The Clash of Liberal Wonks That Could Shape the Economy, Explained – The New York Times

The problem, he says, is that the plans total size reaches a scale that risks major future problems. In particular, the total money being proposed far exceeds most estimates of the output gap. (More on that below.) That implies that much of that spending will just slosh around the economy, causing prices to rise, potentially hindering the rest of Mr. Bidens agenda and risking a new recession.

This isnt a conventional argument between doctrinaire deficit hawks and doves, but something more subtle. In the past, Mr. Summers in particular has repeatedly called for larger budget deficits to help combat secular stagnation, in which major world economies are mired in slow growth, and he has supported large pandemic aid packages.

But Mr. Summers says any new spending package should pay out gradually over time and be devoted more substantially to long-term investments.

There is nothing wrong with targeting $1.9 trillion, and I could support a much larger figure in total stimulus, he wrote in a follow-up article. But a substantial part of the program should be directed at promoting sustainable and inclusive economic growth for the remainder of the decade and beyond, not simply supporting incomes this year and next.

Imagine a world in which the American economy is cranking at its full potential. Pretty much everyone who wants to work is able to find a job. Every factory is at its complete capacity. The output gap is, simply, how far away the economy is from that ideal state.

A traditional approach to fiscal stimulus has been to estimate the size of that gap, apply some adjustments to account for the way federal spending circulates through the economy, and use that arithmetic to decide how big a stimulus action ought to be.

In theory, if the government pumps too much money into the economy, it is trying to generate activity over and above potential output, which is impossible to sustain for long. Workers might put in overtime, and a factory might run extra hours for a while, but eventually the workers want a breather, and the machines need to shut down for maintenance. If there is more money floating around in the economy than there is supply of goods and services, the result wont be increased prosperity, but rather higher prices as people bid up the things they want to buy.

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The Clash of Liberal Wonks That Could Shape the Economy, Explained - The New York Times