Thread by @Noahpinion

1/So, economists are debating whether Biden's COVID relief bill is too large.

I think this debate has been misframed somewhat, by thinking of the bill as "stimulus". In fact, it's more like retroactive social insurance.

noahpinion.substack.com/p/covid-relief…

2/In this thread, Olivier Blanchard uses Keynesian concepts such as the output gap and the fiscal multiplier to analyze the size of the bill, and argues that it's too large.

https://twitter.com/ojblanchard1/status/1358122331995045895

3/The fear is that if the bill is too large relative to the "output gap", then the economy will experience rapid inflation, forcing the Fed to raise interest rates, which will hurt growth.

https://twitter.com/ojblanchard1/status/1358122339301490690

4/But I don't think it makes sense to think about COVID relief in this framework.

In a traditional Keynesian recession, there are lots of idle resources. But in the COVID recession, the main thing keeping people from consuming and working is the threat of disease!

5/If this were a traditional Keynesian recession, we'd have seen big deflation, as @Austan_Goolsbee points out. But we didn't.

https://twitter.com/Austan_Goolsbee/status/1358405078852501505

6/Here's my favorite theory paper for thinking about the macroeconomics of the pandemic.

@IvanWerning et al. describe the COVID recession as a supply shock in some sectors that leads to a demand shock in other sectors.
nber.org/papers/w26918

7/Of course, even in this sort of recession you can formally define a Keynesian multiplier. But past studies of multipliers are just no guide to what it is now. It's probably much lower than normal, because the pandemic stops people from spending.

8/A lot of the relief spending, both in the CARES Act and Biden's bill, is not stimulus at all. It's retroactive social insurance. We're making people whole after an unexpected disaster -- shuffling around financial claims so the unlucky don't take a big hit.

9/This is not to say there are ZERO Keynesian stimulus effects from the bill, of course. Just that these are going to be much smaller than in an episode like the Great Recession.

10/Here's some evidence that people have only been spending less than half of their relief checks (and even that might include spending on rent, which is more like a form of debt).

nber.org/papers/w27693

11/So the Biden bill has a bit of stimulus in it, but mostly it's just retroactive social insurance -- a reshuffling of financial claims from people who were hurt less by the pandemic to those who were hurt more by it.

(end)

noahpinion.substack.com/p/covid-relief…

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