Why you shouldn’t nitpick over the details
By Paul Krugman
President 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 $1400 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 one percent.
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 percent 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.
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