Yellen and Powell Are Wrong: No More Stimulus Is Needed.

Recently, both Federal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen said that although the economy is forecast by them to grow 6.5% this year, more stimulus is needed. That means nearly $6 trillion of already-approved government stimulus is not enough. How much is enough?

In 2009, the Obama administration signed an $800 billion stimulus package. That was, by far, the largest stimulus package ever enacted. As the same time, the Federal Reserve (Fed) massively increased the money supply and also reduced interest rates to near zero.

These actions likely were the reason that the recession ended and a recovery began. The recovery was very sluggish, averaging only about 2% annual growth for the following seven years. That led some mostly liberal economists to conclude that the stimulus package wasn’t large enough.

In 2010, annual GDP was about $15 trillion, meaning the stimulus was about 5.3% of GDP. That, coupled with the Fed’s monetary policy, should have led to greater growth. Since it did not lead to rapid growth, President Joe Biden’s current advisers are pushing for more stimulus.

As Congress has already approved $6 trillion in stimulus in the last nine months, and since this year’s GDP will be $21.5 trillion, the current stimulus packages amount to 28% of GDP. Isn’t that large enough?

The answer is that it is probably way too much. When this stimulus is fully spent, demand in the economy will soar, likely more than business’ ability to meet the large increase, meaning prices will rise significantly. This will lead to a possible runaway inflation issue.

Powell and Yellen have vastly overstated the problem. Their calls for the federal government — which already carries a nearly $30 trillion public debt — to spend even more money that it doesn’t have will be counterproductive.

Yellen notes that, “the country is still down nearly 10 million jobs from its pre-pandemic peak” and that there are still “some very deep pockets of pain” in the economy. That’s partially true, but . . .

Nearly 22 million Americans lost their jobs in March and April last year. By September, about half were called back to work. Today that number is down to under 9 million. While this is a problem, the number will rapidly drop once the economy fully reopens and Americans spend all of the free money they received from the federal government.

In fact, nearly all American households with a family of four received more than $11,000 in free money from the government whether they had suffered economically or not. This is a massive amount of money that once spent will be more than enough to stimulate the economy.

Any more stimulus is just not needed and extremely irresponsible. Both Yellen and Powell seem to subscribe to modern monetary policy theory. This unproven and inaccurate theory says that both the size of the deficit and the growth of the money supply will not lead to more inflation at a time that the economy is operating at less than full capacity.

They cite actions taken after the 2008–2009 recession. The reality is that inflation and more growth did not follow the monetary and fiscal policy actions for two reasons, neither of which had to do with a too-small stimulus package.

The enormous 2009 stimulus package spent much of the money on things like solar panels and social justice issues, rather than giving the money directly to consumers. Consumers will purchase exactly what they want, leading to a greater multiplying effect. When the government spends money on things that the public may not want, the multiplying effect is reduced.

Also in 2010, Congress passed the Dodd-Frank bill, which was designed to eliminate the banks’ ability to make predatory loans. The problem was that the bill severely restricted banks’ ability to make any new loans. That reduced the multiplying effect of increases in the money supply.

In 2018, much of Dodd-Frank was repealed, meaning there is a greater multiplying effect of monetary policy today. Also, much of the recently passed stimulus will give money directly to consumers to spend on things they want. That will increase the multiplying effect of monetary policy.

Both Yellen and Powell are wrong to say that more stimulus is needed. Once the economy reopens, economic growth will soar. Already the Fed increased its forecast for economic growth this year to 6.5%. By June it will raise that forecast to at least 8%.

Clearly, no more stimulus is needed. In fact, any more will be counterproductive and lead to rapid inflation.