Let’s be clear. One of the significant causes of the high inflation we are experiencing today is the Covid relief efforts made by the federal government in 2021. The question is, how do we move forward?
Joe Biden pushed for the enormous infusion of money into the American economy. He was President at an unprecedented time, when government health agencies were shutting down large segments of our economy in an effort to head off a medical and healthcare catastrophe from Covid.
He was also Vice President in 2009 when the country faced massive unemployment and an economic death spiral. His actions in 2021 were undoubtedly influenced by the government actions in 2009 and the results that we can now see from them.
In 2009, President Obama pushed for an economic relief package totaling over $1 trillion. The effort was led by then Treasury Secretary Larry Summers, the same Larry Summers who opposed the Biden relief package in 2021.
The Republicans in Congress pushed back in 2009 with the typical hackneyed conservative response to Democratic efforts: “tax and spend.” Time was of the essence. Summers and others saw that the economy in 2009 would very quickly spin into a devastating depression, as deep and as destructive as the 1930s.
The result was a compromise economic package of about $800 billion, which passed over strenuous Republican objections. Unfortunately, in hindsight, we can see that Obama and Summers were right and the Republicans were wrong.
The actions of the federal government stopped the death spiral in 2009, and a potential depression became “only” the “great recession.”
The longer term result of the underfunding of the recovery was that the American economy grew back out the Great Recession much more slowly than it could have. GDP growth bounced along just above or below 2% from 2010 to 2019. Republicans are quick to point out the feeble growth during the Obama years, but never mention that it was their intransigence in designing the 2009 relief package that caused it.
Biden faced the Covid recession with that recent history and did not want to repeat it. His empathy for working people recognized that the slow growth in 2010 to 2016 resulting in many Americans suffering mortgage foreclosures, homelessness, stagnant or reduced standard of living, and more.
Biden opted to err on the side of potentially too much federal intervention rather than (as in 2009) too little. It worked, initially. GDP growth in 2021 was a phenomenal 5.7% and unemployment has dropped from 12.3% in July 2020 to 3.6% in March 2022.
To be clear, it is much easier to see in hindsight that federal deficit spending was too high or too low. What was the right number in 2009? $800 billion, $850 billion, $900 billion? Perhaps economists today can say, but in 2009 it was impossible to tell.
Although Republicans love to cite Larry Summer’s recent warning of overspending, Summer said in March 2021, (according to New Yorker) “I think there is about a one-third chance that inflation will significantly accelerate over the next several years, and we’ll be in a stagflationary situation like the one that materialized between 1966 and 1969.” Summers said that there was also a one-third chance “that we won’t see inflation, but the reason we won’t see it is that the Fed hits the brakes hard, markets get very unstable, the economy skids downwards close to recession.” Finally, he added, there was “a one-third chance that the Fed and the Treasury will get what they are hoping for, and we’ll get rapid growth, which will moderate in a non-inflationary way.”
What was the right number in 2021? With the country reopening as the pandemic recedes, and the resulting rebound in consumer demand, perhaps $1.9 trillion was too much, contributing to the current inflation. But should it have been $1.7 trillion, $1.5 trillion, $1 trillion? We could not accurately tell in January 2021 and we will likely never know.
To alleviate human suffering, Biden erred on the side of doing too much. Now we need to deal with the resulting inflation, but let’s try not to overreact, sending the economy into a recession that would mean the human suffering was not eliminated but only delayed.