The US economy, like much of the northern hemisphere, emerged from the great global financial crisis of 2008 with a lack of aggregate demand. Even with zero nominal interest rates, meaning slightly negative real interest rates, the labor market recovery took ten years.
According to members of the Federal Reserve’s monetary policy committee (Fed, US central bank), the real interest rate which keeps the economy growing at its potential, the labor market in full employment and inflation on the target, is now 0.5%. .
This situation of structural lack of aggregate demand is called secular stagnation.
Recently there has been a good debate among economists on whether or not a more ambitious budget package is needed. We are talking about figures ranging from $ 1.1 trillion to $ 1.9 trillion, or between 4% and 9% of US GDP.
Such ambitious figures are possible after the Democratic victory in the second round of the ballot in early January to choose the two Georgian senators. The Democrats won, and the Senate is perfectly divided: 50 Republican Senators and 50 Democrats (two of the latter are, in fact, independent, but vote normally with the Democrats). The casting vote is for Vice President Kamala Harris, who gives Democrats a one-vote majority.
After all of Democrats’ frustration with the turtle resumption of the Obama administration after the global financial crisis, the party bench is likely more to exaggerate more than less.
My assessment is that the economic crisis caused by the epidemic is of a different nature from the crises resulting from the dysfunction of the credit market, such as that of 2008-2009.
The current crisis is the result of a totally exogenous shock to the functioning of the economy. The reconstruction of the economic fabric will then follow a more definitive solution to the public health problem.
Indeed, there as here, in Brazil, there was a recovery in “V” in the second half of the sectors which are not directly affected by social distance. With vaccination, economies will return to the path they traveled before the epidemic. China, which has handled the virus well, is already slightly above this trajectory.
The pace of economic recovery will depend on the speed of vaccination.
Thus, several houses of the financial market predict that the growth of the US economy will be 6.5% in 2021 and, in the fourth quarter of 2021, it will be 7.5% above the position of the fourth quarter of 2020, i.e. 4.8% above the Q4 2019 position.
Assuming that the potential growth of the US economy is 1.7% per year or 3.4% in two years, idleness will decrease, between the fourth quarter of 2019 and 2021, by 1.4 percentage points (4.8-3.4).
If the economy was in full employment, or close to it, before the epidemic, it will also be in full employment later this year. The bigger the budget package, the greater the fear of an overheating economy. This was the position recently defended by economist and former chief economic adviser to President Obama and former Secretary of the Treasury in the Clinton administration, Larry Summers.
The fear is greater because, with vaccination, the effect of the tax package to stimulate demand is expected to increase. A 10% of GDP package, for a budget multiplier of 1.5, means a budgetary boost of 15 points of GDP, certainly much more than idleness today.
Obviously, in the epidemic, the multiplier is smaller. But it is certainly not bad.
Structural equilibrium with a lack of aggregate demand and secular stagnation does not mean that the economy supports any demand impulse without inflation. In 2021, the limits of the US economy will be tested.
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