Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 404

Biden is stimulating an economy already enjoying a sugar hit

Detroit’s giant carmakers were among the US businesses tottering as the GFC took hold. About 2.6 million Americans lost their jobs over the four months from when the recession erupted in September 2008 until President Barack Obama assumed office at the start of 2009. The modelling of Christina Romer, Obama’s Chair of the Council of Economic Advisers, showed the then-US$15 trillion economy needed stimulus of about US$1.8 trillion to close the ‘output gap’ within two years.

How times change

But the Democrat-controlled Congress was infused with the era’s conventional wariness of budget deficits and government debt. Obama sought fiscal stimulus of only US$775 billion, though he expected the usual bartering among lawmakers to bloat the package to US$1 trillion. Republican outcries about government squandering swayed enough moderate Democrats, and the American Recovery and Reinvestment Act of February 2009 contained only US$725 billion in new money.

The jobless rate jumped from 8.3% that February to a then-post-war high of 10% eight months later as the number of unemployed swelled by another 3.5 million people. No surprise, the Obama stimulus of 5% of GDP has gone down in Democrat folklore as a 'measly' response that was partly to blame for the party losing Congress in the 2010 elections.

President Joe Biden appears determined not to repeat the errors made when he was Vice President. Biden is implementing a stimulus package worth 9% of GDP, even though the US economy is well past crisis-mode and the output gap – the difference between the economy’s actual and potential performance – is narrowing.

Package upon package

The recovering US$22 trillion economy is enjoying a vaccine-inspired reopening. Congress had already passed four covid-19 fiscal packages worth more than US$4 trillion that are still energising spending. The jobless rate has plunged from 14.8% in April last year to 6%. Housing prices are soaring at a 12% annual clip. The Federal Reserve has pledged to maintain its ultra-loose unconventional monetary policy.

In an era when ‘magic money’ theories dismiss concerns about government debt, the American Rescue Plan entails US$1.9 trillion of fiscal stimulus that will boost the budget shortfall for fiscal 2021 to 18% of GDP. Washington’s debt load will soar from the pre-stimulus forecast of 102% of output, most likely well past the record 107% of GDP it reached around the end of World War II.

To its proponents, the inequality-fighting stimulus gives money to poorer households, extends unemployment relief, adds funds to vaccination programs, helps schools reopen and plugs gaps in the finances of local and state governments. The mostly one-off spending is popular and presaged more durable outlays such as the infrastructure plan Biden announced on March 31 that, if passed by Congress as announced, would over the next eight years entail US$2 trillion of fresh spending. Other Democrats are calling for a US$2 trillion ‘Green New Deal’ and expanding free healthcare to those aged below 65.

With US growth surging, did it need more stimulus?

As for the macroeconomics, the emergency relief prompted Fed officials to lift their US growth forecasts for 2021 from 4.2% to 6.5%, which would be the fastest pace since 1984’s result of 7.2%. Others have raised their US growth forecasts for this year to as much as 8%, a speed last matched in 1951. Unfazed by the faster growth, Fed officials offered the ‘forward guidance’ that the US cash rate would stay at near-zero in coming years.

To its critics, much of the stimulus is a superfluous ‘sugar hit’ because the economy’s spare capacity is shrinking anyway. They worry that government debt is reaching troublesome levels. This first points to higher taxes and reduced benefits in coming years – thus the package boosts intergenerational inequality while hindering growth from 2022.

The major concern is that the package is bound to lift consumer prices. Inflation, as the Fed concedes, is most likely to accelerate beyond the Fed’s 2% target, though the central bank is unruffled by any spike in inflation above target. The critics worry that the expected rise in inflation beyond 2% proves more permanent. Biden’s relief thus could backfire if it were to spark sooner- and larger-than-expected increases in official and market interest rates. Biden’s first big legislative victory shows the new President is prepared to take risks on fiscal policy that could shape the rest of his presidency.

To settle a quibble, Obama’s stimulus should be better remembered because what was one of the largest post-war stimulus programmes set up a record US expansion. More urgently, the pandemic is far from over. Mutations that nullify the vaccine would upend the economy. Yet Biden’s stimulus might make it much harder to conjure up more huge sums without political and financial ructions. As to the threat from higher prices, hasn’t the neoliberal age of ‘independent’ central banking killed inflation? The Fed can always do a U-turn and crush inflationary pressures.

Relying on low inflationary expectations

That, however, would thump the economy and upset capital markets. The most likely outcome is less threatening. In an era of low inflationary expectations and relatively weak labour bargaining power, there appears to be enough of an output gap to make it highly likely that the expected acceleration in inflation proves fleeting and Biden’s bold approach will reinforce just how cautious Obama was 12 years ago.

 

Michael Collins is an Investment Specialist at Magellan Asset Management, a sponsor of Firstlinks. This article is for general information purposes only, not investment advice. For the full version of this article and to view sources, go to: https://www.magellangroup.com.au/insights/.

For more articles and papers from Magellan, please click here.

 

RELATED ARTICLES

Are debt and its servicing cost serious worries?

How the global renewables arms race will benefit Australia

Can quantitative tightening help the Fed fight inflation?

banner

Most viewed in recent weeks

The case for the $3 million super tax

The Government's proposed tax has copped a lot of flack though I think it's a reasonable approach to improve the long-term sustainability of superannuation and the retirement income system. Here’s why.

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

The revolt against Baby Boomer wealth

The $3m super tax could be put down to the Government needing money and the wealthy being easy targets. It’s deeper than that though and this looks at the factors behind the policy and why more taxes on the wealthy are coming.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

The super tax and the defined benefits scandal

Australia's superannuation inequities date back to poor decisions made by Parliament two decades ago. If super for the wealthy needs resetting, so too does the defined benefits schemes for our public servants.

Are franking credits hurting Australia’s economy?

Business investment and per capita GDP have languished over the past decade and the Labor Government is conducting inquiries to find out why. Franking credits should be part of the debate about our stalling economy.

Latest Updates

Superannuation

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

Superannuation

Less than 1% of wealthy families will struggle to pay super tax: study

An ANU study has found that families with at least one super balance over $3 million have average wealth exceeding $19 million - suggesting most are well placed to absorb taxes on unrealised capital gains.   

Superannuation

Are SMSFs getting too much of a free ride?

SMSFs have managed to match, or even outperform, larger super funds despite adopting more conservative investment strategies. This looks at how they've done it - and the potential policy implications.  

Property

A developer's take on Australia's housing issues

Stockland’s development chief discusses supply constraints, government initiatives and the impact of Japanese-owned homebuilders on the industry. He also talks of green shoots in a troubled property market.

Economy

Lessons from 100 years of growing US debt

As the US debt ceiling looms, the usual warnings about a potential crash in bond and equity markets have started to appear. Investors can take confidence from history but should keep an eye on two main indicators.

Investment strategies

Investors might be paying too much for familiarity

US mega-cap tech stocks have dominated recent returns - but is familiarity distorting judgement? Like the Monty Hall problem, investing success often comes from switching when it feels hardest to do so.

Latest from Morningstar

A winning investment strategy sitting right under your nose

How does a strategy built around systematically buying-and-holding a basket of the market's biggest losers perform? It turns out pretty well, so why don't more investors do it?

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.