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Biden’s Sensible Stimulus

Summary:
America erred in 2009-10 in curtailing the size and duration of the fiscal expansion in the aftermath of the Great Recession. Regardless of who was responsible for that mistake, President Joe Biden is right to make sure it isn’t repeated now. CAMBRIDGE – The United States and the world entered recession a year ago. Normally, economists can’t predict the onset of a downturn. But because this recession stemmed from the COVID-19 pandemic, they could reliably discern its beginnings without waiting for the standard economic indicators. The Enduring Populist Threat PS OnPoint Jon Cherry/Getty Images Avoiding a K-Shaped Global Recovery

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America erred in 2009-10 in curtailing the size and duration of the fiscal expansion in the aftermath of the Great Recession. Regardless of who was responsible for that mistake, President Joe Biden is right to make sure it isn’t repeated now.

CAMBRIDGE – The United States and the world entered recession a year ago. Normally, economists can’t predict the onset of a downturn. But because this recession stemmed from the COVID-19 pandemic, they could reliably discern its beginnings without waiting for the standard economic indicators.

By the end of the second quarter of 2020, US GDP had plunged by a record 11%, taking the economy from an estimated 1% above potential output at the end of 2019 to a level 10% below it. Forecasters now expect such rapid growth in 2021 that GDP will return to its pre-pandemic peak very soon. By 2022, it will probably be well above potential. The global economy is also expected to recover, though not as rapidly as that of the US.

Some now warn that the US economy could overheat. Given this possibility, is President Joe Biden providing too much stimulus with his $1.9 trillion American Rescue Plan, enacted earlier this month?

After all, the rosy forecasts for the US economy reflect not only the ongoing vaccine rollout, but also the release of pent-up demand for goods and services. American households saved an estimated $1.5 trillion of the government transfers that Congress approved a year ago, and appear keen to...

Jeffrey Frankel
Jeffrey Frankel, a professor at Harvard University's Kennedy School of Government, previously served as a member of President Bill Clinton’s Council of Economic Advisers. He directs the Program in International Finance and Macroeconomics at the US National Bureau of Economic Research, where he is a member of the Business Cycle Dating Committee, the official US arbiter of recession and recovery.

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