“Will Joe Biden’s fiscal stimulus overheat the American economy?”

That’s the title of a new article in the Economist:

There are three main reasons to suspect overheating might be on the cards: emerging evidence that the downturn may prove temporary; generous stimulus; and the Federal Reserve’s monetary-policy strategy.

The article recounts the calculation of what is needed to fill the output gap, and the possibility that the Biden package (see numbers here, from CRFB) over-fills.

One key question in my mind is — how large is the output gap? If we use the CBO’s most recently published estimate of potential GDP and the mean forecast of Wall Street economists, then the output gap shrinks to zero by 2021Q4.

Figure 1: GDP (bold black), WSJ January survey mean (red squares), CBO potential GDP as of January 2020 (light gray), as of July 2020 (dark gray), and pseudo-Delong-Summers (k=5) using actual data and CBO projections of GDP to 2030 (teal). Source: BEA, CBO (January 2020), CBO (July 2020), WSJ, and author’s calculations.

If on the other hand, potential GDP is closer to the level the CBO projected in January 2020 — so essentially assuming not a lot of the hits to investment actually occur — then the output gap is zero at end of 2023. The CBO revised downward its estimated potential on this basis (CBO, July 22, 2020, p.3):

CBO expects that the pandemic and resulting recession will significantly affect the level of
potential output over the next several years by reducing the level of investment. In the  agency’s assessment, recent developments will have little effect on workers’ long-term willingness to supply potential hours of work. By contrast, lower investment will leave potential output about 0.7 percent lower in 2023 and 2024 than it would have been if the pandemic and recession had not occurred. Through 2030, much of that shortfall in investment will be made up as businesses respond to growing demand for their products and services, but larger federal debt is projected to crowd out some private investment.

Which potential is right? As discussed in this post, perhaps neither. Perhaps the Friedman “plucking model” of maximal GDP is more appropriate. Then the teal line in Figure 1 is right. The output gap shrinks to zero in 2023 as above. But the (absolute value of the) output gap on the way there is larger.

As it turns out, inflation is more responsive to the “shortfall” defined using the plucking model than deviations measured using CBO estimates of output gap (see this post).

From this vantage point, calculations based on conventional measures of the output gap are flawed. The output gap over 2021Q2-Q4 would be $530 billion instead of $157 billion (using the July 2020 CBO estimate).

Two complicating factors:

How much GDP will would grow in the no-stimulus counterfactual depends also on the course of the pandemic. With new, more communicable, strains extant, the current forecasts could be too optimistic.

I’ve treated potential GDP as largely exogenous with respect to policy. However, if PPP, state and local government fiscal support prevent firms from going out of business, then fiscal support actually widens the output gap by maintaining potential GDP even as it shrinks it on the demand side.


Addendum, 1/20:

Clearly, the issue of estimating potential GDP is central in this debate. Here are some past posts on the subject of estimation during normal times.

If Output Is Near Potential, Why Is Inflation so Low?

More on Potential GDP and the Output Gap

Potential GDP, Again

A Quick Note on Different Views of Potential GDP

Output Gap Measurement and Prospects in the Wake of the Crisis

The Output Gap: Neoclassical Synthesis, New Classical and New Keynesian





73 thoughts on ““Will Joe Biden’s fiscal stimulus overheat the American economy?”

  1. pgl

    Back during that dust up in 2016 over Gerald Friedman’s very incomplete “analysis” there were many who suggested that the CBO underestimated potential GDP. OK some of these suggestions were absurd – we did not have an output gap anywhere near 20%. But the gap may have been around 5%.

  2. ltr


    January, 2021

    COVID-19 and global income inequality
    By Angus Deaton


    There is a widespread belief that the COVID-19 pandemic has increased global income inequality, reducing per capita incomes by more in poor countries than in rich. This supposition is reasonable but false. Rich countries have experienced more deaths per head than have poor countries; their better health systems, higher incomes, more capable governments and better preparedness notwithstanding. The US did worse than some rich countries, but better than several others. Countries with more deaths saw larger declines in income. There was thus not only no trade-off between lives and income; fewer deaths meant more income. As a result, per capita incomes fell by more in higher-income countries. Country by country, international income inequality decreased. When countries are weighted by population, international income inequality increased, not because the poorest countries diverged from the richest countries, but because China—no longer a poor country—had few deaths and positive economic growth, pulling it away from poor countries. That these findings are a result of the pandemic is supported by comparing global inequality using IMF forecasts in October 2019 and October 2020.

