EcoFlash

Does the American Rescue Plan go too far?

ECO FLASH  
N°21-05  
23 March 2021  
UNITED STATES: DOES THE AMERICAN RESCUE PLAN GO TOO FAR?  
Jean-Luc Proutat  
To the tune of “whatever it takes”, the United States is merrily leading the dance. According to  
Totalling USD 1.9 trillion or 9 percent of  
GDP, the American Rescue Plan ranks  
IMF estimates, the US is by far the country whose government is doing the most to counter the  
depressive impact of the Covid-19 pandemic: nearly USD 3.7 trillion or 17 points of GDP injected  
in 2020 (excluding equity, loans, and guarantees) twice the size of the European Union’s budget  
among the largest stimulus packages  
ever launched in the United States.  
efforts. At a time when vaccination campaign paves the way for a spectacular recovery, a new  
round of budgetary stimulus is engaged. The new Democratic administration is preparing to  
inject an additional USD 1.9 trillion, a figure that could be much higher if its infrastructure mo-  
dernisation plan also comes to light. Public debt and the deficit, which were already given little  
consideration under Donald Trump, will continue to see major overruns. Without taking into ac-  
The plan aims to overcome the Covid-19 count the Biden’s administration spending programmes, the Congressional Budget Office (CBO)  
estimates that the Federal deficit will hold above 10% of GDP in 2021, after hitting an all-time  
pandemic, but does not stop there. The  
high of 14.9% of GDP in 2020. The public debt ratio also seems to have risen above 100% of GDP  
for the long term. Given the gravity of the health crisis, however, few seem to be alarmed so far.  
new supportive measures, combined  
The coin finally dropped when Lawrence Summers, former Treasury Secretary under Bill Clinton,  
with those approved in December 2020, wrote an editorial in the Washington Post sounding the alarm. At a time when the worst of the  
crisis seems to be over in the US, isn’t President Biden’s vast stimulus plan oversized? Doesn’t  
could rapidly bring the US economy  
it risk triggering price instability in the goods, services or capital markets?  
under pressure.  
Twice as big as the output gap  
Although not as big as the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020,  
the American Rescue Plan is still double the size of the American Recovery and Reinvestment Act  
of 2009 and ranks among the largest stimulus packages ever approved by Congress. Totalling  
USD 1.9 trillion, half of the plan is geared towards households and targets demand (see also  
box 1).  
Inflation is not the biggest threat, even  
though it is expected to rise above 2%.  
The surge in prices is likely to be short  
lived since global competition and the  
accelerating digital revolution are bound  
to have a moderating effect.  
To help the unemployed, whose ranks have swelled by more than 4 million during the Covid  
crisis, jobless benefits will be extended through 6 September 2021 with a Federal contribution  
of USD 300 a week. In a small concession to the moderate part of the Senate, the government  
scaled back the Federal bonus from an initial sum of USD 400 a week. Stimulus checks of a maxi-  
mum of USD 1400 per person will be sent to American households for a total budget of about  
USD 400 billion. The child tax credit will be raised from USD 2000 to USD 3600 per dependent  
child under the age of 6, and to USD 3000 for each dependent child between the ages of 6 and  
1
7. Although the Senate imposed some stricter income-based conditions and made the stimulus  
1
Among the possible harmful effects is  
the risk of fuelling speculative beha-  
viours in certain market segments (tech  
stocks, high-yield bonds…).  
a little less generous , the measures cover a wide range of areas that largely exceed the econo-  
mic victims of the pandemic. According to estimates by the Institute on Taxation and Economic  
Policy, roughly 286 million men, women and children, or 86% of the US population, will receive  
a stimulus check from the Treasury in the weeks ahead. This is bound to fuel debate on the pro-  
per calibration of government subsidies. It is worth keeping in mind that household disposable  
income did not diminish during the crisis, but to the contrary increased exceptionally thanks to  
transfers as part of the CARES Act. With spending curtailed over the past year, Americans have  
built up vast savings: USD 2,850 bn in 2020 (16% of disposable income), more than twice the  
amount of 2019 savings.  
1
Income conditions: up to USD 80,000 annually (degressive above USD75,000 annually) for a single adult, USD 160,000  
annually for a married couple (degressive above USD 150,000 annually).  
