A new report from the Congressional Budget Office indicates that the gap between where the United States’ economy is now in the midst of the pandemic and where it could be performing might not be as wide as previously thought.
The CBO’s February 1 report forecasting the state of the economy over the next decade estimated the gap between real GDP and potential real GDP in 2021 to be about $420 billion, and it says that real GDP is expected to return to its pre-pandemic level by mid-2021, even without further significant federal intervention. However, other economic measures show a slower return to normal: The unemployment rate, for example, is not projected to return to pre-pandemic levels at any point during the 10-year budget window.
The report factors in federal COVID-19 relief enacted to date, including the $900 billion Consolidated Appropriations Act, 2021 (P.L. 116-260), signed into law in December 2020, but it offers no projections on the potential effects of President Biden’s $1.9 trillion American Rescue Plan.
Kyle Pomerleau of the American Enterprise Institute told Tax Notes that the CBO’s findings “should play some role in determining the size and the scope of the relief package,” noting that some advocates for additional, substantial relief have framed it as a way to shrink the economic output gap.
Pomerleau also observed that advocates for a large relief package, like Jason Furman of the Peterson Institute for International Economics, had suggested an assumed spending multiplier of 0.5, so that a $900 billion relief package would boost GDP by half that amount — enough to close the 2021 real GDP output gap.
If that same assumption is applied to the Biden administration’s $1.9 trillion package, “you are going to cover more than the output gap and go a little overboard,” Pomerleau added.
Pomerleau further criticized the Biden administration’s proposed relief package for including provisions that aren’t immediately necessary to address the pandemic. The roughly $100 billion child tax credit expansion Biden is seeking “may be a reasonable policy in general, but it's unclear why it’s appropriate in a COVID package when rebate checks offer the same relief,” he said.
Macro vs. Micro
The White House downplayed the CBO report’s findings. At a press briefing later in the day, press secretary Jen Psaki contended that economic growth isn’t the measurement that Biden’s COVID relief plan is intended to target.
The CBO’s projections are “not a measure of how each American family is doing, and whether the American people are getting the assistance they need or whether they’re able to get vaccines,” Psaki said. Biden’s plan “answers a different question,” she added.
G. William Hoagland of the Bipartisan Policy Center told Tax Notes he agreed with Psaki’s assessment that the output gap is only a macro-level measurement, and further agreed that policies ought to be targeted in ways that address the concerns she highlighted.
However, Hoagland noted that the CBO’s new report also readjusted its July 2020 forecast of how much the economy would decline that year from 5.9 percent to 2.5 percent, which he said was roughly equivalent to how much the economy declined after the 2008 financial crisis. But during that crisis, Congress only enacted $800 billion in stimulus, he noted.
“So, the fact that we have a stimulus package here of well over that $800 billion . . . when you add in the previous exercises, one could argue that the $1.9 trillion is very rich,” Hoagland said. Enacting too much stimulus now could lead to an “overheated economy” after the pandemic, he said.
The roughly $618 billion counteroffer being floated by a group of 10 Senate Republicans might not be acceptable to Biden and congressional Democrats, but their proposal is nevertheless a “start towards bipartisanship, and if it is, it can be done a lot quicker and faster than going the partisan budget reconciliation route,” according to Hoagland, a former Republican Senate staffer.
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