“Economic support in response to the global economic crisis of 2007-09 was too little,” argues Claudia_Sahm. But were covid-19 rescue plans “too much”?
HE PAST few years have once again demonstrated that blunt tools—such as the government sending out cheques and pushing down interest rates—affect how much consumers and businesses spend. But it is difficult to fine-tune such policies without the benefit of hindsight. Even after the fact, it can be hard to analyse what should have been done. Inflation was not transitory, but neither was covid-19. And the stresses the pandemic put on the global economy were far-reaching.
Joe Biden’s $1.9trn spring stimulus in America was a contentious fiscal program, even among left-of-centre macroeconomists. An important area of disagreement was the programme’s size. One metric was its dollar amount relative to estimates from the Congressional Budget Office of the “potential output” of the economy. Some opposed the programme because it was about twice as large as the shortfall in GDP at the time.
Even after that additional surge in demand for goods passed, it was not met with a greater supply. Lockdowns at production facilities in Asia and elsewhere, and the breakdown of global transport systems, continued even after effective vaccines started rolling out. The supply-side situation worsened as more covid waves arrived. The vital factor was the interaction between blunt fiscal policy and the pandemic.
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