Marshall Economist Discusses Stimulus In W.Va.
The American Rescue Plan recently passed by Congress will inject about $4 billion into the West Virginia economy and nearly $2 trillion nationwide. But will this cause inflation? And how will it affect economic recovery?
Nabaneeta Biswas is a professor of economics at Marshall University in the Department of Finance, Economics and International Business. She spoke with WVPB’s Eric Douglas to discuss what it will mean to the U.S. economy.
This interview has been lightly edited for clarity.
Douglas: Congress just recently passed the American Rescue Plan (ARP). In really macro terms, what does that mean for the U.S. economy?
Biswas: It's basically a huge cash injection into the economy. What the government is trying to achieve here is jumpstarting consumer spending. The pandemic has reduced private spending, and the government is trying to replace it with enough public spending, which will then motivate consumers to spend just by putting cash into their hands. Any production activity is usually demand driven. In order to jumpstart production, and create jobs, or at least restore the pre-pandemic level of economic activity and jobs, it is important to expand spending. So it's a demand shock.
Douglas: I saw recently that West Virginia is expected to receive about $4 billion between the direct payments to households and then money to the state, the counties and municipalities. That's a huge amount of money flowing into the state. The money to the municipalities and the counties is aimed at infrastructure work. My first thought was, are there enough people to do the work? And is that going to cause the costs of doing that work to increase as there's this huge demand for infrastructure? Is there potential to cause inflation by this quick infusion of cash?
Biswas: That's what economic theory suggests, because any cash infusion into the economy always has a multiplier effect. And that's Keynesian economics, right? And it means that whatever the cash injection is, the demand shock or the expansion in demand would be much larger than the size of the cash infusion. When that happens, there's always the chance that it would lead to inflation provided that the sectors in which the cash is flowing do not have sufficient production capacity.
Again, imagine that you are injecting cash and jumpstarting spending. In that case, there will be an initial mismatch between demand and supply of services and consumer goods. And that would lead to a temporary increase in prices. But the question then is, how long lasting? And how large would the inflation be? That is the real question.
Douglas: You assume there's going to be inflation. The unknown is how long does it stick around, and how big of a jump does it cause?
Biswas: And it all depends on how consumers use the money. At the end of the day, if most of the consumers spend the money that they're getting in consumer goods or paying rent and utility bills, then the demand shock would be much larger, which would lead to a faster rate of recovery, which the plan is intended to achieve. On the other hand, if most of the consumers save the money, then, of course, the demand shock would be much smaller, and it will slow down economic recovery, but then it would also lower inflation. The larger the demand shock, the larger the inflation.
Douglas: We've heard a lot of people say that it's not enough money, we need even more money in the economy. We've heard people say, it's too much and it's going to cause inflation. Is it enough? Is there an ideal number that you can put your finger on?
Biswas: It's hard to honestly, and we wouldn't know whether it was enough, or we overshot it until it actually plays out because it depends on economic agents like you and me and what we do with the money. There's so many moving parts to this and they have to fit together into a perfect puzzle for the plan to have its desired effect.
In terms of comparing the size, it's $1.9 trillion, which is almost nine percent of the Gross Domestic Product (GDP) in 2019. If you compare it to the stimulus back in 2009 which was the American Recovery and Reinvestment Act, that was about $850 billion. It was about six percent of the GDP in 2008, which also was smaller than the GDP in 2019. This is definitely a much larger stimulus than we have seen in the past. But having said that, whether it's going to achieve the task that it's intended for, it all depends on how agents react.
Douglas: I have heard criticisms of the 2009 stimulus, that it wasn't large enough, that it didn't have the desired effect, and it was a much slower recovery than possible.
Biswas: That's correct. And economists seem to agree on that. Although they also point out that it did lead to a decline in unemployment. So it did have the desired effect, just that it wasn't large enough, but also you have to note that it was slightly different than the current one in the sense that it did have some public works planned, along with the cash injection.
