The American government is launching a huge aid program. The well-known Nobel Prize winner and a former finance minister argue about the consequences.
SControversy among top economists: In a discussion with Nobel Prize winner and columnist Paul Krugman, Harvard professor Larry Summers reiterated the criticism of the new American government’s planned $ 1.9 trillion rescue program. He thinks the size of the program is about a trillion dollars too high.
A support of this size is neither necessary nor useful. Summers, who served as Treasury Secretary under Democratic President Bill Clinton, fears inflation – and that the financial conditions after the rescue program leave little room for the central element of President Joe Biden’s agenda: a large infrastructure program that makes the American economy more modern and climate-friendly makes.
Paul Krugman, however, defended the government’s program. He sees that the state aid is extraordinarily generous and that in some cases it also benefits people who do not need the money. But he is not afraid that the program will trigger inflation. Large parts of the program were used to fight Covid and to help the people who have lost large parts of their income.
Krugman acknowledged that politics was a key factor in getting the program passed around on that scale. The Democrats see it as a historical mistake that they could not push through a larger package to support the economy after the severe financial crisis in 2008. Krugman also admitted that the 1,400 checks in particular were difficult to justify for any member of the household. But the checks are hugely popular and also an election promise with which the Democrats could secure a majority in the Senate in the by-elections in Georgia.
Summers, on the other hand, does not fundamentally oppose the amount of additional government spending. He opposes that they are not used for public investment. And he also fears that the bailout package will spur macroeconomic demand in such a way that the Federal Reserve will have to take a brake.
Summers also made it clear that he lacked confidence in the Federal Reserve’s ability to guarantee a soft landing for the economy. He does not see that he is taking such a risk if the economy is expected to boom in the second half of 2021 even without an additional financial injection.
Summer calculation goes like this: The aggregate monthly loss of income for Americans is $ 25 billion. The rescue package including unemployment benefits, tax privileges for children and the checks add up to around 100 billion dollars a month, four times more than the actual losses. In addition, unlike traditional assets, this additional income will probably be spent quickly as soon as it becomes possible again. That increases the demand pressure.
How people spend some of the checks known as “Stimi” can be seen in the boom for amateur investors, in which private investors have pushed special stocks such as Gamestopn to unprecedented heights. But Summers also made it clear that he supported a determined program to fight the pandemic and to equip schools for classroom teaching as well as the money for the victims of the pandemic.
Krugman, on the other hand, has confidence in the Fed’s ability to curb the hot economy in a gentle, harmless way. Like Summers, he advocates an ambitious infrastructure program. That will not fail because of inflation, or because demand is running too hot. The program depends solely on political will. Republicans need to be convinced that government investment can make sense. The discussion was moderated by Princeton economist Markus Brunnermeier.