  3. ltr

    January 19, 2021



    Cases   ( 24,806,964)
    Deaths   ( 411,486)


    Cases   ( 10,596,228)
    Deaths   ( 152,747)


    Cases   ( 3,466,849)
    Deaths   ( 91,470)


    Cases   ( 2,938,333)
    Deaths   ( 71,342)


    Cases   ( 2,071,473)
    Deaths   ( 49,244)


    Cases   ( 1,649,502)
    Deaths   ( 141,248)


    Cases   ( 719,751)
    Deaths   ( 18,266)


    Cases   ( 88,454)
    Deaths   ( 4,635)

  4. ltr

    January 19, 2021

    Coronavirus   (Deaths per million)

    UK   ( 1,344)
    US   ( 1,239)
    France   ( 1,092)
    Mexico   ( 1,089)

    Germany   ( 587)
    Canada   ( 482)
    India   ( 110)
    China   ( 3)

    Notice the ratios of deaths to coronavirus cases are 8.6%, 2.6% and 2.4% for Mexico, the United Kingdom and France respectively.

  5. ltr


    January 20, 2021

    Chinese mainland reports 103 new COVID-19 cases

    The Chinese mainland on Tuesday recorded 103 new COVID-19 cases – 88 local transmissions and 15 from overseas, the National Health Commission said on Wednesday.

    Among the domestically infected cases, 46 in northeastern Jilin Province, 19 were reported in northern Hebei Province, 16 in northeastern Heilongjiang Province and seven in Beijing.

    A total of 58 new asymptomatic COVID-19 cases were recorded, while 819 asymptomatic patients remain under medical observation. No deaths related to COVID-19 were registered on Tuesday, and 17 patients were discharged from hospitals.

    The total number of confirmed COVID-19 cases on the Chinese mainland has reached 88,557, and the death toll stands at 4,635.

    Chinese mainland new locally transmitted cases


    Chinese mainland new imported cases


    Chinese mainland new asymptomatic cases


  6. pgl

    “Seen from the top down, it is an enormous debt-funded stimulus. Mr Biden’s plan is worth about 9% of pre-crisis GDP, nearly twice the size of President Barack Obama’s spending package in 2009. And it is big, too, relative to the likely shortfall in demand that America might expect to suffer once it puts the winter wave of covid-19 behind it, and given the stimulus already in place.”

    Good grief. I should look for the Richard Pryor gig “it’s too big”. But then I might have to be censored. Come on man – the 2009 fiscal stimulus was too small. Christina Romer wanted to go bigger but she was ignored. But even if the increase in government spending is really too big – we could always have tax increases on the well to do. That at least what other nations do to fund things like health care and infrastructure investment.

  7. pgl

    The “Economist” (UK version of Time Magazine) quotes Summers saying the economy will be on fire. But wait Summers has advocated an economy on fire to get sustained real wage growth. Let’s get out of the habit of cherry picking comments please. More on this theme. Summers along with Christina Romer have always questioned the wisdom of those $2000 checks but not because that is too much stimulus but rather the wrong kind of stimulus. Romer at least wants the Federal government to send more funds to the state and local governments:


  8. Bruce Hall

    Here in Michigan, the COVID-19 virus is miraculously dissipating and Gov. Whitmer will remove all economy killing restrictions and credit Joe Biden’s tremendous economic acumen as she takes her position as DNC assistant chairwoman. Bars will be open for celebration! Just waiting for the money to start pouring in. Happy days are here again! That Trump virus was such a party pooper.

    1. Menzie Chinn Post author

      Bruce Hall: Well, as 7-day moving average of cases/100 has dropped from 44.4 to 25 since Jan 7, I would’ve thought that you would think relaxing restrictions was a good thing.

      1. Bruce Hall

        5% of Michigan residents have been infected with COVID-19; 0.13% have died. Meanwhile, the massive overreaction by the governor and her proxies have ruined sectors of the Michigan economy and cause massive harm to school children, especially children of color.

        So, no, I don’t see relaxing of restrictions as a good thing; I see the restrictions as a politically-motivated evil that did extraordinary harm for very little benefit. Businesses in Michigan are beginning to sue the governor for damages. Too bad those children who lost a year of their education and those lunches for the poor can’t sue.

        Sure, pgl will have a snarky reply, but compare Michigan with 10 million people to Ohio with nearly 12 million people … the policies, restrictions, and outcomes. Michigan got screwed by the new DNC Assistant Chairman so she could make her mark.

