Olivier Blanchard, former chief economist of the International Monetary Fund (IMF).
U.S. President Joe Biden and his supporters believe that when Biden proposed a huge economic bailout plan of $1.9 trillion, all economists agreed. But on Saturday (6), Olivier Blanchard, the former chief economist of the International Monetary Fund (IMF), dealt a heavy blow to Biden.
Blanchard, a prominent liberal economist, posted a series of tweets on Saturday detailing his reasons for opposing Biden’s proposal.
Blanchard reminded people to look at the numbers, which are indeed too big. If the economy continues on its pre-crisis trend, it will increase in size by about $900 billion. Because some sectors will not be operating at full speed for some Time, this suggests that the output gap will be less than $900 billion.
Blanchard said most Americans are saving far more than usual in 2020, with excess savings of about $1.6 trillion, thanks to last year’s relief bill and concerns about a pandemic. Consumers will spend some of that this year as conditions improve. If that’s half, that’s an additional $800 billion in spending.
900 billion in stimulus relief was added last December. Biden’s proposal would add another $1.9 trillion. Blanchard says subsequent infrastructure programs would add even more, adding up just the three numbers above, that’s $3.6 trillion, or four times the output gap cap. This means that four times the output gap will need to be added.
Blanchard’s point is that the size of the stimulus injected into the economy is too large, especially on top of the stimulus taken last year. The additional spending power created by the additional $1.9 trillion budget deficit will drive up prices, forcing the Fed to raise interest rates and causing Inflation.
As a cautious economist, Blanchard said in his tweet that some of the estimates he made may be wrong, and perhaps the stimulus will not hit the economy as hard as expected, or the expansion of production making the ability to meet the additional needs may be greater. Nonetheless, Blanchard argued that a $1.9 trillion program is too big under any reasonable assumption.
Like many economists, Blanchard believes that deficit spending can help the economy grow, but that too much deficit can lead to unnecessary inflation. He also posted an interview in another tweet in which he endorsed deficit spending to directly address pandemic-related health care costs and long-term investments, but he counseled against financing spending through debt.
Last week, former U.S. Treasury Secretary and liberal economist Larry Summers also said that Biden’s plan is risky because it is far larger than the pandemic’s impact on the U.S. economy.
These warnings from staunch liberal economists could affect the prospects of the Biden bill, which could be defeated by the abandonment of moderate Democrats.
Recent Comments