Washington passes another mega-stimulus, but do we really understand the risks?

By James Pethokoukis

Well, we’re off to the races. President Biden on Thursday signed the $1.9 trillion COVID-19 relief and stimulus bill. And while forecasts vary, it’s safe to say that the consensus is looking for a powerful economic surge. How much of a surge? Blip, boomlet, or boom? One key factor is how much Americans will spend over the next year and how much they will save, especially from those stimulus checks. People were fairly frugal with last year’s checks. Maybe they will spend more this time around if they’re more confident about the direction of the economy.

U.S. President Joe Biden signs the American Rescue Plan, a package of economic relief measures to respond to the impact of the coronavirus disease (COVID-19) pandemic, inside the Oval Office at the White House in Washington, U.S., March 11, 2021. REUTERS/Tom Brenner

Or maybe not. As JPMorgan economist Michael Feroli told clients this week in a research note, “Time will tell, but it shouldn’t take too long to tell: the checks will probably be disbursed before the end of the month, and the development over the past year of a number of high-frequency spending indicators should give an early read on how the checks are being used.”

What economists term “the marginal propensity to consume” is hardly the unknown here. Will the likely burst of inflation from this tsunami of cash become more than that? Might we be entering a period of higher and sustained inflation? And if the Federal Reserve gets a big surprise, then what? In a Bloomberg column, my AEI colleague Michael Strain realistically outlines how such a scenario could lead to an expansion-shortening recession.

Most Americans have probably heard little about potential downsides to the American Rescue Plan. And when risks have been mentioned in the media, they’ve often been presented with a dismissive tone. Concerns about spending $2 trillion just a couple of months after passing a $1 trillion plan are thought by some to reflect a sort of out-of-date economics. Again, time will tell.

Oh, and it’s not really a $2 trillion plan. As Alex Brill, another AEI colleague, pointed out in an AEIdeas blog post last week, “A better estimate of the cost of the House-passed American Rescue Plan is a permanent extension of the increased tax benefits. The benefits related to children would alone raise the total cost by roughly 75 percent from $1.9 trillion to $3.3 trillion over 10 years.” Likewise, AEI’s Jim Capretta argues that the ARP’s increased subsidies for insurance enrollment are also unlikely to get rolled back.

What did Washington just do, really? Time will tell.