Recently released data by the Labor Department shows that more than 916,000 jobs were added in March. That means of the 22 million Americans that became unemployed last March and April, only 8.4 million remain unemployed. In the last 11 months, the economy added more than 13 million jobs. This is a remarkable recovery that certainly needs no more stimulus.
In fact, additional stimulus will be counter-productive if it overheats the economy. If that is the case, there will be a severe inflation problem. The U.S. hasn’t had an inflation problem since 1981.The already-approved $6 trillion of stimulus is more than was needed. Yet the Biden administration is talking about more.
In 2009 the Obama administration passed a more than $800 billion stimulus package that was by far the largest ever passed. That amount represented just over 5% of annual GDP. Today the $6 trillion of stimulus already passed in the last 11 months is more than 28% of annual GDP. That could lead to an overly stimulated economy.
To be fair, President Biden’s economists argue that the recovery from the 2008-2009 recession was so sluggish because the stimulus package was not large enough, which is why they are pushing Biden to spend more now.
The reality, though, was that the sluggish recovery after the 2008-2009 recession was due to a number of other factors, not related to the size of the stimulus package. The sluggish over-regulated economy was caused by executive orders. Obama put thousands of growth-stifling regulations on the economy. The Trump administration removed nearly all of those, so they are no longer in effect.
Through legislation, the Obama administration implemented 21 new or increased taxes in the Affordable Care Act. Increases in tax rates always tend to slow economic growth. While those taxes are mostly still in place, Congress passed a massive income tax rate cut that went into effect in 2018.
In 2010, Congress passed the Dodd-Frank bill, which severely limited banks’ ability to make loans. That minimized the multiplying impact of the expansive monetary policy. In 2018, most of those limitations were reversed.
That means stimulus dollars spent today will have a greater impact on economic growth than the stimulus dollars spent in 2010.
The latest jobs report also showed that the unemployment rate has fallen to 6%. Some of that decrease is due to people leaving the job market, but most of the unemployment rate reduction is simply due to the growing economy brought about by re-opening the parts of the economy that have been closed.
As more Americans receive the COVID-19 vaccine, the number of new cases will fall. That will allow the economy to fully reopen, perhaps by Memorial Day. That means millions of workers will be called back, further reducing the unemployment rate. By early fall, nearly all of the remaining 8.5 million workers who lost their job because of the response to the virus, should be working.
That means the unemployment rate will fall to under 5% before the end of the year. At that point, the country may begin to experience a labor shortage. Couple that with a potential capital shortage and the result will be inflation along with a slow-growth economy. In the 1970s, we referred to that as stagflation.
The potential capital shortage could be seen as early as next year. The federal government has a public debt approaching $30 trillion. Of that total, about $24 trillion is financed by selling bonds to the public. This severely reduces the amount of capital available for business.
The remaining $6 trillion of public debt was financed by selling bonds to the Federal Reserve, which just printed $6 trillion more dollars. This, of course, is also inflationary.
If Biden is successful with his desire to raise the corporate tax rate, raise the capital gains tax rate, and raise the personal tax rate for high income earners, capital formation will be severely reduced. This will make the capital shortage worse.
Considering this, it must be clear that no additional stimulus is needed and indeed we probably have overstimulated the economy with the already-passed stimulus. While the nation’s infrastructure surely needs to be rebuilt, the country simply cannot afford to do so at this time.
Any further deficit spending will overstimulate the economy, add to a potential capital shortage, and trigger perhaps large increases in inflation, while eventually slowing economic growth.
That doesn’t benefit anyone.
Dr. Michael Busler, Ph.D., is a public policy analyst and a professor of finance at Stockton University in Galloway, New Jersey, where he teaches undergraduate and graduate courses in finance and economics. He has written op-ed columns in major newspapers for more than 35 years.
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