Governments Are Too Busy To Balance Their Spending

2021-02-14   |   by CusiGO

Janet Yellen, a famous economist, once chairman of the Federal Reserve and now Secretary of the Treasury, had a dangerous prediction when she took office in the Biden administration: the United States will achieve full employment in 2022, Just two years after the coronavirus pushed the country to its worst unemployment rate since the Great Depression of the 1930s. To achieve this, there is only one requirement. But it’s not a small problem: Congress passed a $1.9 trillion (nearly 1.6 trillion) stimulus plan.

The problem lies in its size. Economic science giants have been discussing the risk of going beyond or short recently. Olivier Blanchard, the former chief economist of the International Monetary Fund, has just issued a warning signal that he usually disagrees with supporters of fiscal tightening. “It’s harmful to do too much. I think the plan is too big, “he wrote in a very interesting twitter post, in which he concluded that if his calculations were true, the government would not only overheat the economy, but also” make a fire. “. Larry Summers, a former Treasury Secretary and adviser to President Obama, also warned that inflationary pressures “are unprecedented in this generation” and that financial stability is at risk. Nobel laureate Paul Krugman retorts: “no, Biden’s plan is not too big.” Krugman uses a war metaphor to explain why he doesn’t go back and jump into a vacuum now: “it’s like fighting in a war. When a man goes to war, he doesn’t know how much money he should spend to achieve full employment. Just spend the money you need. ”

War fables also help to discuss the side effects of any conflict. This time, critics warn that the indiscriminate rainfall of millions of people planned by Biden, together with the plan launched by the trump administration in 2020, will reach a huge figure of $5.8 billion, -It is likely to have two unexpected effects: inflation and financial instability associated with the growth of huge debts.

“Aid and this new programme approved in December exceeded 13 per cent of GDP. In addition, there are 8% savings. They are huge numbers! “You don’t have to go that far,” Jean Pisani ferry, a researcher at Bruegel and a theorist at macron, said by phone during the 2017 campaign. Maria Jes ú s fern á ndez of funcas agrees and warns of the risks of entering unknown areas, such as the formation of bubbles, where you know how they started, but you don’t know how they ended.

Other experts found that the danger was just the opposite. Paul de GRAUWE of the London School of economics argues that there has been no big problem with mild inflation for several years. “The real risk is the business. If aid is insufficient, a wave of bankruptcies could lead to a real financial crisis, “he warned. “Inflation risk has now been minimized. Fiscal policy – well designed – must work together to accelerate growth and achieve full employment. In fact, the faster the economy grows, the smaller the permanent consequences, and the lower the medium-term inflation risk, “economist angel ubid added.

This debate transcends American borders. In Europe, the fight against the epidemic crisis is unfolded in three areas: government assistance, the government’s support, and the government’s support, An ambitious plan by the European Central Bank to control the debt costs of vulnerable countries and to use the European Commission as a fund to issue 750 billion euros of common debt is an unprecedented step, very similar to the origin of the much anticipated so-called Eurobonds.

The question is whether that is enough. Adam Tooze, author of collapse: how a decade of financial crisis has changed the world, makes it clear that the answer is no. “although the European Central Bank, governments and the European Commission are determined to avoid mistakes in 2010, they have not done enough to save the European economy from setbacks.”, The economic fragility that has long prevailed in Europe, he wrote. Touz acknowledged the “political victory” of EU leaders in promoting the recovery fund, but warned that it was not big enough. “What Europe needs most is a second massive fiscal stimulus,” he concluded. European Central Bank President Christine Lagarde has reminded governments that they will have to maintain support after 2021.

However, in countries such as Spain and Italy, the debate is not so much about how much money they have to give as about how fast the money has to be put in place, and most importantly, whether governments themselves have the ability to spend all that money quickly and properly.

Rafael DOM é nech of BBVA research believes that given Spain’s 140 billion euros, the challenge begins now. “It is necessary to look for projects with high multipliers to promote growth. But that’s not enough to change the economy. What is really important is to correct our long-standing weaknesses, along with an ambitious reform plan. It will give us more than just external assistance. ” Maria Jes ú s fern á ndez admits she “doubts” whether the European fund is capable of maximizing its role. “It’s important that they contribute to structural transformation. If not, they will be just a temporary stimulus, and over time they will carry countries with huge debts, “he concluded.