Feb 11, 2021 - Economy

The stimulus debate: Is it too big?

Illustration of a large coin squeezing into a small U.S.-shaped wallet

Illustration: Annelise Capossela/Axios

Can too much federal spending cause the economy to overheat? And is that a real risk of the Biden administration's $1.9 trillion economic rescue plan? The consensus answers to those questions are yes and no, respectively.

Why it matters: Fear of inflation has emerged as the single biggest reason for Democrats and Republicans to oppose the latest round of stimulus. For the time being, however, most economists expect that inflation will remain subdued, even if the full package is enacted.

Driving the news: Former Treasury secretary and semi-professional Democratic Party picnic skunk Larry Summers sparked a wonkish firestorm last week with an op-ed declaring that the package is too big. In doing so, he successfully managed to set the macroeconomic terms of the stimulus debate.

  • The risk, as Summers sees it: That more money will be spent domestically than the American economy has capacity to absorb. When that happens, prices can end up rising, in a process known as demand-pull inflation, as consumers compete with their dollars for a finite set of resources.
  • The losers from inflation are savers and anybody living on a fixed (non-inflation-adjusted) income. The winners are generally fixed-rate debtors, which includes most Americans with mortgages.

The big picture: The broad economic consensus, both within and outside the Biden administration, is that the magnitude of the current crisis necessitates a very large response, and that $1.9 trillion is not too big.

  • Most economists, however, agree that in principle there is such a thing as too much government spending, even if we're not yet at risk of reaching that point.

What they're saying: "Could fiscal policy push things too far? Sure," says Stony Brook economist Stephanie Kelton.

  • "Do I think the proposed $1.9 trillion puts us at risk of demand-pull inflation? No. But at least we are centering inflation risk and not talking about running out of money. The terms of the debate have shifted."

Between the lines: Fear of runaway inflation could be overblown, especially in an economy where weak or nonexistent unions have little power to negotiate above-inflation wage deals.

  • The official position from Fed chair Jay Powell, speaking at an event on Wednesday, is that "there could be upward pressure on prices" as the economy reopens, but that any such pressure is likely to be "neither large nor sustained."
  • Besides, if inflation ticks up, says Treasury Secretary Janet Yellen, "we have the tools to deal with that risk." As a former chair of the Federal Reserve, she is better placed than almost anybody to make that claim — it is the Fed that's charged with raising interest rates when inflation risks going too high.

How it works: Rising inflation is not always a bad thing. In moderation, it's exactly what the Fed wants.

  • If a fast-growing economy caused rising inflation and the Fed raised rates to slow growth to a more sustainable level, that could normalize interest rates and inflation after more than a decade when both of them have been abnormally low.

A separate worry is that another round of stimulus checks could serve to push an already-frothy stock market even higher. If the stock market bubble were to burst, that might cause a significant loss of wealth.

  • Most stock market wealth is held by the rich, however. A stock-market crash, combined with unemployment assistance and other help for the poor, would help to reduce inequality — and might not even do much harm to economic growth.

The bottom line: As Mae West famously said, too much of a good thing can be wonderful. When weighing the potential risks of spending too much, it's important to bear in mind the potential benefits, too — including a wealthier, healthier populace.

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