Thread by @DianeSwonk

Lots of uniformed debate about government spending, omicron & the economy. This is a summary of the numbers, without the commentary on what we should do.

First, lost in translation is the 800 lb gorilla in the room - state and local spending.

We had ~ 5T in COVID relief funds but ~ 3.5T have been allocated - $550b of 1.5T shortfall reallocated to infrastructure bill and will take years to spend. Total government spend was a 0.2% drag -yes you read that correctly DRAG - on overall economy in 2021.

GDP looks poised to rise 5.7% in 2021, strongest since 1984. Hence, inflation highest since 1982 in most recent read. 4Q is expected to be strongest quarter of the year but less than many hoped given Omicron spread in December.

Next year was poised to exceed 4% without BBB law. We assumed a slowdown in 1Q due to winter wave - looks more dramatic w/Omicron surge. Hospitalizations and illness are huge tax on broader economy. Lumber plants in South lost workers to Delta, which exacerbated backlogs.

We are not fully accounting for the pandemics effect on labor supply - starting to resemble other pandemics - has severely constrained labor supply, too many actual fatalities, long haul and ongoing infection threats.

Here is where it gets tricky. Total government spending shaved 0.2% from growth in 2021 and is poised to add about 0.2% in 2022, mostly because of slow rollout and deep shortfall in spending by state & local governments in 2021 relative to 2022.

What happened at S&L level? Shift to online instead of in person schooling cut education costs, which showed up as $$s in coffers. Add emp ⬆️, surge in spending on taxed stuff & homes, & transfers from federal gov’t, & S& coffers surged but DID not get spent.

@gao looked at ways to improve the actual spend rate of funds allocated. Here are there recommendations.

gao.gov/products/gao-2…

The slow rate of government spending is nothing new but has been worsened by gross understaffing problems across the board.

In response, total gov’t spending is expected to add 0.2% to back to growth in 2022 w/o BBB. The spend by state & local level is key to outlook. One of the questions many economists are asking is where are those state & local funds.

Now add Omicron.

We assumed a winter wave. Unclear how bad will be with Omicron, but the shear number who are out ill is huge cost on many levels. Hospitals already overwhelmed by Delta a key issue as even if only small % of Omicron ends up hospitalized, the system is stressed beyond max.

The larger issues for inflation are whether Omicron is more disruptive to demand than supply, including the supply of labor. Notable we have accumulated a lot of saving but not evenly distributed. Moreover, safety nets much less than earlier in pandemic. Even access to UI limited

Still have some of enhancements from child tax credits to show up with tax refunds in early 2022 but the role that the enhancements to child tax credit played in reducing hunger & role other programs could play in bringing workers back into labor force evaporating.

Need to weigh tradeoffs when assessing fed spending. BUT few really get into those issues. @WendyEdelberg at @BrookingsInst Hamilton Project and formerly of @CBO has done work on this. Core debate is whether we skew funds for older adults or invest in kids, which we are bad at.

@federalreserve was betting with a lot of humility by Chairman Powell’s, that variants are more inflationary than deflationary. They disrupt supply inc supply of labor make than demand. Delta proved a game changer on this front.

Won’t know until we get into 22 if that holds.

Fed may or may not reassess their stance on rate ⬆️.

ONLY constant is virus & repeated failure to contain spread. Efforts to open amidst a pandemic WITHOUT basic mitigation -😷, frequent tests & 💉- proven penny wise but pound foolish. Cost us growth & spurred inflation.

Current wave will separate those who can work remote from those who can’t. Bubbles erected as people don’t see visceral pain of those hit hardest.

Economy is ab human behavior. We do not always act in our own, let alone collective, best interests. Complicates forecasting w COVID