In March of 2021, Joe Biden signed the $1.9 trillion pandemic relief bill known as “The American Rescue Plan.”
Few stopped to ask if America needed rescuing — especially in the states who ended up with a gargantuan $350 billion payday that, as it turns out, they didn’t even need. California ended up with an unthinkable $75 billion budget surplus in 2020. They will run a $31 billion surplus in 2021. Many other states are still trying to figure out how to spend all that extra cash.
Arguments in favor of the bill ran from the scary to the silly. We were told that state governments needed the money to fund pension plans, pay government workers, and pay for pandemic health care. We were told that the states would lose billions of dollars in tax revenue because of business closings. We were told that hospitals would run out of money, that health care bills would go unpaid.
What we were told didn’t even come close to reality.
In fact, as it turns out, the American Rescue Plan is a major driver of inflation and continues to damage the economy in other ways. It may be the “worst spending bill in decades,” according to the National Review.
ARP was initially promoted primarily as health-care legislation to finance Covid vaccines and treatments (even though just 1 percent of its cost went towards vaccines and only 5 percent had any direct relation to health care) and secondarily as a relief bill. Instead, the legislation became a large grab bag of giveaways and economic “stimulus” provisions that even left-of-center economists such as Lawrence Summers, Jason Furman, and Mark Zandi warned was too expensive, too inflationary, too unnecessary, and too wasteful.
What made the bill so totally unnecessary was that Republicans had passed a $900 billion relief bill in December of 2020. And with the nation beginning to emerge from its self-imposed shutdown, it was thought that $900 billion was plenty of stimulus to get the country rolling again.
But that was a futile hope. Democrats used the reconciliation process to ram the ARP down the throats of Republicans and then gloat over their “victory.”
At what cost was that victory achieved?
Adding $1.9 trillion (plus interest) will — under CBO-projected interest rates — cost roughly $60 billion in government interest payments every year, forever. This cost also reduced by $1.9 trillion Washington’s fiscal space to enact other legislative priorities or respond to other crises. To the extent that the long-term debt continues to grow to unsustainable levels, this $1.9 trillion in borrowing accelerates the point at which interest rates and taxes will begin rising.
The practical effect of all this money being pumped unnecessarily into the economy is a predictable equation that economists use to gauge the economic impact of government spending.
ARP’s more urgent failure is its significant contribution to today’s soaring inflation. In early February, CBO estimated that the baseline economy would operate $420 billion below capacity in 2021, and a total of $857 billion (or about 1 percent) below capacity over the next four years before returning to full employment in 2025. Even for those soft Keynesians who believe that government spending has a small multiplier, a $1.9 trillion stimulus bill would vastly overshoot the output gap. And once America’s output capacity taps out, any additional stimulus will simply bring inflation. Don’t take my word for it. Top Clinton and Obama White House economist Lawrence Summers warned Democrats that ARP would accelerate inflation.
It’s not very satisfying to say “I told you so” to Democrats who dismissed arguments out of hand that inflation would go up and the economy would suffer for all the excess spending. In their eyes, this was consequence-free spending that would only help people — and help their cronies in state capitols across the country.
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