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As President Biden presses ahead with plans for a $1.9 trillion stimulus package, he and his top economic advisers are brushing aside warnings that acting aggressively to stimulate a struggling economy will bring a return of the monstrous price increases that plagued the nation in the 1970s.
After years of dire inflation predictions that failed to pan out, the people who run fiscal and monetary policy in Washington have decided the risk of “overheating” the economy is much lower than the risk of failing to heat it up enough.
Democrats in the House plan to spend this week finalizing Mr. Biden’s stimulus proposal to pump nearly $2 trillion into the economy, including direct checks to Americans and more-generous unemployment benefits, with the aim of holding a floor vote as early as next week. The Senate is expected to quickly take up the proposal as soon as it clears the House, in the hopes of sending a final bill to Mr. Biden’s desk early next month. Federal Reserve officials have signaled that they planned to keep holding rates near zero and buying government-backed debt at a brisk clip to stoke growth.
The Federal Reserve, under Chair Jerome H. Powell, and the administration are staying the course despite a growing outcry from some economists across the political spectrum, including Lawrence Summers, a former Treasury secretary and top adviser in the Clinton and Obama administrations, who say Mr. Biden’s plans could stir up a whirlwind of rising prices.
No one better embodies the sudden break from decades of worry over inflation — in Washington and elite circles of economics — than Janet L. Yellen, the former Federal Reserve chair and current Treasury secretary. Ms. Yellen spent the bulk of her career fighting in a war against inflation that economists have been waging for more than a half century. But at a time when the American economy remains 10 million jobs short of its pre-pandemic levels, and millions of people face hunger and eviction, she appears to be ready to move on.
In the guarded language of a Fed chair, Mr. Powell used a speech last week to push back on the idea that the economy was at risk of overheating. He said that prices could show a brief pop in the coming months, as they rebound from very low readings last year, and he said the economy could see a “burst” of spending and temporarily higher inflation when it fully reopens. But he said he expected such increases to be short-lived — not the sustained spiral that many economists worry about.
A small but influential group of economists is questioning that view — in particular, calling for Mr. Biden to scale back his economic aid plans, which include sending direct payments to most American households, increasing the size and duration of benefits for the long-term unemployed and spending big to accelerate Covid vaccine deployment across the country.
They argue that the size of the package outstrips the size of the hole the coronavirus has left in the economy. With so many dollars chasing a limited supply of goods and services, the argument goes, purchasing power could erode or the Fed might need to abruptly lift interest rates, which could send the economy back into a downturn.
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