Pandemic rescue: It’s ‘and’ not ‘or’
By Paul Krugman
President Joe Biden is proposing a large relief package to deal with the continuing fallout from the coronavirus. The package is expansive, as it should be. But it is, predictably, facing demands that it be scaled back. Which, if any, of these demands have some validity?
We can discount opposition from Republican leaders who have suddenly decided, after years of enabling deficits under Trump, that federal debt is a terrible thing. We’ve seen this movie before, during the Obama years: Republicans oppose economic aid not because they believe it will fail but because they fear it might succeed, both helping Democrats’ political prospects and legitimizing an expanded role for government.
But there are also some good-faith objections to parts of the Biden proposal, coming from Democrats like Joe Manchin and progressive economic commentators like Larry Summers. What these commentators object to, mainly, are plans for broadly distributed “stimulus checks” (they aren’t checks and they aren’t stimulus, but never mind): payments of $1,400 to many families.
I’m posting this note to explain why I believe that these objections are wrong. To be more precise, I’d argue that these critics are giving the right answer to the wrong question.
Let’s start from common ground: The main purpose of the proposed plan isn’t stimulus, it’s disaster relief. The U.S. economy will remain depressed as long as the pandemic is rampant, so the goal is to help those parts of our society hit hard by the constrained economy to make it through with minimum damage. This includes families with unemployed workers, state and local governments that can’t run deficits and are taking a financial hit, and businesses hurt by lockdown.
The core of the package, then, is aid to these afflicted groups — enhanced unemployment benefits, aid to state and local governments, and business financial relief. And these things, along with specific pandemic and vaccine funding, account for most of the proposed outlays.
The controversial part is those broad-based grants to families, many of which would go to Americans who are doing OK. And the critics are right to say that many of those who would receive payment wouldn’t need the money.
Where they go wrong is in assuming that the stimulus checks (I’ll call them that, since everyone else does) are in competition with the other parts of the package.
The fact is that the U.S. government is not financially constrained. It has no trouble borrowing, and borrowing is very cheap, with the 10-year interest rate barely above 1%.
This interest rate is far below the economy’s expected growth rate. The Congressional Budget Office expects the dollar value of potential GDP — output at full employment — to grow at an annual rate of 3.7% over the next decade. What this means is that borrowing now will not store up big burdens for the future: Any debt we incur will tend to melt away as a share of GDP over time.
So there isn’t a relevant dollar limit on the amount we can spend on economic rescue. The constraints are, instead, political: The crucial thing is to build enough support for aid to those who do need it.
And stimulus checks would help build that support, for two reasons.
One is that the checks would play a useful role. Unemployment benefits won’t reach everyone hurt by the pandemic, so some of the outlays on broad payments would reach people who need help. They wouldn’t be as well targeted as other aid, but again, money is not the constraint here.
The other is that stimulus checks are both very popular and something Democrats have promised. So why not honor that promise and do something that builds support for all the measures in the rescue package?
Put it this way: Given the economic and political situation we’re in, stimulus checks are an “and,” not an “or.” They’re complementary to other emergency relief, not in competition with it.
What about concerns that we’ll end up providing too much aid and that it will be inflationary?
I’m actually an optimist about near-term economic prospects. There’s a quite good chance that the economy will come roaring back late this year, once vaccinations have produced herd immunity and Americans can resume normal life. If and when that happens, the economy won’t need whatever stimulus the rescue package is still providing.
But so what? We’ll be coming out of the pandemic with inflation still below the Fed’s target, and it would do little harm to overshoot that target and run the economy hot, leading to a bit of excess inflation — and a bit is all that would happen, because inflation responds slowly to economic conditions. If the boom gets big enough and goes on long enough that inflation actually starts to look like a concern, the Fed can always rein it in by modestly raising interest rates.
We need to remember the lesson of the 2009 stimulus: The risks of doing too little are much bigger than the risks of doing too much. Do too little, and you probably won’t get a second chance; do too much, and the Fed can easily contain any pickup in inflation.
So please, don’t nitpick this plan. Not every dollar has to be spent in the best possible way. Speed, simplicity and broad support, not purity, are of the essence.