Read on Twitter
My colleague Olivier Blanchard lays out the case for concern about the Biden stimulus package. https://www.piie.com/blogs/realtime-economic-issues-watch/defense-concerns-over-19-trillion-relief-plan via @PIIE
Let's walk thru the numbers briefly. First, let's assume vaccines work and get us reasonably close to normal by late summer. If not, spending will remain subdued and we'll be glad of having a large long-lasting stimulus package. 1/n
It is plausible that $1.6T of excess household savings piled up in 2020 would start to be spent in late 2021. The $0.9T package in December 2020 ought to be enough to get us to potential by 2022Q1, even if you think potential is higher than CBO. 2/n
Adding another $1.9T on top of that could put us 9% above potential, something that only ever happened in WWII. Yet Edelberg and Sheiner of Brookings, looking at the same data, project only 1% above potential. 3/n https://www.brookings.edu/blog/up-front/2021/01/28/the-macroeconomic-implications-of-bidens-1-9-trillion-fiscal-package/
The difference is that E&S assume no spendout from the 2020 savings bulge and they assume the $0.9T and $1.9T packages enter into final spending very slowly over 3 years. Also, they assume no further fiscal stimulus and perhaps some shortfall in output without stimulus. 4/n
I am somewhere between Blanchard and E&S. I would like the package to be as conditional as possible on economic (and health) outcomes, so that spending is reduced if not needed. But some overshooting is actually desirable. 5/n
We need to find out where potential truly is. We also need to overshoot on inflation to offset years of undershoots. And we need to give the Fed the opportunity to raise its inflation target to better combat the zero bound on interest rates. 6/6