The bank  
for a changing  
world  
Eco Flash 21-05 // 22 march 2021  
economic-research.bnpparibas.com  
2
Another subject of debate that was a serious sticking point for the The monetarist explanation, which claims that inflation will finally  
Republican minority in Congress is state and local government react to the central bank’s quantitative easing, is not much convincing.  
subsidies, which will near USD 350 bn. These funds are not targeted The trillions of dollars created in counterparty of Fed’s asset purchases  
a specific budget line covers the rollout of testing and vaccination could have a thousand different destinations other than the US market  
campaigns –and they are being injected into state and local coffers that for goods and services: excess reserves can be recycled far and wide,  
have already benefited from major Federal subsidies. Like household in the emerging markets, real estate, infrastructures, cryptocurrencies,  
income, state and local revenues rose at a record-high pace in 2020.  
as well as the stock market.  
Is there reason to fear that the economic swimming pool will not only Especially the stock market. In the United States, the surge in equity  
be filled but will overflow? According to CBO estimates, the output gap prices did not begin with the discovery of Covid-19 vaccines, but dates  
-
the production shortfall that must be closed before the US economy back precisely to 23 March 2020, when the Fed fired its monetary  
returns to its potential - is USD 960 bn. Twice as big, the American bazooka (unlimited quantitative easing, exceptional refinancing pro-  
Rescue Plan would quickly close the gap, even with a low multiplier. grammes). At a time when valuations are becoming hard to explain in  
Assuming a multiplier of 0.5 and that most of the stimulus plan’s certain segments of the markets (tech stocks, high-yield bonds), there  
USD 1.9 trillion will be rapidly deployed, the economy would grow by is a risk that the billions in stimulus funds will fuel irrational exube-  
at least 6% in 2021. Under these circumstances, the US economy would rance along with the economy.  
more than close the output gap, and by next fall, it would be operating  
near full potential. At the current pace of vaccinations (2 million shots  
daily, or a total of 120 million altogether), it is reasonable to assume  
that by this same horizon, the sectors currently paralysed by the  
pandemic (hotel and restaurant services, entertainment industry) will  
have returned to normal operations and will have begun hiring again.  
The labour market would fully recover or so. For Treasury Secretary  
Janet Yellen, full employment could be reached as early as 2022.  
THE AMERICAN RESCUE PLAN (USD BILLION)  
Inflation and asset prices: moderate to strong risks  
Along with the upturn in commodity prices (oil prices have risen roughly  
HOUSEHOLDS  
910  
400  
160  
270  
80  
Direct stimulus checks  
1
50% over the past year, and metals are up by 60%), growing tensions  
Tax credits (children, individuals)  
Jobless benefits boost  
across the US economy are fuelling inflation expectations, notably in  
the markets, where 10-year indexed swap rates have risen to nearly  
Health insurance (extension of Obamacare…)  
PUBLIC SERVICES AND INSTITUTIONS  
Transfers to state and local governments  
Transfers to schools and universities  
Funding for testing and vaccination campaigns  
Other (social welfare actions…)  
COMPANIES  
2
.5%. Consumer prices are, de facto, picking up, mainly as a result of  
heavier energy and food bills. They also signal a catching-up effect.  
With fewer Covid-19 cases and the easing of lockdown restrictions,  
consumers are now able to make certain purchases that they had  
been putting off. Household demand for durable goods (automobiles,  
household furnishings) is strong, contributing to the rebound in prices.  
Starting in April and the months thereafter, when statistics will be  
compared with the depressed figures of spring 2020, inflation will be  
well above the Fed’s 2% target, and could even reach 3%.  
763  
350  
170  
123  
120  
226  
140  
86  
Transfers to ailing sectors  
Transfers to pension systems  
TOTAL  
Yet the surge in inflation will be short lived. Unless the post-Covid  
world will mark a 40-year leap backwards in time, there is little risk  
of “having to get the toothpaste back into the tube” . In the United  
1900  
2
SOURCE: COMMITTEE FOR A RESPONSIBLE FEDERAL BUDGET, US TAX FOUNDATION,  
BNP PARIBAS  
States, as elsewhere, wages and prices are still subject to global  
pressures, possibly even more so since the Covid crisis has accelerated  
the digital revolution in the services sector. They are no longer reacting  
as they did before to labour market slacks, a phenomenon known as  
the “flattening” of the Phillips curve. Inflation was already remarkably  
stable at around 2% during the historical decline of unemployment in  
2
010-2020, and there is no reason for it to accelerate over the long  
term.  
2
To use the expressive image of former Bundesbank chairman Karl Otto Pöhl, who in the early 1980s compared inflation to toothpaste: “once it’s out of the tube, you can hardly get it back in”  
The bank  
for a changing  
world  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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