AI
Friday, April 02, 2021 9:57:51 AM
There's no 'overnight' in the article and there is precedent for a much smaller Stimulus helping to kick off the longest bull market in history, job growth, decline in unemployment and recovery of GDP.
Everything you read is gloomy? Apparently you don't read widely enough and you read through the eyes of an economic ideologue discounting what conflicts with your conservative dogma.
What would you suggest in place of the Biden Stimulus, more tax cuts?
The wild card, the uncertainty, about how well the economy will recover, lies in just how much longer irresponsible leadership at the state and local level continues to encourage irresponsible COVID related behavior.
https://www.brookings.edu/blog/up-front/2021/01/28/the-macroeconomic-implications-of-bidens-1-9-trillion-fiscal-package/
The Economic Effects of the Biden Package
Figure 2 shows the breakdown of the effects on GDP by our four categories of aid layered over our baseline projection of real GDP with no additional support. The largest effect stems from the roughly $750 billion for COVID-19 containment and vaccination, aid to state and local governments, and increased federal spending (the dark green region), because of both the magnitude of the federal outlays and our assessment that the MPCs out of this aid are relatively large.
The smallest effect stems from the roughly $150 billion for business aid (the dark purple region), because the outlays are relatively small and the effect on GDP per dollar of outlay is relatively modest. As a result of the expected path of federal outlays and the estimated effects of those outlays, the largest boost to GDP is projected to occur in the fourth quarter of 2021.
The estimated effects per dollar of total fiscal outlay for each of the four categories are shown in figure 3. Aid to financially vulnerable households (shown by the light green line) has the largest effect on GDP—boosting it by almost than 10 cents per dollar of aid in the second quarter of 2021, with a peak effect of about 25 cents in the first quarter of 2022. The GDP effect changes over time for several reasons. First, for this category of aid, federal outlays are assumed to be disbursed over a few quarters. Second, we expect that households will spread their spending out over two years, partly in response to an expected temporary increase in prices, with three-quarters of the response in the first year and the remainder in the second. And third, the fiscal multipliers take time to increase production and GDP. From 2021 to 2023, aid to financially vulnerable households is estimated to boost cumulative GDP by about $1.20 (as shown in the inset box).
Aid to businesses (shown by the dark purple line) has the smallest effect on GDP. From 2021 to 2023, aid to businesses is estimated to boost GDP by about 30 cents for each dollar of total fiscal outlay in this category.
The other two categories, COVID containment, aid to state and local governments, and federal spending as well as direct aid to families, have similar effects on GDP, peaking at about 10 cents per dollar of fiscal outlays by the end of 2021, and having cumulative impacts of 70 cents and 80 cents per dollar, respectively, over the 2021 to 2023 period.
Our GDP projection given enactment of the $1.9 trillion fiscal aid package shows an economy outpacing its pre-pandemic projected path in 2021 and 2022, and then smoothly coming back close to it in 2023. The economy was strong in early 2020 before the pandemic began, with unemployment at just 3.5 percent. At the time, CBO projected that GDP would be just slightly above its projection of potential—the maximum sustainable level of output—through the end of 2023. With enactment of the fiscal aid package, GDP would be projected to be even further above that projection of potential: by about 2 percent at the end of 2021, 1 percent at the end of 2022, and just a touch above at the end of 2023.
With GDP expected to exceed potential output over the course of 2021, we are uncertain whether the landing will be as soft as we project. For example, businesses may misinterpret a temporary increase in demand as a permanent one, leading to overinvestment in the near term and a somewhat sharp contraction in investment when the surge in demand abates. That outcome seems less likely if the surge in GDP is predominantly in sectors of the economy that were suppressed during the pandemic—such as dining, travel, entertainment, and medical services. However, the magnitude of the $1.9 trillion fiscal package may be so large that the increase in demand would be broad, increasing the chances of a somewhat more painful adjustment in economic activity.
Moreover, the effects of the COVID-19 recession may have reduced potential output, suggesting an even larger overshooting or, in other words, a larger positive projected gap between GDP and potential output if the package were enacted. For example, as a result of the pandemic and recession, the potential labor force may be smaller if workers have permanently left the labor force or immigration is reduced for some time. In addition, declines in investment in 2020 may have persistently reduced the size of the capital stock. Indeed, in July 2020, CBO lowered its estimate of potential GDP, alluding to some of those factors.
In our view, however, better containment of the pandemic and a stronger economy could to some degree reverse the factors that have dampened potential output.
As a result, a comparison of the projected GDP path with enactment of the package and CBO’s projection of potential output in July 2020 would overstate the size of the positive output gap that would result.
In our view, if the $1.9 trillion package were enacted in full, the path of potential output would be between CBO’s January 2020 and July 2020 estimates. That would imply that, with the enactment of the package, GDP would be a little over 2 percent above potential output at the end of 2021 and then above by a more modest 1 percent at the end of 2022. See the technical appendix here.