        1. Barkley Rosser


          I see here a rather blazing contradiction in your comments nobody else seems to have caught out of the many nonsensical things you have written here. So, on the one hand you say, “I don’t see relaxing restrictions as a good thing” but then right after that you say, “I see the restrictions as a politically-motivated evil…” So, which is it? Should not something that is just a “politically-motivated evil” be relaxed or not?

          I understand that you are kind of confused and having some trouble dealing with hard realities right now, but maybe you want to read what you post here more carefully in the future so as to avoid this sort of wildly rank conrradiction. Anybody here is supposed to take you remotely seriously? Gag.

          1. 2slugbaits

            Barkley Rosser Well, I for one did catch Bruce’s non sequitur but I just dismissed it as Bruce being so upset that right now he’s just flailing, railing and ranting unintelligibly. They might need to adjust his Prozac if he doesn’t learn to turn off NewsMax and OAN.

    2. pgl

      Your partisan garbage has been beyond disgusting throughout 2020. One would have thought you might have followed Trump and just flown away in the wee hours of this morning. But no – you have to keep embarrassing your poor mother. Sad.

      1. Bruce Hall

        It’s partisan to your partisan opinions.

        But now, of course, a miracle happens because the savior was installed today. After four years of sabatoge, subterfuge, undermining, attacking, maliciously lying, and massive corruption, the new/old face of the Democratic Party is calling for “unity”. Sorry, but that’s not going to happen. Despite attempts at censorship and intimidation, the Democrats/Progressives/Socialists will have a “loyal opposition”. And Biden is the perfect target for mockery as he takes his newly won seat in the U.S. Senate.

        But, pgl, the nice thing about America is that I can’t force you to agree with me and vice versa, though some “leaders” are mulling “re-education”. You can simply ignore what I write and I can simply laugh at what you write and we can all be happily ununited.

        David Atkins, an official who was just elected as a California member of the Democratic National Committee, took to social media this week to say that Democrats need to “start thinking in terms of post-WWII Germany or Japan” in order to “deprogram 75 million people.”

        1. Menzie Chinn Post author

          Bruce Hall: If you are saying that there is massive corruption with the out-of-power Democrats, and all the time ignoring (at least in all your comments on this blog) the mind-bogglingly extensive/pervasive/monstrous corruption in the Trump administration, then truly you are detached from reality.

        2. 2slugbaits

          Bruce Hall Maybe this David Atkins guy has a point. Would you agree that those who bought into the QAnon conspiracy theories are badly in need of deprogramming? How about those who bought into the Proud Boys ideology? And anyone who regularly listens to Mark Levin or Tucker Carlson ought to be a candidate for reprogramming…if not their mind, then surely their cable provider. You weren’t always such a nutjob. I do remember a time when we simply disagreed on this or that issue, but your arguments were at least coherent. But as you fell more and more under the influence of the Trump cult you became evermore untethered from reality. Maybe a little reprogramming is exactly what you need to bring you back in touch with reality.

          After four years of sabatoge, subterfuge, undermining, attacking, maliciously lying, and massive corruption

          I assume you’re referring to Trump’s efforts to sabotage and undermine the peaceful transfer of power. As to malicious lying, the WaPo’s count puts Trump deep into five figures. Massive corruption…Trump was king of the swamp. Notice that what you’re doing here is what psychologists call “projection.”

          And Biden is the perfect target for mockery as he takes his newly won seat in the U.S. Senate.

          Are you drunk? Biden didn’t win another Senate seat. He was inaugurated President, not Senator.

          Here’s an opportunity for you to test your personal hold on reality with a few simple questions. Do you believe the election was stolen and that Trump actually won? Yes or no. On January 6th did you find yourself rooting for the insurrectionists at the Capitol? Yes or no.

          1. pgl

            Excuse me but when did Bruce Hall ever write a coherent thought? Was that his latest nonsense on estate taxes when he could not address a single question and his “expert” was this hack?

            Anders Ydstedt is a partner at Scantech Strategy Advisors, which advises major Swedish industry and business organisations. In 2004, he worked as a campaign manager at the Confederation of Swedish Enterprise against the inheritance tax.

          2. Bruce Hall


            Thanks for responding so eloquently. President Xi would be proud of you. Starting with the Steele dossier and going forward with that foundation, the Pelosi/Schumer/Nadler triad built a house of cards in which to stock one false allegation after another against Trump and disrupt the political arena for four years. https://www.thenation.com/article/politics/trump-russiagate-steele-dossier/
            But, hey, that’s politics.

