By Joseph E. Stiglitz
NEW YORK – US President Joe Biden has proposed a $ 1.9 trillion rescue plan to help the American economy recover from the pandemic. Many Republicans oppose it, suddenly consumed with the monetary religion they leave in disarray whenever their party is in control of the White House. The massive tax cuts that the GOP gave billionaires and corporations in 2017 led to the highest recorded fiscal deficits in the US, outside of a deep recession or war. But the promised investment and growth were never realized.
In contrast, Biden’s proposed spending plan is urgently needed. Recently released data shows slowing America’s recovery in terms of GDP and employment. There is overwhelming evidence that the recovery package will provide a huge stimulus to the economy, and that economic growth will generate significant tax revenues, not only for the federal government but also for the now starving provinces and municipalities of the money they need to provide essential services.
Opponents of the Biden scheme also cautiously warn against inflation – that lurking bogeyman who is more fantasy than a real threat these days. Indeed, some data suggests that wages may be falling in parts of the economy. But if inflation does come to light, the US already has enough financial and fiscal tools.
The economy, of course, would be better off without zero interest rates. It would also be better if policymakers raise taxes by imposing levies on corruption and restoring greater continuity to the tax system. There is no valid reason why the wealthiest Americans should pay lower taxes as a percentage of their income than those who are far less affluent. Given that wealthy Americans have been least affected, medically or economically, by the coronavirus pandemic, America’s regressive tax system has never looked more bleak.
We have seen how the pandemic has robbed some sectors of the economy, leading to high rates of company closures, especially among small businesses. There is a real risk that not passing a large recovery package will do huge, and potentially long-lasting, damage. This is because poor economic performance intensifies economic anxiety (exacerbating the anxiety caused by the pandemic itself), leading to a downward spiral where precautionary behavior reduces consumption and investment, further weakening the economy.
Indeed, whatever the cause, weak balance sheets and business failures are fueling an infection that will infect the whole economy, with the effects of powerful hysteresis taking effect. After all, companies that have gone bankrupt in the pandemic will not bankrupt themselves when COVID-19 is brought under control.
The fact that COVID-19 is a pandemic – covering it globally – only makes things worse. While the best available data suggests that many developing countries and emerging markets have not been hit as badly as people feared a year ago, there is an unprecedented slowdown the global economy suggests softening demand for US exports.
Poorer countries do not have the resources to support their economies that developed countries do. China played a major role in the recovery from the 2008 global financial crisis; but although it was the only major economy to grow in 2020, its recovery was significantly weaker than that crisis in 2008 (when annual GDP growth exceeded 9% and 10% in 2009 and 2010, respectively that). China is also now allowing its trade surpluses to grow, providing less impetus for global growth.
Because the Biden plan incorporates the key features of what must be done, it promises to make big gains. A first priority is to make money available to fight the pandemic, to enable children to return to school, and to allow states and districts to continue to provide the health, education and other services that people rely on . Extending unemployment insurance will not only help the vulnerable. By providing certainty, it will lead to increased spending, with benefits across the economy.
The moratorium on eviction through March 31 and support for low-income families will also encourage spending. More generally, it is well established that the poor have a high propensity to drink, so a package aimed at increasing income will be at the bottom (including increases in the minimum wage, child credits, and the income tax credit and earned) helps revive the economy.
Under President Donald Trump, programs that focused on small businesses were not as effective as they could or should be – in part because too much of the money went to non-small businesses, and partly due to a rash of administrative problems. The Biden administration seems to be fixing those problems. If so, expanding business support will not only help in the short term, but will also put the economy in good stead as the pandemic deteriorates.
Economists will undoubtedly argue about every feature of the program design – how much money should go here and there; what the threshold should be for receiving cash benefits; and optimal drivers for reducing the unemployment insurance program. Reasonable people may disagree about these details. Adapting them is part of the things from which political compromise is made.
But where there should be no disagreement is that large sums of money are urgently needed, and the opposition to it is heartless and dangerously short-sighted.
Copyright: Project Syndicate, 2021.
www.project-syndicate.org