The American Rescue Plan continues to drive inflation and economic damage.
More than eight months after its enactment, the $1.9 trillion American Rescue Plan (ARP) continues to reveal itself as the most damaging spending bill enacted in decades. 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. Congressional Republicans – who had already enacted a $900 billion relief bill just weeks earlier – made counter-offers desperately trying to negotiate this unnecessary $1.9 trillion proposal downward. Despite their empty rhetoric about bipartisanship and compromise, President Biden and congressional Democrats responded by cutting off negotiations without moving one inch off their opening proposal. As the economic case for the stimulus collapsed, the bill became a political “MacGuffin,” or a symbolic vehicle for Democrats to “resist Republican obstructionism” and show that they too were prepared to play hardball to pass their agenda. The details of the bill were secondary. Democrats passed the bill on a party-line vote and President Biden signed it.
Democratic leaders achieved their objective of gleefully spiking the football on Mitch McConnell, but what did the rest of America get?
To start with, $1.9 trillion in new debt. Measured by its ten-year deficit impact, the American Rescue Plan will likely end up as the most expensive spending bill of the past 50 years. More expensive than last year’s CARES Act, the 2009 stimulus, ObamaCare, or any enacted spending bill of the Ford, Carter, Reagan, Bush I, Clinton, or Bush II eras. The only comparable-size bills have occurred on the tax side – the 2001 and 2017 tax cuts. Of course, depending on the final legislation, Build Back Better may end up even more expensive
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.
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.
And inflation is precisely what occurred. ARP-derived spending amounted to a staggering $1.2 trillion between March and the end of September. Another $500 billion will have been added to the tab by next September. At the same time, the Federal Reserve indirectly monetized much of this debt as part of its $120 billion in monthly bond purchases. Washington may as well have printed $1 trillion and thrown it out of helicopters.
With supply chains limited and unemployment rates not falling as quickly as desired (more on that later), the ARP (with the help of the Federal Reserve) shot a bazooka of new demand into an economy struggling with supply and production. As economic malpractice goes, this was a textbook case.
Speaking of economic malpractice, even rising Covid vaccination rates and the prospect of a general economic reopening did not dissuade lawmakers from including a $300 weekly federal unemployment benefit bonus. This bonus combined with the typical $387 in weekly state unemployment benefits to equal $687, or the equivalent of roughly $17 per hour. That exceeded the wages that a large share of unemployed workers had been earning in their previous jobs. Accordingly, the number of unfilled job openings soared to unprecedented levels. Many employers proved unable to lure new applicants, and the labor-force-participation rate remained roughly equal to pre-stimulus levels.
The $300 unemployment bonuses were so self-defeating that 26 states took the rare step of refusing federal assistance and canceling the bonuses before they expired.
Driven by these poorly designed policies, the first $1.2 trillion in ARP spending failed to raise employment above the “zero-stimulus” baseline scenario that CBO assumed in February. Critics will lazily respond “it otherwise would have been worse,” but there is little indication that this so-called “stimulus” legislation put people to work, especially when it paid many people more to stay home.
Perhaps the most absurd ARP provision granted state and local governments an astounding $350 billion to close budget deficits that did not even exist. Democratic economists Jason Furman and Mark Zandi warned lawmakers that $350 billion was excessive and unnecessary, especially since Washington had already provided states with more than $500 billion in emergency pandemic aid. Lawmakers did not listen, and California now projects a $76 billion budget surplus over two years — nearly half of its $165 billion general fund budget. State and local government revenues are now 16 percent above pre-pandemic projections, and many governors have little idea what to do with such a large one-time cash infusion. Congress forbade states from rebating the federal funds to taxpayers. Creating permanent new state programs would recklessly outlast this one-time cash infusion. Addressing state and local infrastructure backlogs may have made the best sense, but Congress instead went ahead and recently threw $550 billion at infrastructure as well. It makes no sense for Washington to go deeper into debt so that state and local governments can sit on bloated budget surpluses with little use.
There is still more nonsense to beat out of the ARP piñata.
The $1,400 relief checks were undoubtedly popular. Yet there is no policy justification for Washington going deeply in debt to give the typical family of four that has lost no income $11,400 in relief checks over one year (when combined with earlier relief checks). Just like the 2020 checks, these grants were largely saved, and their value is being eroded by the very inflation that the ARP worsened.
Still not done subsidizing families, the ARP provided for $110 billion to be spent on a one-year child credit expansion (which lawmakers are now looking to extend at a potential cost of $1 trillion over a full decade) and a $26 billion expansion of the Earned Income Tax Credit. Layering on duplicative benefits did not seem to faze congressional spenders.
And the unnecessary and expensive duplication did not end there: States were also given $129 billion for temporary education needs — the largest K-12 grant ever — without a clear purpose, even while state and local governments were sitting on more than $50 billion in unused K-12 school relief funds from earlier emergency bills. Yet the temporary nature of these funds also prevents them from being used for permanent policies such as hiring new teachers. Moreover, any remaining education needs could have been easily financed from the $350 billion federal bailout received by state and local governments in the same bill. There was no remaining education “emergency” for this emergency funding bill to address.
Finally, the public barely even noticed an $80 billion bailout of bankrupt union pension systems, which overrode bipartisan negotiations for a cheaper solution. This federal bailout of private pensions sends a message to all corporate and union pension systems that any future underfunding will simply be rewarded with a taxpayer bailout.
The American Rescue Plan was the most expensive spending bill in half a century. It takes remarkable economic illiteracy and incompetence to apply $1.9 trillion in “stimulus” in a manner that actually worsens the economy, and (with few small exceptions) fails to address any significant policy challenges. Lawmakers struggling to finance Build Back Better legislation surely wish they could have much of that $1.9 trillion back to finance today’s expensive new initiatives. Such is the price of lawmakers dismissing warnings from liberal and conservative economists thanks to their determination to “own” those obstructionist Republicans.
This piece originally appeared at the National Review Online
Photo by Douglas Rissing/iStock