            As for Uncle Joe getting his Senate seat: https://youtu.be/WqS4m-8B4IQ
            We’re all looking forward to four years of his comments. And you can be certain, there will be many, many comments about his comments.
            But, hey, it’s all in good fun.

          3. 2slugbaits

            Bruce Hall I see that you refused to answer my two simple questions. I’ll take that as an affirmative for both of them. I realize this might be hard for you to take, but QAnon was always a hoax. You were duped. Q made a fool of you. But you should blame Q and your media sources that fed you that BS rather than taking it out on us. And the truth is that Biden did win the election legitimately. Not everyone is as screwed up and delusional as the MAGA base.

            As to the Steele dossier. Apparently you don’t know much about it. For the most part it got things right. BTW, have you ever read the Mueller Report from front to back, including the 2000 footnotes? If not, then you should. It would disabuse you of much of the rotgut you hear on Fox Noise.

          4. Barkley Rosser


            The final WaPo count on Trump’s lies while president is 30,573, which is 20.78 per day on average, which escalated to a max of nearly 500 on the day before the election. I realize, of course, that you consider that to be “fake news.”

            Also, 2slugbaits is completely correct that the Steele dossier has mostly been verified, although you would never know that if you watch Hannity, who describes it as “discredited” and “bought and paid for by Hillary Clinton,” ignoring on the latter matter that it the investigation into Trump was started by the Jeb Bush campaign before it got turned over to HRC.

            The main items found to be false in it had to do with Carter Page, which was the messed-up FISA request to have FBi investigate him after he left the Trump campaign, although that was supposedly “spying on the Trump campaign” according to Hannity again, night after night. There was a false claim he was going to get some huge amount of money from Gazprom, alhough the report he met with them was in fact correct. There was another item about him. That is almost it, oh, aside from the claim that Michael Cohen had visited Prague at one point. Most of the report was verified. One of the few items stil neither verified nor discredited is the infamous “pee tape,” which Trump supporters considered outrageous, although later it came out that he paid off prostitutes to keep their mouths shut during the 2016 election, and he certainly hates Obama, so the pee tape does not seem incredible at all, although in the end it may be false.

        3. pgl

          Gee Brucie boy. It seems Team Trump had no plans whatsoever to distribute the vaccine:


          I wonder why that might be Brucie boy. Oh yea – Trump like you could care less than over 4000 people died just yesterday from this virus. Of course the utter incompetence of Trump means it will take even longer to end our social distancing. Which of course to a self centered type like you only means it will still be hard for you to go to the grocery store for your precious snacks. Now more people will be dying but we know – you could care less.

    3. pgl


      Since you babbled on without a shred of evidence (per usual) I provided this link. The number of deaths really spiked a lot which of course you totally mispresent. Maybe they have come down a bit but alas this link is not showing 7-day averages for the noisy series. But it does have a comment section where a few Trumpian morons have decided to pollute like you pollute this comment box. Craig is tired of those Communist shut downs. Hey Bruce – is Craig really you?

      1. pgl

        Garth Brooks sang yesterday which has made a lot of MAGA wearing hat rednecks decide his music is no longer for them. I bet Garth is not going to miss all these racists from his future concerts.

        1. baffling

          garth is an example of a genuine human being, looking to make the world a better place. he understands that differences of opinion do not make you the enemy. for all the maga hatters who blame the left for cancel culture, let me remind you of the dixie chicks a couple of decades ago. conservative cancel culture at its finest.

    4. Dr. Dysmalist

      Just one little error there, Bruce. The restrictions did not kill the economy. The virus did that all by its little self, even in states that strenuously resisted restrictions for as long as possible before succumbing to reality. Your ideological dogma is still blinding you to facts.

      The truth is that you should be grateful that Gov. Whitmer was intelligent enough and courageous enough to impose the restrictions that she did, and when she did. That’s the reason your state can begin to get back to normal earlier than most states, including Indiana, where I live. It probably could have happened sooner if more of your fellow residents had cooperated instead of resisted.

      Most of my fellow citizens, even in a blue town like mine, still are too stupid to do what’s necessary to gain some control over the situation. Therefore, our economic activity remains lower than it could be.

      1. pgl

        You do get that Bruce could care less about other people dying, As long as he can get his potato chips and beer without having to wear a mask. That is the only thing this self centered troll gives a hoot about.

