Biden risks the future to juice the present

On the Democrats' risky relief package and the impending return to slow growth

President Biden.
(Image credit: Illustrated | iStock)

America is about to run a pretty wild experiment. And hardly a riskless one. After the nearly $2 trillion American Rescue Plan is passed and signed, Washington will have committed more than $5 trillion in fiscal support since the start of the COVID-19 pandemic. That's an amount equal to 25 percent of the pre-pandemic 2019 economy. No other country in the world is pumping money into their economy quite like the United States. Even if the ginormous ARP were half or even a quarter of its current size, the economy's output gap — the difference between where the economy is and where it probably should be based on its underlying potential — would probably be closed sometime this year.

So this grand fiscal experiment is a choice rather than a necessity. The cautionary case against making that choice is straightforward: A tsunami of nearly $2 trillion of government spending, when combined with some $2 trillion in excess savings, could fuel such a spending binge in a reopened economy that inflation will soar like crazy. If that surge is beyond current expectations, the Federal Reserve might have to raise interest rates faster and farther than now expected, short-circuiting the strong jobs and wage recovery. (And all this would be happening, as I wrote recently in The Week, against longer-term changes in demographics and globalization that could make the advanced economies more susceptible to inflation.)

Subscribe to The Week

Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.


Sign up for The Week's Free Newsletters

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

Sign up
To continue reading this article...
Continue reading this article and get limited website access each month.
Get unlimited website access, exclusive newsletters plus much more.
Cancel or pause at any time.
Already a subscriber to The Week?
Not sure which email you used for your subscription? Contact us
James Pethokoukis

James Pethokoukis is the DeWitt Wallace Fellow at the American Enterprise Institute where he runs the AEIdeas blog. He has also written for The New York Times, National Review, Commentary, The Weekly Standard, and other places.