Fortunately, there is already a lot of impetus. The most recent coronavirus relief act, signed in late December, came to around $ 900 billion. Its effects have not yet been shown in the GDP data.
Added to this is the pent-up demand from the pandemic. When people started avoiding restaurants, travel and non-essential purchases last spring, the personal savings rate rose and has only partially returned to normal since then. Much of this additional savings is in cash that people can spend when it is safe to do so.
All of this means that fiscal policymakers may already have pressed the accelerator hard enough to bring the economy to its speed limit by the end of the year, when widespread vaccination is likely to have sparked much of that pent-up demand. Another $ 1.9 trillion, as President Biden has suggested, could push the economy way over the limit.
Of course, some new federal spending on public health and people in need may be needed. But spending on disaster relief also increases the demand for goods and services.
Beyond this necessary expenditure, there is no strong case for more fiscal incentives in general. The $ 1,400 checks for most Americans in the Biden proposal go to many people who don’t need them. This item alone costs $ 422 billion.
Proponents of greater fiscal stimulus suggest that estimates of potential GDP are very imprecise. In addition, it is said that when the economy exceeded potential in late 2019, there was hardly any hint of inflation. So why worry now?
You’re right about the inaccuracy, but some signs of inflation started appearing in 2019. For the year ended in the first quarter of 2020, the labor cost index for wages and salaries in the private sector rose 3.2 percent, the fastest rate in more than a decade. Had the pandemic not interrupted this acceleration, companies would eventually have passed rising labor costs on to consumers as higher prices.