  9. David O'Rear

    Wouldn’t it be great to over-shoot, and generate some inflation? Considering that we have had a lot more success dampening down rising prices than propping up falling ones, the easiest risk to manage is the one on the up side.

    Added bonus: the Fed would be able to raise interest rates, thus refilling the recession-fighting ammo belt.

    1. baffling

      i have been arguing this approach for quite some time. the risks are asymmetrical. people that are arguing for inflation concerns when inflation is sub 2% are arguing their portfolio, not the benefit of the nations economy. we are a very long ways from inflation being a problem. we have people arguing about a hypothetical inflation problem, while the real problem of low growth stares us in the face.

    1. Bruce Hall

      It’s a symbolic gesture. Neither Pompeo or Navarro will being doing business with China or have the slightest inclination to visit Chinese territories. Of course, the Chinese can tell all of their media outlets and businesses in the U.S. to vilify these two men, but, hey, that’s politics.

      Meanwhile, some of us will continue to point out that doing business with a country that uses forced labor to benefits its military expansionism might not be in our best interests. Some of us will continue to point out that doing business with a country that has a network of agents in our universities stealing technology secrets might not be in our best interests. Some of us will continue to point out that locations such as Hong Kong that used to be vibrant centers of commerce and freedom are being crushed by an oppressive regime and ignoring that might not be in our best interests. Some of us will continue to point out that obtaining “inexpensive” products from such a country may have future costs that are not in our best interests.

      1. pgl

        “Neither Pompeo or Navarro will being doing business with China or have the slightest inclination to visit Chinese territories.”

        Bruce? Did they cut you out of the loop? Pompeo has designs to lead the Taiwanese invasion of Mainland China. He will need all the troops he can find. So get out your rifle so you can charge the beaches of China. This should be a lot of fun!

      2. pgl

        “Some of us will continue to point out that obtaining “inexpensive” products from such a country may have future costs that are not in our best interests.”

        Have you been asleep for the last 40 years. Real wages in China has increased quite substantially. This is why apparel and shoe multinationals are using labor in other Far East nations. In the meantime, the Chinese are actually buying a lot of those French made luxury goods you can find on Rodeo Drive. Well not an impoverished incompetent like you.

        But damn – you need to get out of your Michigan basement as there is an entire world you are totally unaware of.

  10. ltr

    January 20, 2021



    Cases   ( 574,718)
    Deaths   ( 4,174)

    Deaths per million   ( 454)


    July 4, 2020



    Cases   ( 29,170)
    Deaths   ( 330)

    Deaths per million   ( 36)

    Having apparently approached a containment of the coronavirus in June, the Israeli government incautiously opened schools and businesses, and the result has been a persistent community infection spread contributing to what are now 574,718 cases in the small country as compared to 88,557 in all through all of mainland China.  Israel unfortunately now has nearly 6 and a half times the number of coronavirus cases in mainland China.  Paul Krugman noticed the Israeli “disaster” on September 14 when there were 160,000 coronavirus cases.

    1. ltr

      January 19, 2021



      Cases   ( 476,526)
      Deaths   ( 13,749)

      Deaths per million   ( 1,995)


      January 19, 2021


      New York

      Cases   ( 1,301,191)
      Deaths   ( 41,380)

      Deaths per million   ( 2,127)

  11. Tom Michl

    What about hysteresis and path dependence? The CBO methodology and even the plucking model accept the neoclassical dogma that the economy converges on an equilibrium that already exists. We’ll see but it looks like they are underestimating the effects of the covid shock (for example, capital productivity shocks). But on the upside, if we do get a high-pressure labor market, that could undo much of the damage. I know on this blog commenters like to make fun of poor Gerald Friedman but he is in principle much closer to understanding the endogenous nature of technical change, labor force growth, and capital accumulation. Mainly because he benefits from an arguably better theoretical vision. All scientific communities need a dogma, an accepted framework, but its past time to ditch the neoclassical dogma IMHO.

    1. Menzie Chinn Post author

      Tom Michl: The way the Plucking model is implemented by Delong and Summers (and I slavishly imitate) implies some kind of hysteresis since potential depends on actual path of GDP (even if it does not deliver necessarily unit root time series behavior).

      Sorry, hard to believe even if ARRA had been $2 trn that the financial crisis would not have resulted in decrease in potential, hysteresis or not. In any case, Friedman just assumed (counterfactually) linear trend as max output — kind of weird wouldn’t you agree? More reasonable would be to take estimates from something like that in Blanchard et al.