Everything you read is gloomy? Apparently you don't read widely enough and you read through the eyes of an economic ideologue discounting what conflicts with your conservative dogma.
What would you suggest in place of the Biden Stimulus, more tax cuts?
The wild card, the uncertainty, about how well the economy will recover, lies in just how much longer irresponsible leadership at the state and local level continues to encourage irresponsible COVID related behavior.
https://www.brookings.edu/blog/up-front/2021/01/28/the-macroeconomic-implications-of-bidens-1-9-trillion-fiscal-package/
The Economic Effects of the Biden Package
Figure 2 shows the breakdown of the effects on GDP by our four categories of aid layered over our baseline projection of real GDP with no additional support. The largest effect stems from the roughly $750 billion for COVID-19 containment and vaccination, aid to state and local governments, and increased federal spending (the dark green region), because of both the magnitude of the federal outlays and our assessment that the MPCs out of this aid are relatively large.
The smallest effect stems from the roughly $150 billion for business aid (the dark purple region), because the outlays are relatively small and the effect on GDP per dollar of outlay is relatively modest. As a result of the expected path of federal outlays and the estimated effects of those outlays, the largest boost to GDP is projected to occur in the fourth quarter of 2021.
The estimated effects per dollar of total fiscal outlay for each of the four categories are shown in figure 3. Aid to financially vulnerable households (shown by the light green line) has the largest effect on GDP—boosting it by almost than 10 cents per dollar of aid in the second quarter of 2021, with a peak effect of about 25 cents in the first quarter of 2022. The GDP effect changes over time for several reasons. First, for this category of aid, federal outlays are assumed to be disbursed over a few quarters. Second, we expect that households will spread their spending out over two years, partly in response to an expected temporary increase in prices, with three-quarters of the response in the first year and the remainder in the second. And third, the fiscal multipliers take time to increase production and GDP. From 2021 to 2023, aid to financially vulnerable households is estimated to boost cumulative GDP by about $1.20 (as shown in the inset box).
Aid to businesses (shown by the dark purple line) has the smallest effect on GDP. From 2021 to 2023, aid to businesses is estimated to boost GDP by about 30 cents for each dollar of total fiscal outlay in this category.
The other two categories, COVID containment, aid to state and local governments, and federal spending as well as direct aid to families, have similar effects on GDP, peaking at about 10 cents per dollar of fiscal outlays by the end of 2021, and having cumulative impacts of 70 cents and 80 cents per dollar, respectively, over the 2021 to 2023 period.
Our GDP projection given enactment of the $1.9 trillion fiscal aid package shows an economy outpacing its pre-pandemic projected path in 2021 and 2022, and then smoothly coming back close to it in 2023. The economy was strong in early 2020 before the pandemic began, with unemployment at just 3.5 percent. At the time, CBO projected that GDP would be just slightly above its projection of potential—the maximum sustainable level of output—through the end of 2023. With enactment of the fiscal aid package, GDP would be projected to be even further above that projection of potential: by about 2 percent at the end of 2021, 1 percent at the end of 2022, and just a touch above at the end of 2023.
With GDP expected to exceed potential output over the course of 2021, we are uncertain whether the landing will be as soft as we project. For example, businesses may misinterpret a temporary increase in demand as a permanent one, leading to overinvestment in the near term and a somewhat sharp contraction in investment when the surge in demand abates. That outcome seems less likely if the surge in GDP is predominantly in sectors of the economy that were suppressed during the pandemic—such as dining, travel, entertainment, and medical services. However, the magnitude of the $1.9 trillion fiscal package may be so large that the increase in demand would be broad, increasing the chances of a somewhat more painful adjustment in economic activity.
Moreover, the effects of the COVID-19 recession may have reduced potential output, suggesting an even larger overshooting or, in other words, a larger positive projected gap between GDP and potential output if the package were enacted. For example, as a result of the pandemic and recession, the potential labor force may be smaller if workers have permanently left the labor force or immigration is reduced for some time. In addition, declines in investment in 2020 may have persistently reduced the size of the capital stock. Indeed, in July 2020, CBO lowered its estimate of potential GDP, alluding to some of those factors.
In our view, however, better containment of the pandemic and a stronger economy could to some degree reverse the factors that have dampened potential output.
As a result, a comparison of the projected GDP path with enactment of the package and CBO’s projection of potential output in July 2020 would overstate the size of the positive output gap that would result.
In our view, if the $1.9 trillion package were enacted in full, the path of potential output would be between CBO’s January 2020 and July 2020 estimates. That would imply that, with the enactment of the package, GDP would be a little over 2 percent above potential output at the end of 2021 and then above by a more modest 1 percent at the end of 2022. See the technical appendix here.
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