I just watched a Princeton U. webinar debate between Larry Summers and Paul Krugman on the subject of Mr. Biden’s proposed $1.9 trillion program. Mr. Summers argued that it should be drastically cut back, particularly the “helicopter money” checks for every American, because there isn’t actually any sizeable output gap in the US economy and, therefore, the huge increase in liquidity will create inflation. Mr. Krugman countered that most of the money will be saved anyway, and will only be spent gradually over 2-3 years, thus keeping inflation low. In any case, he went on to say, the checks are hugely popular (duh!) and the plan will fly through Congress. In other words, pork politics. Needless to say, I’m with Larry on this.
Let’s look at some numbers: Real disposable personal income per capita hasn’t decreased at all during the pandemic; in fact, the massive aid packages in 2020 produced the largest annual income increase in at least 60 years (Chart 1). Remember, these are inflation-adjusted dollars, so the spike is very real. It constitutes the largest one-time government subsidy (dole?) in the history of the country. Heck, it’s the largest one-time government program of any kind, ever, including WWII.
Chart 1
From the same chart we see that real disposable income per person is presently increasing at a more normal $1,000/yr level - though still at the high end. So, yes, I can see why Mr. Summers is saying that no more one-off checks are needed. Yet, as Mr. Krugman says, they will probably be approved and sent out.
IMHO sudden inflation is the least of our potential problems. What’s at stake here is the full faith and credit of the United States, the pre-eminence of the dollar as global reserve currency and the strength of Pax Americana. This is not 1990, or even 2010: China can and eventually will challenge America for global leadership. It’s time to preserve the fiscal and monetary power of the US, not to dilute it with fresh trillions in debt and “money for nothin’”.
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