      1. Tom Michl

        So why do you call it potential output? Its just one possible realization of potential output.

        Blanchard seems not to believe in path dependence based on his JEP piece–its just “persistence”. Circling the wagons around the dogma, I’d say.

        1. Menzie Chinn Post author

          Tom Michl: Well, I call those gray lines “potential output” or “potential GDP” because that’s what CBO calls them. Do you want me call them “the variable CBO calls potential GDP”?

          1. Moses Herzog

            I realize my weighing in here means very little, as just a joe six pack economist wanna be (and that’s an accurate self-depiction there, not fake humbleness). But as self-obsessive as it may seem, I’d like to be on the record here as leaning more towards Blanchard’s take on this specific issue, rather than Gerald Friedman’s. And the reason I want to say that, is I am considered as a “Bernie Bro” by some on this website, but I think I can view things in a relatively objective manner, regardless of my affection towards Bernie, and belief in the vast majority of his policies, along with believing in a decent amount of MMT concepts~~~ I still view Blanchard’s take as the most accurate one on this particular issue—or at least better than Friedman’s.

          2. Tom Michl

            I was referring to your reply, not the graph. In your reply, you called the DeLong-Summers line potential output.

            I don’t know what to call it. I think “inflation-neutral equlibrium output”? But with path dependence, that does not exist in advance.

  12. ltr

    Latin American countries have recorded 4 of the 13 highest and 6 of the 25 highest number of coronavirus cases among all countries.  Brazil, Colombia, Argentina, Mexico, Peru and Chile.

    Mexico, with more than 1.6 million cases recorded, has the 4th highest number of cases among Latin American countries and the 13th highest number of cases among all countries.  Peru, with more than 1 million cases, has the 5th highest number of cases among Latin American countries and the 18th highest number among all countries.  Mexico was the 4th among all countries to have recorded more than 100,000 and 140,000 coronavirus deaths.

    January 19, 2021

    Coronavirus   (Deaths per million)

    US   ( 1,239) *

    Brazil   ( 991)
    Colombia   ( 965)
    Argentina   ( 1,014)
    Mexico   ( 1,089)
    Peru   ( 1,175)

    Chile   ( 915)
    Ecuador   ( 808)
    Bolivia   ( 823)
    Panama   ( 1,118)
    Costa Rica   ( 484)

    * Descending number of cases

  13. 2slugbaits

    The goods sector seems to have fully recovered (2020Q3 relative to 2019Q4). It’s the services sector that is lagging and is still below its 2019Q4 level. The inflation risk is likely to be higher if Biden’s stimulus is directed towards the goods sector rather than the services sector. Why? Because it would mean people trained in service sector jobs would have to be retrained in goods production. Retraining workers and repurposing physical structures comes at an efficiency cost. It’s a lot easier to reboot a failed restaurant than it is to expand factory production.

  14. Moses Herzog

    It’s official now. Proud Boys declares donald trump a weak LOSER.

    Who will sammy and CoRev pray to before bedtime now?? This is extremely disconcerting. And yet, entertaining at the same time. In this divorce, does Proud Boys get half the house?? Which spouse gets the family dog?? And is trump still desirable as a wife??

    I suggest couples counseling at QAnon.

  15. 2slugbaits

    Question for the professional economists out there. To the extent that inflation is a function of economic activity, why don’t economists look at the output gap relative to potential GROSS OUTPUT rather than potential GDP, which is a measure of the final demand for goods & services? Doesn’t a dollar’s worth of intermediate goods generate just as much inflationary pressure as a dollar’s worth of final demand?

    1. Moses Herzog

      My understanding is, there are parts of gross output that are “redundant” , Would be counted more than once. Am I misunderstanding??

    2. Barkley Rosser


      In today’s (Jan. 25) WaPo there is a long article by David Lynch, which I suspect will get supported by similar stories elsewhere shortly that says we have massive supply chain problems due to the pandemic, especially involving shipping containers, especially on the trans-Pacific route, with major problems arising at the LA port involving imports from China, many of them parts for US manufacturing. This turns out to be quite a complicated mess involving things in both China and the US and other parts of the world, with certain pasts of it not making sense to me fully, frankly. But on some routes shippers have doubled their rates, and genuine shortages involving especially parts of US manufacturing showing up, and also midwest farmers, including those fabled soybean ones, having trouble getting their crops shipped out to China.

