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O’Brien and Kaissar: COVID relief bigger than World War II budget? Sounds right

15March 2021

President Joe Biden signed a $1.9 trillion COVID-19 relief bill on Thursday that brings total federal spending to combat the pandemic over the last year to about $6 trillion. He also plans to tee up a huge infrastructure outlay of about $4 trillion over the next 10 years on roads, bridges, tunnels, energy grids, strategic industries and other needs.

That’s a lot of money. And it’s raised the hackles of Biden’s critics. They’re concerned that those trillions amount to dangerous overreach, will saddle the government with gargantuan, unmanageable debt and will eventually produce rampant inflation. Just look, they say: It’s more than the U.S. government spent fighting World War II!

Indeed it is. In inflation-adjusted dollars, the U.S. spent about $4.1 trillion waging World War II. It also spent more than $300 billion each on World War I and the Korean War, and $738 billion on the Vietnam War. The bill for the wars the U.S. has waged in Iraq, Afghanistan and elsewhere since the terrorist attacks of Sept. 11, 2001, is $2.3 trillion and counting. All told, the U.S. has spent about $7.9 trillion on warfare since World War I.

Well, we’re at war again, as Biden’s predecessor and others have routinely noted of the yearlong battle against COVID-19. So the comparison with World War II is apt. Going to war requires being on a war footing, including a willingness from the federal government to flex its ample fiscal muscles in response to the pandemic’s economic and social devastation.

It’s also worth remembering that it was government spending on World War II that ultimately lifted the U.S. out of the Great Depression, not the well-meaning, necessary but often experimental and scattered New Deal initiatives that preceded it. Federal spending on defense represented about 40% of gross domestic product by 1945. By comparison, the $6 trillion Congress has committed to fighting COVID-19 represents less than 30% of current GDP.

In addition to winning the war, that spending helped bring new people into the labor force and fostered public-private partnerships that spawned manufacturing and technological innovations. Despite fears among some analysts that World War II outlays might set back the economy after the war, they ushered in one of the largest economic expansions in history and helped provide the foundations for unprecedented middle-class growth and prosperity.

One of the most common criticisms of Biden’s bill is that it will cause inflation to skyrocket, but that argument is grounded more in theory than data. There isn’t an obvious link between spending and inflation. The Federal Reserve more than tripled the size of its balance sheet after the 2008 financial crisis, spurring constant fearmongering about inflation. And Congress has run huge annual deficits since then — yet inflation has remained stubbornly below the Fed’s 2% target. Japan’s central bank has been trying to stimulate and spend its way to higher inflation for three decades without success. The reality is that no one knows exactly what causes inflation to jump.

Many inflationistas are haunted by the stagflation of the 1970s, which featured an unusual combination of high inflation and unemployment. Inflation climbed above 13% by 1980, exceeding anything before or since in modern times. Importantly, those were the days before big, bold Fed interventions and federal deficits. While the money supply expanded in the 1970s, that expansion was not meaningfully higher than the one that came after the financial crisis, so the surge of inflation in the 1970s can’t be linked cleanly to spending. The more likely culprits were a pair of energy crises ignited by oil embargoes.

While the amount of money flying around has swelled more in the last year than in any other during the 1970s or since the financial crisis, there’s no indication that the $9 trillion Congress and the Fed have spent or committed is stoking a worrisome spike in inflation. The core consumer price index rose less than expected last month and 1.3% during the last year. Overall CPI was up just 1.7%. If anything, inflation is running too low. While longer-term inflation expectations have risen over the last year, they remain only slightly above the Fed’s 2% target.

As we have argued frequently, there are reasons to criticize the federal relief effort. The government could have spent significantly more to help working Americans and build a better safety net beneath consumers whose spending traditionally generates about 70% of the country’s GDP. More of the funding should have gone directly to workers rather than being channeled through businesses. One of the key shortcomings in COVID-19 spending so far is that only a fifth of the aid went directly to individuals. The money could have also gone a long way toward badly needed investment in infrastructure, education and public health.

Regardless, we don’t think that inveighing against the Biden plan for its size has merit. Unlike previous installments of COVID-19 spending, it does more to prioritize direct relief for low-income and working-class Americans. Exactly how relief money is targeted matters as much, if not significantly more, than the amount.

This isn’t Biden’s first battle, either. He was in the trenches during the government’s response to the financial crisis. In the interests of bipartisanship, the Obama administration settled for relief spending of less than $1 trillion. It was crafted to meet the needs of Wall Street and corporations but did little to help ordinary Americans. That tepid fiscal response put a much-needed stimulus effort in the hands of central bankers here and abroad, who ultimately had to use monetary policy to keep economies afloat. That was a useful Band-Aid, but economic growth suffered. Average workers, meanwhile, were cast adrift with social and political consequences we’re living with today.

To be sure, the realities of all of this recent spending have to be recognized, including the contribution made by a huge tax cut for the wealthy and corporations that Republicans engineered. But theoretical arguments about the optimal size of the federal debt or the impact of spending on inflation shouldn’t trump real and obvious problems Biden’s relief bill will address.

Biden has learned his lessons from the financial crisis. He’s going big this time, and he’s not letting false gestures from Republicans about bipartisanship get in his way.

Timothy L. O’Brien is a senior columnist for Bloomberg Opinion. Nir Kaissar is a Bloomberg Opinion columnist covering the markets. He is the founder of Unison Advisors, an asset management firm. He has worked as a lawyer at Sullivan & Cromwell and a consultant at Ernst & Young.

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