Let me double down and go through some numbers. I agree that too much is better than too little and we should aim for some overheating. The question is how much. Much too much is both possible and harmful. I think this package is too much.
Let’s look at the numbers. Size does matter and can be assessed.
If the economy had continued on its pre-covid trend, it would be about 900 billion dollars larger. This suggests an output gap of less than 900 billion as some sectors will not operate at full speed for some time.
(CBO’s gap is 480 billion.) But let’s take 900 billion as the upper bound.
Thanks to CARES and given worries about the pandemic, most Americans saved far more in 2020 than usual. Excess saving was around 1.6 trillion. As conditions improve, consumers will spend some fraction of it this year. If we say half, that’s 800 billion in additional spending
CARES added 900 billion of stimulus in December. The Biden proposal adds 1.9 trillion. The infrastructure program to come, will add more, but let’s leave it aside. Adding the three numbers above gives: 3.6 trillion or 4 times the upper bound on the output gap.
How this number translates into an increase in demand this year depends on multipliers. If the average multiplier is 1 (which I think of as a conservative assumption), this implies that demand would increase by 4 times the output gap.
If this increase in demand could be accommodated, it would lead to a level of output at 14% above potential. It would take the unemployment rate very close to zero.

This would not be overheating; it would be starting a fire.
If it were to happen, it would lead to strong inflation (not the 2.5% that some predict, but potentially much more), and, likely a strong reaction of the Fed to limit the overheating, a very large increase in interest rates, again far more than is currently priced in.
Why go there? Why force the Fed to in effect cancel some of the Biden package?

Could I be wrong and too pessimistic? Sure. Multipliers could turn out to be very small, maybe 0.25. I see no strong reason for it.
Potential output could be much higher, say half a trillion higher. I see no strong reason for that either. Or demand may be very weak for other reasons. Again, I do not see why. But it could happen, and everything would turn out fine. The question remains: Why take the risk?
Let me be clear. We should spend what we need to save people from poverty and fund the needed response to the pandemic. I think we do not need to spend 1.9 trillion for that, and we should have a smaller program. But suppose we did need to spend that.
Why couldn’t we finance it partly by an increase in taxes, say an exceptional tax on capital gains, given that the stock market has done so well in the recent past? This would be fair, deliver protection and limit overheating. Wouldn’t this be a better way?

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More from @ojblanchard1

20 Nov 20
1. PIIE has created a great go-to site on inequality: facts, perceptions, policies. bit.ly/331EXo81.

For example, did you know that, since 1985, among AEs, Sweden had the largest increase in its Gini coefficient, Greece had a decrease, France had practically no change.
2.Did you know how dramatically different the evolution of income distribution had been in the US versus Europe since 1980?
3.Did you know how much marginal income tax rates have decreased since the 1970s?
Read 4 tweets
13 Nov 20
1. Twitter is great in allowing you to get your thoughts out quickly. Sometimes too quickly. You have second thoughts. The world changes. I want to take three covid forecasts that I got wrong:
2. I thought the second wave would be associated with more uncertainty: Worries that a limited lockdown might not decrease the infection rate enough, worries that the end might trigger a third wave.
3. I am not so sure. The news about the vaccine go the other way. It looks like there is light at the end of the tunnel. Uncertainty is probably less, despite the intensity of the increase in infections in the short run.
Read 6 tweets
29 Oct 20
Some quick reactions to the new lockdowns in Europe.

1. The degree of uncertainty is much higher than in the first wave. In the first wave, the (incorrect) belief was that the infection rate would quickly decrease and remain low thereafter.
2. This time, whether we can quickly decrease the infection rate, and whether we can keep it low thereafter, is much more in question. This is likely to adversely affect spending behavior by firms, and by workers.
3. The current plans are to allow more activity than in the first lockdown, for example by keeping schools open and thus allowing parents to go to work (whether this will have to be tightened is again uncertain), so the supply side effects may be smaller than in the first wave.
Read 10 tweets
3 Sep 20
Quick reactions to the French economic plan released today.
The three legs, climate, competitivite (helping firms), cohesion (helping people) make good sense. The amount committed, 100 b euros on top of what has already been spent is substantial. But (there is always a but...)
Help to firms is largely in the form of a decrease in taxes on output (``impots de production’’). These are indeed not great taxes, as they must be paid independent of profit. Removing them is good for firms and for employment. But what is needed for the time being is different.
I believe there were better ways to do it. For example, wage subsidies (which Jean Pisani-Ferry, Thomas Philippon and I argued for) to COVID affected firms, the approach taken in the UK, or paying for fixed costs for COVID affected firms, the approach taken in Germany.
Read 8 tweets
8 Jun 20
When the virus struck, the priority was to protect fragile firms and workers. As the lockdown ends, the focus must change from protection to reallocation. How it should done is the topic of a piece by Jean Pisani Ferry, Thomas Philippon and me. bit.ly/3dIiHCY
The challenge is to do it in an environment of high unemployment, and high uncertainty both about the course of the virus and the end of physical distancing constraints, but also about which sectors will contract and which sectors will expand in the medium run
We argue for the following architecture. For workers, extending the duration of unemployment benefits. Where it exists, maintaining the partial unemployment schemes, that have kept the link between firms and workers, and allowed for a smoother distribution of funds.
Read 10 tweets
13 Mar 20
A 11-piece thread on Italy, the ECB, and the need to avoid another euro crisis. Start with the basics, the first two points being the most important.
The Italian government is behaving extremely responsibly—more so than many. It is putting health considerations and the control of the epidemic ahead of short term economic considerations---exactly as it should.
This commitment will have large economic and fiscal costs. But, at the interest rate that prevailed until yesterday (less than 1%) however, even a large increase in the debt ratio, even of the order of 10% to 20% does not put debt sustainability into question.
Read 11 tweets

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