Today’s favorable employment and GDP numbers, pointing to a U.S. economy well on the mend, have to raise a couple of basic questions.
With the US economy already recovering, did the U.S. economy really need as large a budget stimulus as the Biden Administration rushed through Congress earlier this month?
Might overstimulating the economy now not run the real risk of reviving our past inflation demons?
After today’s official economic releases, there can be little doubt that the U.S. economy is far from the depths to which it plummeted in the immediate aftermath of the Covid-19 pandemic’s onset. At 680,000 new claims, weekly jobless claims are now at their lowest level since the pandemic began. Meanwhile, in the fourth quarter of last year, GDP is now estimated to have grown by a satisfactory 4 ¼ percent or somewhat better than had been expected.
It would also seem to be clear now that the U.S. economy at the start of the Biden Administration was in very much better shape than it was at the start of the Obama Administration. Whereas today the unemployment rate is around 6 ¼ percent and the so-called output gap measured by the Congressional Budget Office is 3 percent, in March 2009 unemployment exceeded 8 ½ percent and the output gap had reached 6 ¼ percent.
The Federal Reserve may not be sweating the possibility of higher inflation, but it may have another problem to contend with.
Broader expectations of higher prices could snowball and create a problem in and of itself, says BMO Wealth Management chief investment strategist Yung-Yu Ma.
“There is some concern out there certainly that consumers are seeing now. They’re seeing the price of oil rise, the cost of goods is going up faster than the cost of services, and there’s a lot of inflation in the system,” Ma told CNBC’s “Trading Nation” on Thursday. “The question is whether or not it becomes a self-fulfilling prophecy.”
Higher expectations of persistent inflation could push businesses to pass costs onto the consumer and unions and employees to push for higher wages, a cycle that would then boost prices, says Ma. Americans are already growing more concerned about the risk of higher prices – Axios reported Thursday a CivicScience survey that found 77% of Americans were at least somewhat worried about higher inflation.
Part of the fight over the $1.9 trillion “stimulus” package recently passed by President Biden and his allies in Congress was whether we could really afford nearly $2 trillion more in spending amid skyrocketing debt and already having spent record-levels of money ostensibly on ‘COVID’ relief. But according to a recent report, the latest legislation could prove even more expensive than we thought.
The $1.9 trillion estimate assumes that various tax credit programs will be allowed to expire. However, a report by American Enterprise Institute economist Alex Brill concludes that this is highly unlikely—and that if they’re eventually renewed, the bill’s cost could nearly double.
“Expansions of the child tax credit (CTC), earned income tax credit (EITC), and the child and dependent care credit would be enacted for just a single year under the guise of promoting economic security during the pandemic,” Brill explains. “However, the Wall Street Journal recently reported on Democrats’ desire to make permanent the CTC expansion. In addition, the House passed a permanent version of their expansion of the child and dependent care credit last year, and it is unfathomable to imagine Congress letting the one-year EITC expansion lapse post-2021.”