Biden Goes Big
Feb 1, 2021JOSEPH E. STIGLITZ
The US president's proposed $1.9 trillion recovery package will provide
enormous stimulus to the economy. The economic growth that results will
generate substantial tax revenues, not just for the federal government but also
for the states and municipalities that are now starved of the funds they need
to provide essential services.
NEW YORK – US President Joe Biden has proposed a $1.9
trillion rescue plan to help the American economy recover from the pandemic.
Many Republicans oppose it, suddenly
consumed with the fiscal religion they unceremoniously abandon whenever their party controls the White House.
The massive tax cuts the GOP bestowed on billionaires and corporations in 2017
resulted in the highest US fiscal deficits on record, outside of a deep
recession or war. But the promised investment and growth never materialized.
By contrast, Biden’s proposed spending plan is
urgently needed. Recently released data show a slowdown in America’s recovery
both in terms of GDP and employment. There is
overwhelming evidence that the recovery package will provide enormous stimulus
to the economy, and that economic growth will generate substantial tax
revenues, not just for the federal government but also for the states and
municipalities that are now starved of the funds they need to provide essential
services.
Opponents of the Biden plan also disingenuously warn
against inflation – that lurking bogeyman that is more fantasy than real threat
nowadays. Indeed, some data suggest that wages may be falling in parts of
the economy. But if inflation does emerge, the US has ample monetary
and fiscal tools at the ready.
The economy would, of course, be better off without
zero interest rates. It would also be better if policymakers raised taxes by
imposing levies on pollution and restoring greater progressivity to the tax
system. There is no valid reason why the richest Americans should pay lower
taxes as a percentage of their income than those who are far less well off.
Given that wealthy Americans have been the least affected, medically or
economically, by the coronavirus pandemic, America’s regressive tax system has
never looked uglier.
We have seen how the pandemic has ravaged some sectors
of the economy, leading to high rates of firm closure, especially among small
businesses. There is a real risk that not passing a large recovery package will
do enormous, and possibly long-lasting, damage. This is because poor economic
performance heightens economic anxiety (compounding the anxiety induced by the
pandemic itself), leading to a downward spiral in which precautionary behavior
lowers consumption and investment, further weakening the economy.
Indeed, whatever the cause, weak balance sheets and
business failures fuel a contagion that will infect the entire economy, with
powerful hysteresis effects coming into play. After all, firms that have gone
bankrupt in the pandemic will not un-bankrupt themselves when COVID-19 is
brought under control.
The fact that COVID-19 is a pandemic – global in scope
– makes matters worse. While the best available data suggests that many
developing countries and emerging markets have not been hit as badly as
people feared they would be a year ago, the global economy’s unprecedented
slowdown implies softening demand for US exports.1
Poorer countries don’t have the resources to support
their economies that developed countries do. China played a big role in the
recovery from the 2008 global financial crisis; but even though it was the only
large economy to grow in 2020, its recovery was markedly weaker than in the aftermath
of that 2008 crisis (when annual GDP growth exceeded 9% and 10% in 2009 and
2010, respectively). China is also now allowing its trade surpluses to grow,
providing less impetus to global growth.
Because the Biden plan incorporates the key features of
what must be done, it promises to yield large returns. A first priority is to
ensure that funds are available to fight the pandemic, to enable children to
return to school, and to allow states and localities to continue to provide the
health, education, and other services that people depend on. Extending
unemployment insurance will not only help the vulnerable. By providing
reassurance, it will lead to an increase in spending, with economy-wide
benefits.
The moratorium on evictions through March 31 and assistance
to low-income families will also encourage spending. More generally, it is well
established that the poor have a high propensity to consume, so a package
directed at increasing incomes at the bottom (including an increase in the
minimum wage, child credits, and the earned income tax credit) will help revive
the economy.
Under President Donald Trump, the programs that
focused on small businesses were not as effective as they could or should have
been – partly because too much of the money went to businesses that were not
really small, and partly because of a rash of administrative problems. It
appears that the Biden administration is fixing those problems. If so,
expanding aid to businesses will not only help in the short run, but will also
put the economy in good stead as the pandemic wanes.
Economists no doubt will argue about every feature of
the program’s design – how much money should go here or there; what the
threshold should be for receiving cash benefits; and the optimal triggers for
scaling down the unemployment insurance program. Reasonable people can disagree
about these details. Adjusting them is part of the stuff of which political
compromise is made.
But where there should be no disagreement is that
large amounts of money are needed urgently, and that opposition to it is both
heartless and dangerously short-sighted.
Writing for PS since 2001
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Joseph E.
Stiglitz, a Nobel laureate in economics and University Professor at Columbia
University, is Chief Economist at the Roosevelt Institute and a former senior
vice president and chief economist of the World Bank. His most recent book
is People, Power, and Profits: Progressive Capitalism for an
Age of Discontent.
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