Tribune. Is the US stimulus package oversized? Yes, according to Lawrence Summers and Olivier Blanchard, two experts whose voices are heard and who fear economic overheating. In such a scenario, inflation would threaten to accelerate uncontrollably, forcing the US Federal Reserve (Fed) to end its ultra-accommodative monetary policy.
We can then imagine the equity and bond markets experiencing a violent correction, caught between the rise in rates and the decline in risk appetite. This worst-case scenario is possible, but it is far from certain. “Anything can happen in life, and especially nothing”, said Michel Houellebecq.
At the height of the Covid-19 crisis, America’s gross domestic product (GDP) fell sharply. It has since recovered, but is still nearly 4% behind its potential level, according to estimates by the Congressional Budget Office, the International Monetary Fund and the Organization for Economic Co-operation and Development. .
However, the amounts promised by Joe Biden’s stimulus plan would not only make up for this delay, but also, potentially, exceed it by nearly 5%, unheard of since the Second World War – hence the fears. overheating, further accentuated by the possibility of the 3 trillion dollars being discussed today, which would be added, in the year, to the 1.9 trillion just voted and the 900 voted at the end of 2020 …
But three caveats must be made. On the one hand, the amounts committed will not necessarily all be spent. A part will be spared, and even a large part if households remain cautious. Everything will depend on the “multiplier”, a concept that divides economists: a multiplier of 1 would mean that all the stimulus ends up in GDP. But there is great uncertainty around its value, and it is not excluded that the multiplier is just sufficient for the GDP to only catch up.
Who is right ?
On the other hand, the GDP lag might be underestimated. Indeed, the 4% is an average, but some organizations go up to 6%, the difference being played in the method of estimating the potential GDP. With such a delay in GDP, the stimulus plan would then be barely sufficient.
As for the 3 trillion, these would be investments in the country’s infrastructure, which will therefore boost real and potential GDP at the same time, without much risk of increasing a gap from which the economy would overheat. .
You have 59.69% of this article to read. The rest is for subscribers only.
