Part 1 of a two-part analysis. In Part 2 we will do some sums. In this part, we will build the conceptual base.
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Two levels of analysis involved<\/h2>\n

Laurence Summers was interviewed by Bloomberg (December 24, 2020) – $2,000 Stimulus Checks Don’t Make Sense, Says Larry Summers<\/a>.<\/p>\n

I wrote about Summers in this blog post – Being shamed and disgraced is not enough<\/a> (December 18, 2009).<\/p>\n

My assessment of him has only deteriorated since.<\/p>\n

He will occupy a senior economics position in the incoming US administration.<\/p>\n

Pity America.<\/p>\n

Here is the – (edited) transcript of the interview from Bloomberg:<\/p>\n

\n… I don’t think the two thousand dollar checks make much sense. The real issue is going to be sustaining this expansion. Think about it. The nine hundred and eight stimulus bill probably would pay out two hundred two hundred and fifty billion dollars a month for the next three months.<\/p>\n

The level of compensation is running about 30 billion dollars a month below what we would have expected it would. GDP is running about 70 billion dollars a month below what we would have expected it would. So in a way that’s quite unprecedented. We have stimulus already much more than filling out a hole. <\/p>\n

And given that lots of a hole is from the fact not that people don’t want to spend but that they can’t spend because they can’t take a flight and they can’t go to a restaurant.<\/p>\n

I don’t necessarily think that the priority should be on promoting consumer spending beyond where we are now. So I’m not even sure that I’m so enthusiastic about the six hundred dollar checks. And I think taking them to two thousand dollars would actually be a pretty serious mistake that would risk a temporary overheat.<\/p>\n

I would like to see more assistance to state and local governments. I would like to see more money put into testing more money put into accelerating of vaccines.<\/p>\n

But gosh David I think it would be a real mistake to be going to two thousand dollars. And I have to say that when you see the two extremes agreeing you can almost be certain that something crazy is in the air. And so when I see a correlation of Josh and Bernie Sanders and Donald Trump getting in behind that idea I think that’s time to run for cover.<\/p>\n

And I know that many of my fellow Keynesians who believe in fiscal stimulus will likely be in favor of this. But sometimes there can be too much too poorly designed of even a basically good idea. And that’s my reaction to two thousand dollar stimulus …\n<\/p><\/blockquote>\n

Almost as soon as the interview was made public, progressives went wild.<\/p>\n

They pointed out the harm done by COVID to workers and their families, the impending rent eviction maelstrom, the rising mortgage defaults, and all sorts of other social pathologies that are threatening social stability in the US and have been increasing over the last several decades.<\/p>\n

The problem is that these responses didn’t really address the issue that Summers was making.<\/p>\n

The critics were largely constructing their claims in terms of Summers being a heartless so-and-so who didn’t have a progressive bone in his body and was just reverting to form (of the type I discussed in the blog post linked to above).<\/p>\n

I have sympathy with that assessment of the man.<\/p>\n

But in doing, the critics failed to contest the actual point he was making – a macroeconomic point.<\/p>\n

There were thus two levels of analysis at work:<\/p>\n

1. A macro analysis of output gaps (Summers).<\/p>\n

2. A distributional assessment of how existing resources and income is distributed in the US (the critics)<\/p>\n

Summers might be correct on (1) but sadly lacking on (2).<\/p>\n

We need to carefully separate the arguments.<\/p>\n

Lawrence Summers was making a macroeconomic point that simply is this.<\/p>\n

1. We define potential output where all productive resources are fully employed and no further output can be produced<\/p>\n

2. An output gap forms when the current level of spending in the economy drives output below the potential level. This is an indication of how much extra spending is required, taking into account the multiplier effets that follow spending injections, to move the economy back to potential.<\/p>\n

3. Driving spending growth beyond that full employment capacity will probably introduce demand-pull inflationary pressures as firms exhaust their capacity to produce and respond to the increasing spending demand by pushing up prices.<\/p>\n

So Summers believed that the $US900 stimulus alone would threaten that limit.<\/p>\n

Adding another $US1,400 to the cash handout would, in his view, push the economy past the limit.<\/p>\n

That assertion is empirically testable (see below) although the frameworks we use to conduct that sort of analysis is ridden with conceptual and measurement problems which means that we are doing art rather than science.<\/p>\n

But within the notion of ‘ball park’ estimates, we can make some statements that bear on whether Summers was correct in his analysis.<\/p>\n

However, and this is the important point – there is no guarantee that at full capacity, the well-being of the people, the fortunes of the least privileged, the scope and quality of government services, etc – will be at any levels considered desirable.<\/p>\n

At the extreme, a nation could be producing all sort of military equipment and all the workers and productive capital fully employed, but with the majority living in abject poverty.<\/p>\n

The output gap might be zero – but the society is devastated by poverty and disease.<\/p>\n

So within that spending room, there is a debate that to be had about what initiatives are best – so Summers favoured health care and assistance to sub-federal governments rather than a $US2,000 cash handout.<\/p>\n

I found that part of his assessment disclosed his own preferences, which progressives might find rather offensive, but doesn’t make him wrong.<\/p>\n

So here are some deeper considerations.<\/p>\n

The NAIRU redux<\/h2>\n

The following blog posts cover past writing on the NAIRU:<\/p>\n

1. The NAIRU\/Output gap scam reprise<\/a> (February 27, 2019).<\/p>\n

2. The NAIRU\/Output gap scam<\/a> (February 26, 2019).<\/p>\n

3. No coherent evidence of a rising US NAIRU<\/a> (December 10, 2013).<\/p>\n

4. Why we have to learn about the NAIRU (and reject it)<\/a> (November 19, 2013).<\/p>\n

5. Why did unemployment and inflation fall in the 1990s?<\/a> (October 3, 2013).<\/p>\n

6. NAIRU mantra prevents good macroeconomic policy<\/a> (November 19, 2010).<\/p>\n

7. The dreaded NAIRU is still about!<\/a> (April 6, 2009).<\/p>\n

I also have written books, PhD theses and many Op Eds about this topic.<\/p>\n

Here is a summary of the Non-NAIRU facts which taken together provide strong evidence against the dynamics implied by the NAIRU approach:<\/p>\n