EconExtra is a series of posts that go beyond the textbook, relating current events and recent developments in economics to content standards, and providing resource suggestions to help you incorporate the current events into your lessons.

As this hot, politically charged Rescue bill has passed the House last week and passed the Senate today (the Senate version goes back to the House for another vote), let's look at the economics behind this issue. We have already heard from both Fed Chair Powell and Treasury Secretary Janet Yellen who believe that too little is worse than too much, and that they have tools to deal with any potential inflationary pressure. (WAPO, FOX Business) What do other leading economists think? What arguments do they make?

The first resource here is an actual debate on this very question that was sponsored by the Bendheim Center for Finance at Princeton between Lawrence Summers (it will trigger inflation) and Paul Krugman (it won’t trigger inflation.) Other resources are an article written for the New York Times by Greg Mankiw, another Harvard Economist.  He agrees with his Harvard colleague, but for slightly different reasons. Finally, a Washington Post article also provides arguments regarding the inflation potentially driven by the Rescue bill.

These resources could form the basis of a real-time, real-life economics lesson as the legislative process unfolds in coming days. Whether you assign students to one side or the other of the argument and have them debate, or simply watch/read the materials and decide which arguments they support and why, this could not only add to their economics knowledge but also heighten their interest and awareness in the impact of legislation. Perhaps the students could design a rescue package of their own! (This article explains what is in the Senate version in case you go this route.)

The Live Debate Broken Down

The Bendheim Center at Princeton has been holding weekly programs that are taped and available to the public for viewing. Here is the link to the February 12 Debate between Summers and Krugman. The debate runs for an hour and fifteen minutes. However, it is perfectly reasonable to have students just watch the first half hour. After a one-minute introduction, first Summers, then Krugman, took about fifteen minutes each to state their position, and Marcus Brunnemeier, the moderator, sums up their positions. During the next 45 minutes, the two gentleman answer questions and clarify the particulars, including a more detailed discussion of lessons from history, the Fed’s role in managing any fallout, and how the politics of the situation cannot be totally separated from the economics.

• To guide students’ listening, you can give them the top-level arguments made by each side, and have them fill in the details.  Here is my summary of the key arguments of each economist.

Summers:

1) Like Yellen, better too much than too little, but $1.9 trillion is really large! And much bigger than the “output gap.”

2) Proposed monthly stimulus spending is roughly four times the wage and income shortfall; could we do more for the economy by spending this differently?

3) $1.9 Trillion of spending on top of an underlying strong economy risks inflation.

4) Where will funding and support come from for a (more important) “Building Back Better” plan on top of a $1.9 Trillion Relief Act?

Krugman:

1) The negative impact from Covid is not like a typical recession. Suppressed output and demand require you to spend until you get out of the hole you are in, and output gap is not an appropriate measure.

2) This spending is temporary, and it is appropriate to use deficit financing.

3) There are three distinct areas of spending that make the total so big.

            Public goods spending to deal with the health emergency

            Income support (targeted)

            Stimulus checks and other (not well-targeted—to do so would leave gaps)

4) The non-targeted payments won’t create inflationary pressure—if people receive checks they don’t need, they save them. (There is data to support this.) The (Keynesian) multiplier won’t be greater than 1. Krugman clarifies this between minute 37 and 38.

Where/how do they differ?

*Use of output gap as measure of needed stimulus.

*Multiplier effect of relief measures

Where do they agree?

•  Tune in to the debate at the 1:10:00 point to hear the two summarize where they agree.

*“Build Back Better” infrastructure spending is desirable.

*Agree with certain elements of the spending (public goods spending related to Covid and income support.

The Debate in Print

These articles might help students hone their arguments on either side, either in addition to listening to the debate, or as a shorter assignment.

Arguments made by Mankiw in the New York Times

IMO, a more interesting debate would have been between Krugman and Mankiw. Mankiw’s arguments are similar to Summers, but perhaps because they are in writing, they are clearer.

1) Mankiw acknowledges that output measures are imprecise, but also argues that the $900 Billion measure passed in December hasn’t fully hit GDP yet.

2) Targeted measures still put dollars into the economy, and his estimate of the Keynesian multiplier is 1.5

3) Mankiw’s argument concerning potential inflation centers on the jump in savings rate, standing at the ready to satisfy pent-up demand in a big way once everyone is vaccinated are ready to go back to their pre-covid spending, and then some.

Arguments made in the Washington Post

 1) Much of the article deals with the historical (and political) perspective on inflation. Many economists and politicians expressing concern about inflation are marked by the experience of the 70s and 80s.

“Our understanding of inflation has changed, our ability to control it has improved and the danger is more remote than we once believed.”

2) The labor market is weaker than it appears (there are still about 10 million people out of work), and the output gap is not a good measure upon which to base a fiscal package.

About the Author

Beth Tallman

Beth Tallman entered the working world armed with an MBA in finance and thoroughly enjoyed her first career working in manufacturing and telecommunications, including a stint overseas. She took advantage of an involuntary separation to try teaching high school math, something she had always dreamed of doing. When fate stepped in once again, Beth jumped on the opportunity to combine her passion for numbers, money, and education to develop curriculum and teach personal finance at Oberlin College. Beth now spends her time writing on personal finance and financial education, conducts student workshops, and develops finance curricula and educational content. She is also the Treasurer of Ohio Jump$tart Coalition for Personal Financial Literacy.