Overheating the economy?

President Joe Biden and his allies are attempting to force a $1.9 trillion COVID-19 relief package through Congress. House Committees are approving the package piecemeal this week, and the Senate Finance Committee and other panels are expected to fast-track the bill once the impeachment trial of former President Donald Trump wraps up. The proposed economic stimulus is expected to become law by mid-March, before additional unemployment benefits expire. But it faces unexpected opposition from some voices on the left who warn the price is simply too high.

Several prominent economists, including former International Monetary Fund chief economist Olivier Blanchard and former Clinton administration Treasury Secretary Larry Summers, said they support some level of financial intervention by the government, but they warned that overdoing it could have serious repercussions for the economy and Americans.

Blanchard, Summers, and others pointed out that the size of the proposal overshoots the output gap, or the difference between what economists would expect the country to produce if it had full employment and production capacity versus what it actually produced.

The Congressional Budget Office projects an output gap for the rest of 2021 of about $380 billion. During the Great Recession, government stimulus measures were only half the size of the projected output gap; Biden’s proposed stimulus is five times greater than the shortfall.

The concern is that once government spending exceeds the output gap, the excess spending in the economy can lead to the demand for goods outpacing supply. Prices could rise, setting off “inflationary pressures of a kind we have not seen in a generation,” Summers wrote in a Washington Post op-ed. “I worry that containing an inflationary outbreak without triggering a recession may be even more difficult now than in the past.” He argued the $1.9 trillion figure could work if stretched across a longer period of time, but it should not simply support incomes this year and next.

Untargeted spending, Summers said, will increase the risk of inflation rising rapidly, which would mean prices and the cost of living would increase, a stock market bubble might form and burst, and the economy could enter a recession.

After receiving pushback from his party, Summers doubled down in a follow-up column: “In my piece, I suggested that a 13 percent of GDP total stimulus (adding the $900 billion and the $1.9 trillion) was very large, especially in an economy with extraordinarily loose financial conditions, reasonably rapid growth forecasts, still unmet public spending needs and a very big overhang of private saving.”

But such warnings are, so far, falling on deaf ears. Because Democrats are using the budget reconciliation process to pass the proposal, they will not need any Republican support. President Joe Biden on Friday said the economy urgently needs aid: “The one thing we learned is we can’t do too much here. We can do too little. We can do too little and sputter,” he said, referencing the Obama administration’s 2009 stimulus package.

Treasury Secretary Janet Yellen on CNN acknowledged the risk of inflation but said, “we have the tools to deal with that risk if it materializes,” and a bigger risk would be doing nothing to alleviate the current “tremendous suffering in the country.”

“Almost a year into the pandemic, almost 11 million workers remain unemployed and around 4 million have been unemployed for six months or longer,” responded Jared Bernstein and Heather Boushey of the White House's Council of Economic Advisers in a statement. They also pointed to research by the Brookings Institution, which projected that Biden’s plan would assist the economy by allowing gross domestic product to reach pre-pandemic projection levels by the end of 2021. The Congressional Budget Office estimated that GDP would not fully recover until 2025.

Meanwhile, conservatives are amplifying the concerns voiced by Summers and other dissenting voices in the Democratic Party.

“I do think Summers is right to warn about the possible consequences of continuing to borrow, print, and spend such copious amounts of currency,” said Joel Griffith, a research fellow on financial regulations at the Heritage Foundation.

Conservative radio host Erick Erickson tweeted: “Everybody save this Larry Summers op-ed so when the recession hits next year and the press and Democrats blame Trump, you’ll have on record that the Democrats’ most prominent economist was warning the Democrats they were about to cause a recession.”

The stimulus plan includes about $750 billion for COVID-19 testing and vaccine distribution, aid to state and local governments, and reopening schools. It allots $600 billion for direct aid to families, including rebate checks to the tune of $1,400 for most individuals. Another $400 billion would be set aside for additional unemployment benefits, and about $150 billion would include loans and aid to small businesses.