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Biden’s stimulus package: Too much of a good thing?

Joe Biden’s $1.9 trillion Covid-19 relief package will support the recovery of the US economy. Economic output in the United States is likely to have reached pre-crisis levels by the beginning of the third quarter. However, the stimulus is not expected to create lasting inflationary pressure.

The American Rescue Plan put together for the US economy by President Joe Biden has cleared all the political hurdles and can now be put into practice. Worth $1.9 trillion, it is the third fiscal stimulus package to be introduced as a means of getting the US economy back on its feet after the coronavirus crisis. Although the new Biden administration had to accept some minor compromises – the amount of the boost to state unemployment payments was cut, for example, and the package no longer includes an increase in the minimum wage – the majority of the fiscal stimulus was passed.

The key elements of the rescue plan

The package combines a number of different measures. All adults earning up to $75,000 a year will receive a $1,400 stimulus cheque, provided total household income is below $150,000. Those earning more than $80,000, or $160,000, will receive no stimulus cheque at all.

Weekly unemployment benefit will also be topped up, but only by $300 – not the $400 Joe Biden wanted. Schools and universities will receive $170 billion in relief and $160 billion has been provided for testing and immunisation programmes.

Biden's economic stimulus package provides comprehensive support measures

Overview of the individual measures in the package

Biden's economic stimulus package provides comprehensive support measures
Source: Evercore, Union Investment; As at 11 March 2021

Overshooting the mark?

The reason for creating a relief package of this magnitude is that President Biden is desperate to avoid repeating the mistakes made after the 2008/2009 financial crisis. Then, too little money was funnelled into the economy and it took years to recover. The job market took more than eight years to get back to its pre-crisis levels. This time around, the president is determined to do everything possible to get the economy back on track for growth as quickly as possible.

Ahead of the bill, there was a lot of talk about whether the rescue package might be over-ambitious. The fear was that there was a possibility it would not just close the output gap, but actually cause the economy to overheat and thus create inflationary pressure. But the economists at Union Investment do not share these concerns.

They do expect inflation to rise significantly in the second quarter. But that has nothing to do with the stimulus package. The increase will have more to do with year-on-year effects, because the US inflation rate was unusually low in the corresponding prior-year quarter as a result of the crisis. The US economy is not expected to overheat in 2021 and the Federal Reserve is likely to see the temporary rise in inflation for what it is.

In addition, the recovery of the US job market has slowed noticeably in recent months. There are still around 9.5 million more people out of work than before the crisis, and the disparities between the individual income groups are huge. High earners have largely come through the crisis unscathed, while among low earners, levels of employment are more than 20 per cent below the pre-crisis level.

Consumption or saving?

This is just one of the reasons why the stimulus cheques are not expected to flow fully into consumer spending and thereby boost the economy (multiplier effect). Studies have shown that one third of last year’s support payments were used to pay down debt. One third went into savings, to make provision for an uncertain future, and only a third was directly spent. Surveys suggest that the proportion saved could be higher this time around.

The reason why households are inclined to put more into savings is the expectation that the stimulus cheques in this package will be the last for the time being. Consequently, spending is likely to be gradual – and determined by what happens with the economy and the recipient’s personal circumstances. That would repeat the pattern of behaviour witnessed last year, when the gradual release of savings kept consumer spending in the US relatively stable, even though there was no sustained improvement in the employment situation. This would have positive implications for the medium-term outlook, as it would provide ongoing support for economic growth rather than just a one-off boost.

Next fiscal package expected in the autumn

On this basis, the experts at Union Investment expect the US economy to reach its pre-crisis level at the start of the third quarter of this year. Even with Biden’s rescue plan, they do not expect the economy to overheat. Discussions on the next fiscal package will begin soon, ahead of its likely introduction in the autumn. However, the next package is expected to look very different and to focus on new infrastructure and clean investment – with the aim of boosting the growth potential of the US economy.

 

As at 15 March 2021