      The story says this will get straightened out once the pandemic ends, and the higher shipping costs will not lead to a substantial increase in inflation. But it does say this is going to lead to a temporary minor burst of inflation, probably in several nations.

      I note that this is completely consistent with something I reported here recently to some ridicule from a couple of parties that Jim Bullard, president of the St. Louis Fed, was forecasting a short-term small increase in US inflation largely tied to short-run problems in our supply chains. Looks like he was right, just as he was last February when he called before anybody else at the Fed that the US was going to have a major collapse in output due to the pandemic. And again, he is not calling for any cutback in the current stimulative policy by the Fed, nor has he called for any reduction of the proposed fiscal package being put forth now, however one wants to label it.

    1. pgl

      “you interviewed not a single economist who dissents from this fiscal incontinence. This omission is unfortunate.”

      I love it when Hayek nutcases use big shot words to glosses over stupid “analyzes”. He dismisses a lack of aggregate demand which shows he is almost as clueless as you are. But he does have a point about people reacting to the fear of this virus. A point we have tried to hammer into your worthless brain many times. Trying actually reading this and rethink all of your prior incredibly stupid comments.

    2. Dr. Dysmalist

      Really? For an opinion on federal disaster relief you go to the Mercatus Center? They haven’t learned anything new and useful since they were founded in 1980, and probably well before then. That’s like asking a diehard Red Sox fan about the Yankees. You couldn’t find a hack with an even stronger bias against it no matter how much you tried.

  16. Bruce Hall

    Uncle Joe is hoping that a $2 trillion will sufficiently “stimulate” the economy: https://www.cnn.com/2021/01/14/politics/stimulus-payments-2000-dollars-biden/index.html

    Washington (CNN)A $2,000 stimulus check will be at the heart of a $2 trillion Covid relief plan that President-elect Joe Biden is set to unveil Thursday evening.

    In the U.S. there are 128 or so million households. If we take that entire $2 trillion and divide it by 128 million households (https://www.statista.com/statistics/183635/number-of-households-in-the-us/), that’s about $15,600 per household. Then if we just say “no more restrictions on businesses and travel”, that could be one helluva lot of consumer spending to stimulate the economy in ways that are not Soviet-style centrally planned. Why, some of that student debt could be paid off.

    But the real question is: do we need a $2 trillion stimulus if we open up the country for business again?

    Memo: What counts as a household?
    According to the U.S. Census Bureau, a household is considered to be all persons living within one housing unit. This includes apartments, houses, or single rooms, and consists of both related and unrelated people living together. For example, two roommates who share a living space but are not related would be considered a household in the eyes of the Census. It should be noted that group living quarters, such as college dorms, are not counted as households in the Census.

    1. pgl

      All that verbiage and you as usual miss the elephant in the room. Something called Federal revenue sharing to help states pay for teachers, police, health care workers, etc. Oh wait – you have no idea what they people do. Stay in your little basement Brucie and just hope your mom goes not catch this virus getting food for her coward of a son.

    2. pgl

      “if we open up the country for business again?”

      I noted earlier the total failure of Team Trump to do a damn thing to distribute the vaccine. That might help open up the economy but Trump does not give a damn. Neither apparently do you as you have been dodging this comment directed at you just like you dodge everything when your pathetic partisan lies have been exposed.

    3. 2slugbaits

      Bruce Hall Please make an effort to get your facts straight. The Biden stimulus plan is nothing like your description. A lot of it goes towards helping the states fight COVID as well as extended unemployment insurance and assistance to get schools COVID ready. Here’s a link with some of the details:


      As to those checks, Biden isn’t arguing for $2,000 per household. It’s $1,400 per person up to an income level of $75K, after which it falls off. And if you’ll recall, those direct checks were something that the Republicans wanted. It was Trump’s idea, remember? Personally I’m not a big fan of those direct payments, but given the output gap and current interest rates they are probably relatively benign. It’s not the best way to keep the economy afloat, but there are much worse ways. Given the current environment we’re better off being overly aggressive than overly conservative. If you actually knew some macroeconomics, then you might understand why that’s the case.

      Then if we just say “no more restrictions on businesses and travel”, that could be one helluva lot of consumer spending to stimulate the economy in ways that are not Soviet-style centrally planned. Why, some of that student debt could be paid off.

