Wrong Stimulus, Wrong Time – WSJ


Democratic economist

Larry Summers

and former GOP Senator and economist Phil Gramm don’t agree on much. But when they do, it’s probably worth paying attention. Now they’re both warning that President Biden’s $1.9 trillion spending plan may carry more risks than benefits.

Mr. Gramm made the case in our pages this week, and Mr. Summers in the Washington Post on Friday. Their economic vantage points are different, but they both suggest that the Biden bill’s focus on spending so much at the current moment to boost consumer demand is misplaced. The economic data increasingly backs them up.

That’s true despite Friday’s report that the economy added a disappointing 49,000 new jobs in January. The jobs report undershot expectations, but the details show that most of the damage to the labor market comes from state lockdowns and supply constraints. Payrolls were revised downward by a combined 159,000 for November and December as states shut down businesses.

Manufacturing employment declined by 10,000 in January amid shortages of components and workers. Some have hauled in office workers to run their assembly lines. Notably, the average work week for all private and manufacturing employees increased by 0.3 hours as businesses utilized their workers more.

Especially striking were the job losses in nursing homes (31,000), home-health care (13,100), transportation and warehousing (27,800), general merchandise stores (30,500) and online retail (14,800). Employers in these industries are desperate to hire, which Congress made harder by reinstating the $300 per week in enhanced jobless benefits through mid-March. Most low-income workers can make more unemployed.


President Biden and Democrats nonetheless jumped on the jobs report as justification to pass their $1.9 trillion spending bill. They say another six months of enhanced unemployment benefits, $1,400 checks to individuals, $130 billion for public schools, $350 billion in aid to state and local governments and a potpourri of transfer payments is needed to give the economy a shot in the arm. It could end up being bad medicine.

Democrats compare the current moment to the recession of 2009 and

Barack Obama’s

$800 billion spending bill. They say this one needs to be larger. But that comparison works in the opposite direction because the current economy is far stronger than it was in February 2009.

Then the economy was still in a recession that didn’t end until June 2009. The jobless rate was rising and would peak at 10% in October 2009. Today the economy has been growing for two quarters, including 4% in the fourth quarter. The jobless rate is already down to 6.3%, a rate it didn’t hit during the Obama years until spring 2014. The black unemployment rate in January (9.2%) is already lower than it was during the first 79 months of the Obama Presidency.

As for spending stimulus, the $3.7 trillion that Congress passed last year in virus relief already far exceeds what Democrats spent during the 2008-2009 recession. Personal transfer receipts increased last year by $1.1 trillion, or about as much as from 2008 to 2010. Couples making up to $150,000 received $3,600 in direct payments last year plus $1,100 for dependents. That’s three times more than from the 2008 Bush tax rebates.

Personal savings soared as high as 33.7% in April following the Cares Act and were still a healthy 13.7% in December before Congress passed another $900 billion in Covid aid. This means that, unlike during the 2009 recession, households aren’t weighed down by debt.

Personal bankruptcies, home foreclosures and loan delinquencies last fall were the lowest since at least 2003. The mortgage delinquency rate was 0.7% in the third quarter of 2020 compared to 7% in the first quarter of 2009. Home-buying and prices are surging thanks to record low interest rates, and people can take equity out of their homes to spend if they need it.

Wages are increasing across most industries as employers compete for workers. By December aggregate employee compensation had exceeded levels in February. It took 34 months for the economy after the 2008-2009 recession to hit this milestone. Millions of leisure and hospitality jobs should return once lockdowns ease and vaccines roll out.

According to a recent House Budget Committee estimate, $1 trillion from last year’s bills hasn’t been spent—including $59 billion for schools, $239 billion for health care and $452 billion in small business loans. State and local governments added 67,000 jobs in January. They don’t need more federal cash.


All of this suggests that the economy is poised for a strong rebound as the pandemic eases even without new federal spending. Money for vaccines and low-income workers who are suffering the most is justified, but much of the rest will far exceed the economic or social need. As Mr. Summers puts it, if the Biden plan passes, Congress will have spent the equivalent of 15% of GDP responding to Covid before addressing any of Mr. Biden’s other priorities like public works.

Sooner or later all of this spending will have economic and political costs. The Biden spending bill is the wrong remedy for an economy that is growing. The best economic stimulus is to end the lockdowns and accelerate the vaccine rollout.

Potomac Watch: House Republicans stay united over Liz Cheney and punishment for Marjorie Taylor Greene. Images: AFP via Getty Images Composite: Mark Kelly

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