The government was in the process of creating jobs. That makes it similar to the New Deal, which was on a much, much larger scale than what we have seen either in 2009, or what we're seeing now. The New Deal was almost 40 percent of the GDP back in those days.
Douglas: This is only a quarter of the New Deal, relatively speaking to the economies of the time.
Biswas: The New Deal is very different from either the 2009 stimulus, or the ARP because the New Deal had a range of federal works programs planned over a period of almost eight to nine years. Not only were the benefits staggered over time, but it also saw a much larger role for the federal government itself in terms of creating jobs and putting salaries into people's account or their pockets, which is different from the role the federal government is playing under the ARP, except for providing money to local and state governments. That is the part of this plan that is going towards direct investment into productive capacity through job creation.
Douglas: What about the long term? Another one of the criticisms I've heard is the long-term debt where we are assuming. What does that mean to the country?
Biswas: Any sort of fiscal debt is definitely not desired. But given the circumstances the nation is facing, it probably makes sense to go big and overshoot rather than undershoot. The federal government has enough credibility to be able to borrow that money in the short term. But we know that eventually, the federal government is going to raise taxes and collect back a lot of the debt that they're now incurring. So it's almost like borrowing from the future.
Given that a lot of the households that are receiving the stimulus, but really don't need it, and aren't credit-constrained, they're going to save that money to be able to pay off the future taxes. We know that we are borrowing from the future.
Douglas: Looking forward, I know the president is proposing a massive infrastructure project. What does that mean? Do we need something like that? What would it mean for the country in general?
Biswas: We had very low levels of unemployment before the pandemic hit, which is actually a good thing. But right now, the boost that the ARP gives, and on top of that the infrastructure projects is not actually a bad thing, because it will directly create a lot of jobs. So if the ARP fails to achieve the task, then we have that infrastructure project backing it up. It may be the case that we not only restore the pre-pandemic jobs, but we end up creating even more to put the economy on a higher growth path, than before the pandemic. Of course, having said that, if the productive resources are at full employment, then it becomes harder to create new jobs.
Douglas: There are people who are concerned that the economy could overheat, that there will be such a demand for people for workers that the cost of everything will skyrocket as companies are competing for employees. Are there enough people out of work, who are looking for work, and able to work, to actually support that kind of increase?
Biswas: If you look at the pre-COVID unemployment that was really at one of its lowest levels.The way it's calculated, it often includes people who move in and out of the workforce and were not officially falling into the unemployed category. In other words, it's hard to say what the actual size of the workforce is based on just the unemployment statistic that we have.
Compared to what the potential output could have been, what is the shortfall? What is the actual output relative to that? The employment rate is considered a measure, but then it may not be perfect. And if it is not, that's good news for us. In that case, we have way more unemployed than those who are getting accounted for in that statistic, which means that the infrastructure project would actually help.
Douglas: A lot of this is “We'll do our best and we'll figure it out afterwards.” There's no direct checklist of “we do this, we do this and this happens.”
Biswas: It's learning by doing and even seasoned economists with years and years of experience in policy-making and implementation could go wrong. There's always that chance. But the good news is maybe we will revive the economy back to where it was and maybe even take it higher. So we have to be hopeful.
Douglas: Is there anything that I haven't touched on that that you want to mention?
Biswas: The thing I would like to say is that I know we have been worrying about not only the large size of the stimulus but also whether there's proper targeting; is the money going to people who really need it? One good thing about this plan, I would say is that it's a bottoms-up approach instead of a trickle-down approach that we might have seen in the past.
Here the idea is the bulk of the cash injection should go to the lowest income quintile. We are expanding from the bottom upwards. Especially in these times when we have been talking about inequalities and we've seen how the pandemic has exacerbated wealth inequalities or income inequalities and affected certain subgroups of the population more than others, this plan actually considers that wealth gap and at least attempts to reduce it so that's that's a good thing.