      Sorry, but this comment is unintelligible. And BTW, do you know anything at all about “Soviet-style” central planning? I’m curious, but what would you call Trump’s tariffs to protect steel and his subsidies to support Big Ag if not “Soviet-style” central planning?

      1. pgl

        Biden released a 200 page comprehensive plan to fight the virus. We should ask Bruce Hall to read it but we know this poor little boy would not get past the first 200 words before launching his usual total misrepresentations.

    4. Dr. Dysmalist


      No one with any understanding the issue is talking about stimulus. To repeat from many previous threads, they are discussing relief payments to partially offset the damage done by a natural disaster. I’m sure you’ve at least heard of SARS-CoV-2, right?

      “No more restrictions on business and travel … to stimulate the economy”

      By this ‘logic,’ after Hurricane Dorian practically destroyed everything man-made in the Bahamas in 2019, and after Hurricanes Laura and Delta devastated Lake Charles, Louisiana last fall, the best policy prescription would have been to encourage as many people as possible to travel as tourists to those areas because the destroyed hotels, bars, and restaurants needed the revenue. Such tourists would have been endangering themselves, the locals, and emergency personnel. That’s why FEMA and other Federal agencies provide the cash infusion, and anyone who is not a local or an emergency responder is banned from the area.

      In short, your wingnut so-called policy prescription does not withstand even cursory scrutiny. Even to call it harebrained would be insulting to rabbits.

  17. joseph

    Once again you have economists thinking in terms of GDP and calling it a stimulus plan. It’s a rescue plan. This shouldn’t be so hard to understand. It’s right there in the title: American Rescue plan.

    We don’t need to plug a hole in demand. We need to plug a hole in individual and business income because people can’t work or spend on the things they would without an epidemic. It’s to fix all the things broken by the epidemic. Coronavirus testing, vaccination help, pandemic supplies, 100,000 public health workers, emergency leave, unemployment insurance, housing assistance, SNAP (food) assistance, emergency child care support, small business grants.

    It’s about survival not stimulus. Please stop calling it a stimulus plan. Please stop trying to fight the last crisis. It’s not the same as this crisis. And please stop obsessing about GDP.

    1. 2slugbaits

      joseph That’s a good point and one I’ve made a few times myself. We need to keep in mind that calling it “stimulus” is really just shorthand out of habit (read intellectual laziness). Traditionally, overheating the economy meant inflation, but in the current situation overheating results in a spike in new infections. We want to keep the economy at a low simmer until we reach something like herd immunity, but we also need to support those people who cannot work because of the pandemic.

      Sadly, we’re already hearing the (not unexpected) laments of those so called “moderates” in the GOP. Romney and Collins were just fine with deficit busting tax cuts in the midst of steady economic growth, but now they’re wringing their hands about additional deficits when the markets are screaming for more government debt. If certain of our citizens and politicians would only spend as much time reading about macroeconomics as they spend listening to Fox Noise hosts we’d be a lot better off.

      1. Baffling

        The best rescue plan would have been a solid federal plan to distribute the vaccine. Trump had that chance and passed. It is a shame, because that would have been much cheaper than what must be done now. If trump could have had vaccines in lots of arms in december, we would be reopening the economy by end of february. A matter of weeks cost us a trillion dollars.

  18. David O'Rear

    Show me an economy with a demand problem, and I’ll show you an economy that can be fixed by fiscal stimulus. Show me an economy with a supply problem, and … you’re not talking about the USA today.

  19. Erik Poole

    The output gap is an artificial construct with potential to misguide policy as it has in the past. The objective here is not to make work for American macroeconomists.

    Perhaps the guide in this crisis should be to keep the fiscal flood gates open until states and municipalities can comfortably cover costs and large chunks of the service sectors are no longer shut down?


    On a related subject, it is sad to think that the Democrats have a vested interest in the pandemic-driven economic crisis lasting beyond 2022. The best fiscal response once the recession fades would be to reduce the deficit relatively quickly. That would cost the party votes in the 2022 election.

    It is sad to ponder how the largest and richest democracy in the world has so much trouble managing risk these days.

    1. Barkley Rosser


      He needs to wear large mittens in the cold? He can’t because his hands are too large?

  20. just-anecdotally-me

    A lot of the people in my orbit — meaning middle class people able to work from home — the stimulus money is being saved or used to pay down debt. That doesn’t seem inflationary. The people who I know needed the money spent it to make up for downturn related shortfalls. I just don’t see all this being inflationary. But that’s just anecdotal, and all that.

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