Thread by @jasonfurman

In one sense the claim that fiscal policy is going to become less expansionary is obviously true. In another sense it fails to make a critical point: fiscal policy will still be *very* expansionary.

A 🧵motivated by @Neil_Irwin (among others): nytimes.com/2021/06/21/ups…

The largest fiscal injections are now behind us. Together with the reopenings they have contributed to the very rapid GDP growth we had in 2020-Q3 and Q4 and so far this yr. And the very rapid growth we're likely to have in the coming quarters.

Cash payments and pandemic-curtailed services have contributed to a big increase in spending on goods which in turn has contributed to higher imports, lower inventories, and higher prices.

(Note, retail sales #s are mostly but not entirely goods.)

Going forward as fiscal stimulus diminishes these will too. No one is seriously arguing that we will continue to see the 8% inflation (annual rate) we've had in the last three months. Or that real GDP growth won't slow dramatically from the ~10% (annual rate) expected for Q2.

So yes, the observation that stimulus is falling therefore inflation will fall and real GDP growth will fall is obviously true and worth making.

But the bigger question is how much? Does inflation fall from 8% to 4%? Or 3%? Or 1%? How much does real GDP fall?

I find it useful to do the counterfactual of where the economy is as compared to where it would have been absent the pandemic. This leads me to expect above-trend demand & below-trend supply for some time for several reasons, including fiscal policy.

https://twitter.com/jasonfurman/status/1390777141495697408?s=20

Compared to pre-pandemic fiscal policy will be expansionary:

1. There's still a lot of fiscal support coming. The American Rescue Plan is $538b in FY 2022. The CARES Act still has substantial sending in FY 2022. Totals 3-4% of GDP. That is ≈ the (too small) stimulus in 2009-10.

2. Previous fiscal support continues to affect the economy with a lag: people will continue to spend out of checks etc. We don't have good estimates for these lags in normal times let alone for this unique moment. But even 10% of the huge amount so far would be a huge amount.

3. We'll hopefully be adding a lot of jobs at higher nominal (and hopefully real) wages. We're still 10m jobs short. I don't think we'll close the full gap this year but I do expect to make faster progress in closing it in the coming months.

https://twitter.com/jasonfurman/status/1402384667689508866

In summary, fiscal policy is a good reason to expect:

--Real growth/inflation to moderate relative to the current moment

--Real growth/inflation to remain higher than pre-pandemic

Addendum: I do agree with @Neil_Irwin that this is a risk (which is the point of his piece, he's not claiming to predict a problem with certainty). Is why I was arguing since last year that we should avoid too many $/month but not enough months.

https://twitter.com/jasonfurman/status/1340034808337076225?s=20