Faced with the most difficult economic circumstances since the Great Depression of the 1930s, America is doing what it does best. It has fired up the big guns.
In defiance of fiscal conservatives, Congress yesterday gave its approval to the third and largest stimulus package since the pandemic swept across the 50 states of the union this time last year.
The first President Biden stimulus, largely negotiated by Treasury Secretary Janet Yellen, is worth a cool £1.4 trillion.
Covid cure: The first President Biden stimulus, largely negotiated by Treasury Secretary Janet Yellen, is worth a cool £1.4 trillion
It comes in addition to the Trump tax-and-spend spree of £1.2 trillion in March 2020, and a further £660billion in December.
What is fascinating about the US response is that it draws heavily on two very different economic traditions.
Britain’s John Maynard Keynes argued in his classic work The General Theory Of Employment, Interest And Money that when private sector demand falls off a cliff, as it did when the US economy was largely shutdown at the start of the pandemic, government must step into the vacuum through massive public support.
But in a free market twist to this, both Biden and his much-disparaged predecessor Donald Trump opted to make the consumer the main driver of demand by showering money on citizens through one-off cheques.
This is a version of the ‘helicopter money’ advocated by the apostle of monetarism, Milton Friedman.
The lessons of the early 1930s have been learnt, when successive Republican presidents sought to deal with collapsing US and global demand by tightening belts, raising interest rates instead of cutting them to the bone, and keeping a tight rein on spending.
Sometime in the next week or so, citizens in the US earning up to £54,000 a year (or £108,000 for a married couple) will find cheques for just over £1,000 popping through their letter boxes.
A signed cheque sends a cheery political message directly from the White House, but is also evidence that US banking still has a great deal to learn from the online revolution in Britain.
In addition to the cash handouts to adults, the Biden deal rains money on kids, through a one-year doubling of the tax credit for children, schools, vaccine distribution and struggling state and local governments.
Moreover, if Biden is as good as his word, his next move will be to introduce a £720billion infrastructure plan designed to update the nation’s bridges, rails and roads, many of which are in dilapidated condition.
The invasion of Covid-19 this time last year had a shocking impact on US jobs, with an astonishing 22m shed between February and April 2020.
This compares with 8.7m jobs lost between 2008-10 at the peak of the financial crisis. It took more than six years to claw back the jobs in the Obama years.
In the pandemic, the monumental scale of the fiscal boost has seen the jobs market power back with 13m jobs restored.
Yellen is predicting that with the latest package, together with the Federal Reserve’s promise to maintain easy money, the labour market should return to pre-Covid levels by 2022.
America has been among the hardest hit in sheer numbers by the virus, which closed schools, placed restrictions on businesses and left 500,000 dead.
Throughout, there has been a huge effort by many states to keep as much open as possible.
In high-tech and music-mad Austin, Texas, where my own son and daughter-in-law live and work, bars, craft breweries and eating out are regarded as consumer freedoms which should never be curtailed!
All the indications are that output across the US is ready to take off like a rocket.
Economic forecasters rapidly are updating their predictions. The current consensus is that output will expand by 5.95 per cent between the fourth quarter of 2020 and the fourth quarter of this year.
A new analysis by the Paris-based OECD suggests that providing interest rates are unchanged, the new package is worth 3.8 per cent to US output in its first year.
Helpfully, the biggest beneficiary among the US’s richest trading partners should be Britain, which is set for a 0.6 per cent uplift, underlining why the UK’s trading relationship with America is among the most important that we have.
Money talks: The first President Biden stimulus plan was largely negotiated by Treasury Secretary Janet Yellen
The decision of successive US administrations to go for growth is not a free lunch.
It was approved by Senate Republicans through gritted teeth, fearful of the impact on the US’s public finances.
The additional £3.5 trillion of pandemic spending and tax breaks raises the US national debt to £16 trillion which, as in Britain, represents 100 per cent of output – the highest level since the spending splurge on bolstering defences and weapons production in the Second World War.
The US enjoys the extreme privilege of not having to worry immediately about how this Rocky Mountain of debt is financed. As the custodian of the world’s main reserve currency, the dollar, it is able simply to print more to pay the bills.
And for the moment, the keeper of the purse Jay Powell, chairman of the Federal Reserve, has made it clear that he is willing to keep the presses running.
The concern for the financial markets is that the combination of an extremely loose budget policy together with easy money will trigger a new era of inflation.
Forecasters suggest that consumer prices could be rising by as much as 2.48 per cent by the end of this year, requiring the Federal Reserve to stop the party by taking away the punch bowl.
The inflation cloud has already caused the interest yield on the 10-year US Treasury bond to rise above 1.5 per cent in what has been called a bond market ‘tantrum’. But the risks of higher interest rates for heavily-borrowed nations are very real.
Covid-19 is a crisis like none other in our lifetimes and has required a Herculean response to preserve US prosperity.
The bills will fall on the generations to come.
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