The American Rescue Plan Assessed

I talked through some issues regarding the competing recovery plans in this Wisconsin Public Radio interview. Here are some graphs to buttress my point that the Senate Republican plan is underpowered.

First, where is the economy? Facing a big output gap, even after all that previous fiscal stimulus.

Figure 1: GDP (black), CBO projection (red), and CBO estimate of potential GDP (gray), all in billions of Chained 2012$, SAAR. Source: BEA 2020Q4 advance, CBO, An overview of the Economic Outlook (Feb 1, 2021).

Discussion of size of plans is here, in the context of the output gap. CRFB argues that $1.9 trillion is too large. Using CBO’s pandemic/social distancing estimates with economic slack, it’s not clear to me that it’s too large.

In any case, filling the aggregate demand hole is not quite the full story; we need to prevent firm bankruptcies, labor force erosion, extreme suffering, and the package is meant to accomplish that aim. In order to maintain the productive capacity of the economy, some spending is going to be needed.

Second, does more stimulus make sense? What about all the accumulating debt? Consider the government’s borrowing cost:

Figure 2: TIPS 10 year interest rate, % (blue), and 10 year Treasury yield minus 10 year expected inflation from Survey of Professional Forecasters, % (red +). Source: Federal Reserve, Philadelphia Fed, author’s calculations.

Third, what about the proposal to raise the the minimum wage? The real minimum wage has eroded over time, and is fairly low relative average hourly wages.

Figure 3: Federal minimum wage divided by CPI-all, in 2019$ (blue). NBER defined recession dates shaded gray. Source: BLS via FRED, NBER, and author’s calculations.

Figure 4: Federal minimum wage divided by average hourly earnings for private sector production and non-supervisory workers (blue). NBER defined recession dates shaded gray. Source: BLS via FRED, NBER, and author’s calculations.

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