Fortunately, a lot of stimulus is already in place. The most recent coronavirus relief bill, signed into law at the end of December, was for about $900 billion. Its effects have not yet shown up in G.D.P. data.
On top of that is the pent-up demand from the pandemic. When people started avoiding restaurants, travel and inessential shopping last spring, the personal saving rate soared, and it has since only partly returned to normal. Much of that extra saving is sitting in liquid assets, ready for people to spend when it is safe to do so.
All of this is to say fiscal policymakers may have already pushed on the accelerator hard enough to bring the economy close to its speed limit by year’s end, when widespread vaccination is likely to have released much of that pent-up demand. Another $1.9 trillion, as President Biden has proposed, could push the economy well beyond the limit.
To be sure, some new federal spending may be needed for public health and for those experiencing hardship. But even spending that is targeted at disaster relief expands the demand for goods and services.
Beyond these necessary expenditures, there is not a strong case for more fiscal stimulus in general. The $1,400 checks for most Americans in the Biden proposal are going to many people who don’t need them. That item alone costs $422 billion.
Advocates for greater fiscal stimulus point out that estimates of potential G.D.P. are highly imprecise. Moreover, they say, when the economy exceeded potential in late 2019, there was hardly a whiff of inflation, so why worry now?
They are right about the imprecision, but some portents of inflation did appear in 2019. For the year that ended in the first quarter of 2020, the employment cost index for wages and salaries in private industry grew 3.2 percent, the fastest rate in more than a decade. Had that acceleration continued uninterrupted by the pandemic, businesses would have eventually passed rising labor costs on to consumers as higher prices.