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Joe Biden’s budget activism could create economic overheating. Should we be worried or rejoice?

Eco side. A chronicle by Etienne de Callataÿ

Temperance is one of the four cardinal virtues, alongside prudence, courage, also aptly called “strength of soul”, and justice. And the economist finds his account there, he who likes to oppose the arguments under the double formula on the one hand, on the other hand. Likewise, when it comes to lowering the mountains and raising the valleys (Isaiah, 40), he willingly tackles the task, reinforced by another bible, the General theory de Keynes, and promotes so-called counter-cyclical policies. When the economy is bad, it is necessary to press firmly on the gas pedal, and on that of the brakes when it is going well. This is the so-called stabilizing function of the public authorities, a function they resolutely fulfill in the current crisis.

The fact that temperance is a virtue means that there can never be a question of “good excesses”, that any excess should be prohibited? In these times when we are forced into social frugality and, for many citizens, also economic, we would like to believe in beneficial excesses. Well, imagine that it is, to follow Joe Stiglitz, Nobel Prize winner in economics and voice heard in macroeconomic debates (1).

The scale of the stimulus package announced by Joe Biden, namely 1.9 trillion US dollars, has sparked controversy among economists. For some, there is a risk of overheating the American economy. This amount comes in addition to measures for 900 billion dollars decided at the end of 2020 and adds to the possible injection into the economy of most of the forced savings accumulated in recent quarters by households. The additional savings alone are approaching $ 2 trillion. As a result, companies may not be able to respond to such a surge in consumption.

For others, this worry about overheating is misplaced. The unused productive potential of the economy would be underestimated and households could keep a good part of this woolen stocking made up last year, even if its constitution is a matter of constraint and not of choice. Stiglitz adds a third counter-argument, namely that even if there was overheating, far from being a catastrophe, it would be beneficial. We would therefore have a “good excess”, and that for three reasons. The first is that, if there is overheating, the central bank will have to raise interest rates, and that seems desirable to it. Today, the prudent saver receives a remuneration lower than the rate of inflation, and therefore sees the purchasing power of his savings decrease. Such “euthanasia of annuitants” is socially undesirable. In addition, low interest rates are fueling speculation.

The second is that, if there is overheating, the public authorities will have to compress purchasing power by raising certain taxes, and that too seems desirable to them. In particular, he cites environmental taxation, the taxation of financial transactions and the accentuation of the progressivity of levies.

The third reason, finally, is that, if there is overheating, it would serve the cause of social integration. Faced with a labor shortage, employers should let go of their prejudices and recruit from marginalized social groups. In addition, only such a boom context can lead to a significant revaluation of low wages.

With Schumpeter and his “creative destruction” already mentioned here, according to which the decline of companies is a stage which allows the emergence of others, more efficient, we knew that evil is associated with good. With Stiglitz, we learn that there would be virtues to certain excesses. Wasn’t Thomas Carlyle wrong to call economics a gloomy science?

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(1) J. Stiglitz, “Failing to pass Biden’s relief package would be irresponsible and reckless”, CNN Business, February 23, 2021.

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