The US stimulus plan is a risky gamble by Biden

Biden’s interesting economic stimulus package, which is based on Keynesian economic theory - which is the subject of much criticism - aims to reach the full potential of the US economy as soon as possible, and if this bet succeeds, contrary to popular economic theory, the eurozone will have to change its way of operating.

The writer Guillaume de Calnion said in a report published in the French newspaper "lesechos" that the repercussions of the global Covid-19 pandemic do not cease to surprise us, as the economic changes that began since the 2008 crisis have become more apparent and may become reality, and as is often the case. It is the United States of America that defines this pattern, and if the Biden administration’s massive stimulus package of about $ 1.9 trillion, directed mainly to families, succeeds, that would change the economic experts ’view of the world.

Some economists, like the former chief economist at the International Monetary Fund, Olivier Blanchard or Larry Summers, a former advisor to Bill Clinton - who are considered new Keynesians - fear that the stimulus plan will lead to the growth of the US economy above the normal rate and the return of inflation, and in principle it is difficult to justify The adoption of this huge budget to revive American consumption, with the growth of American household income by 6% last year, thanks to aid.

Change in economic performance

In the 1970s, since the end of the Bretton Woods Accords in 1971 and the pegging of the dollar to gold, developed countries faced an inflationary recession, a devastating mixture of high inflation and low growth, economists were in a state of great confusion, so was the then Fed Chairman Paul Volcker - who was appointed by Democratic President Jimmy Carter - The first to raise interest rates in the early 1980s during the era of Ronald Reagan.

Since then, central banks have been responsible for regulating the rate of economic growth using interest rates that decline when economic growth is very weak and rise when the risk of inflation looms on the horizon, while the role of fiscal policy has been reduced to a minimum in terms of organizing the economy.

In order to make their decisions, central banks sought to estimate what economists call the "non-accelerated unemployment rate" (NAIRU), below which prices rise, and when unemployment reached this rate, economic performance was at its peak, while inflation disappeared, and perhaps This was limited to the price level of financial assets, but not cars, phones, food, clothes, or even wages, and for 20 years central banks failed to bring back inflation.

Perhaps worse, central banks expected their return often, such as the European Central Bank in the spring of 2011 or the Federal Reserve system in 2015 when they both raised their rates preemptively in the wake of unemployment almost falling to its structural level (the rate of non-accelerated inflation of unemployment) And despite the estimates, the structural unemployment rate was never observed because prices have not accelerated since 2008.

Before the Covid-19 pandemic, the unemployment rate fell to 3.5% without any pressure on prices, and in 2015 economists at the US Department of Labor estimated this rate at 5.2%, and this means that no one really knows the rate of structural unemployment, and the growth rate cannot be expected. Probably, therefore, we cannot accurately estimate how far we are from a fully functioning economy.

If Biden's economic plan fails, the United States will end up with a massive (European) budget deficit.

A plan to revive the economy

The Biden team is trying to see to what extent the production system can be put under pressure by risking more revitalization of the economy than is necessary, even if that implies higher inflation, and at the moment it appears that Fed Chairman Jerome Powell is agreeing to regulate policy. The financial and the economy, which will negatively affect the public debt in the short term, and if the gross domestic product achieves rapid growth, the debt burden will be eased after that.

The writer explained that the Covid-19 pandemic did not contribute to the emergence of these economic ideas, because it has existed since the 2008 crisis, but rather contributed to accelerating its implementation, and Joe Biden is not the only one who tried to revive the American economy on a large scale, but rather Donald Trump preceded him through tax cuts. And reduce unemployment rates at a time when everyone expected the failure of his efforts.

What about Europe?

Europe seems far from the United States on the intellectual and institutional levels, and in light of competitive inflation and pressure on export demand, the obstacles that European countries must overcome are many before making changes of this size, for example Germany - which is now considered the strongest economy in the old continent - has structures that allow its economy It delivers very good performance without inflation.

The writer pointed out that the level of the minimum wage is not reviewed every year, and the decentralization of social negotiations at the level of the institution is almost complete, and the joint management of institutions provides the possibility of reconciling the interests of employees and employers, not to mention that the demographic aging makes Germany a country resistant to any rise in prices, especially In light of the abundance of savings.

All these characteristics - which other countries such as France lack - would help achieve a moderate wage rate that contributes to feeding trade surpluses, but this European model could pose a problem if the economic recovery experiment proposed by Joe Biden is successful, and that will be clear by mid The year 2022.

If economic growth picks up again across the Atlantic and inflation remains under control, the public debt burden of the United States will gradually decrease.

On the other hand, the eurozone will be subject to pressure to move or it will find itself economically backward. In addition, the trade deficit will worsen with the increase in European surpluses, which is sure to create tensions with Washington.

If Biden's economic plan fails, the United States will end up with massive budget deficits and external deficits as well, and economists will face greater uncertainty and confusion.