Olivier Blanchard, the former chief economist of the International Monetary Fund and perhaps the most cited economist in the world, spelled out his case against the Biden bill in a series of tweets on Saturday.
Blanchard’s argument is that the size of the stimulus injected into the economy would be too large, especially when added to the measures taken last year. The additional spending power created by the additional $1.9 trillion budget deficit would drive up prices and force the Federal Reserve to hike interest rates.
A careful economist, Blanchard follows up his tweets with warnings that some of the estimations he uses could be wrong. Perhaps the stimulus will have a smaller multiplier effect, he says, so it would not hit the economy with as much force as expected. Or the economy’s ability to expand production to meet the additional command could be greater. Nonetheless, the $1.9 trillion would be too large under any reasonable assumptions, he argues.
Like many economists grounded in the work of John Maynard Keynes, Blanchard thinks that deficit spending can be helpful to help an economy overcome a shortfall. But too much of it can result in unwanted inflation. In another tweet, he posted an interview in which he approved of deficit spending to deal directly with pandemic related health care costs and longer-term investments but warned about financing consumption through debt.Blanchard’s objections to the Biden plan make him the second leading liberal economist to raise the alarm about the size of the proposal. Last week, Larry Summers–who was Treasury Secretary in the Clinton administration and chief White House economist in the Obama administration– said the Biden plan was risky because it was so much larger than the hole the pandemic punched in the U.S. economy.
The warnings coming from stalwart liberal economists could be a problem for the Biden administration because the Democrats’ hold on the House is slim and the Senate is evenly divided. Moderate Democrat defections could bring down a bill and the threat of such defections would likely force the White House to pare back the ambitious spending package.