Now that the $1.9 trillion Biden fiscal stimulus is a done deal and the stimmys will be mailed out any day, Wall Street economists are lining up to opine on whether it will be sufficient to spark sustained inflation or not, and if so why. One among them is JPM's chief economist Mike Feroli who overnight published an update on the fiscal package while stating his view that he does not see the package causing runaway inflation, despite it being a massive amount of money.
CBO now estimates the ten-year budgetary impact of the ARP will increase cumulative deficits by $1.85 trillion. This was somewhat lower than their prior scores due to the reduced generosity of the (still-generous) stimulus checks, a lower estimate of the cost of extending unemployment benefits, and the removal of the budgetary drag from the earlier minimum wage proposal. But this modestly smaller figure is still enormous by any historical comparison.
Feroli's timid view is based on the fact that the fiscal package is not an immediate shot to the economy but will be disseminated over the next two years. $1.16T will be distributed in 2021 but this is overstated he believes that the $300bn for state/local governments will be spent more slowly, to wit:
Even so, we are somewhat less concerned than Larry Summers that it is too enormous for the economy to handle. For one, the federal government won’t disburse these funds immediately. CBO estimates that the budgetary impact for the remainder of the current fiscal year will be $1.16 trillion. Even this overstates the short-run impact, as almost $300 billion will quickly be disbursed to state and local governments who will be much slower to spend the funds (many of these governments are already working on their 2022 budgets). In addition, the extension of unemployment benefits will remove a near-term cliff effect—which is good—but removing a cliff effect doesn’t narrow the output gap, it prevents it from widening.
Of the remaining $680Bn, more than half will be stimulus checks. And while Those stimulus checks may see consumers save at least half of the payment, based upon last year’s behavior:
This highlights the importance for the economic debate of the size of the marginal propensity to consume out of these checks. Most of the evidence from last year’s stimulus checks indicates consumers were relatively prudent with those checks, likely spending less than half in the months following their receipt. There are sensible arguments as to why spending propensities could be larger or smaller with the ARP checks.
JPM concludes that while "time will tell, it shouldn’t take too long to tell" as "the checks will probably be disbursed before the end of the month, and the development over the past year of a number of high-frequency spending indicators should give an early read on how the checks are being used."
Finally, here is the CBO scores as the largest elements of the Biden plan:
Stimulus checks: $402 billion; $393 billion in FY21.
State and local fiscal recovery funds: $362 billion; $284 billion in FY21.
Extension of expiring unemployment benefit provisions: $205 billion; $195 billion in FY21.
Aid to schools: $165 billion; $12 billion in FY21.
Increased generosity of the child tax credit: $109 billion; $26 billion in FY21.
Aid to union pension plans: $86 billion; $0 billion in FY21.
FEMA: $50 billion; $11 billion in FY21.
Testing, contract tracing, and mitigation: $48 billion; $10 billion in FY21.
COBRA subsidies: $37 billion; $28 billion in FY21.
Transit emergency grants: $30 billion; $10 billion in FY21.
Restaurant aid: $29 billion; $29 billion in FY21.
Child care assistance: $24 billion; $4 billion in FY21
Premium tax credit aid: $24 billion; $4 billion in FY21.
Rental assistance: $22 billion; $8 billion in FY21.
Various other smaller provisions: $262 billion; $149 billion in FY21