Consequences of the US Rescue Plans for the Global Economy

Rescue Plan of the Biden Administration

By Joachim Bischoff

[This article published on March 17, 2021 is translated from the German on the Internet, Sozialismus: Rescue-Plan der Biden-Administration,]

"Help Is Here": U.S. President Joe Biden and Vice President Kamala Harris have launched a campaign to popularize the Rescue Plan for America. This 1.9 trillion. U.S. dollar aid package is not only aimed at combating the Corona pandemic, but at the same time is intended to trigger a boost to the economy through financial aid.

The public is to be informed about various aspects of the huge rescue plan and people are to be shown perspectives on how to get through the crisis. The rescue program, which is one of the largest ever, is expected to bring about a breakthrough in the fight against the viral pandemic through mass vaccinations over the course of the next few months and at the same time spur an overcoming of the crisis in the U.S. economy. Thanks to the rescue plan, the US economy is expected to grow faster than at any time since 1984. The rest of the world will also benefit.

For Biden, it is his first major political success as president seven weeks after taking office. Thanks to their majority in the House of Representatives, the Democrats pushed through the package against fierce Republican opposition by 220 votes to 211. The Senate, where the Democrats also have a narrow majority, had previously given the green light.

Among other things, one-time checks in the amount of 1,400 U.S. dollars are planned for almost all Americans except high-income earners. This alone will cost the federal government 0 billion - in the hope of boosting consumption, a central pillar of the American economy. In addition, financial injections are planned for the states and municipalities, for schools and kindergartens.

Families with children will receive tax rebates. Unemployment benefits will be increased through September. And more money is to flow into the Corona vaccination campaign, into vaccines and tests, in order to protect even more Americans against the virus more quickly and thus bring back more safety and normality in everyday business and private life.

Shortly after the package passed Congress, Biden announced an initiative to increase production of vaccines. First, he said, we will ensure that Americans:inside are supplied. "But then we will help the rest of the world. If we have a surplus, we will share it with the rest of the world.". The rescue plan as a whole also mobilizes the economic resources of other countries.

Progress in vaccinating against the Corona pandemic and financial aid will propel the global economy forward this year, the OECD's interim conclusion. The U.S. is expected to grow much faster than Europe thanks to the trillion-dollar aid package. Global gross domestic product will grow by 5.6% in 2021, driven by the U.S. and China, it said. "Global economic output will rise above pre-pandemic levels in mid-2021," stressed OECD chief economist Laurence Boone. The OECD is thus significantly more optimistic than it was in December: at that time, it had only predicted a plus of 4.2%.

At the same time, Laurence Boone urges a different approach to vaccines: "If we are at war with the virus, we need to increase the production of vaccines and use them much more quickly. That means more licensing, more transfer of technologies, and vaccination centers working seven days a week." The global economic outlook has "improved significantly in recent months, supported by the gradual deployment of effective vaccines." Additional government Corona aid packages in some countries would also support the global economy. In addition, many economies are coping better with measures to contain the virus, he said.

"Despite the improved global outlook, however, output and incomes in many countries will remain below pre-pandemic levels at the end of 2022," Boone warned at the same time. At the same time, a risk arises from this assessment: if the vaccination campaigns progress only more slowly and new virus mutations emerge that once again influence the infection pattern with increasing infection numbers, growth would be slowed down, higher job losses as well as more extensive company bankruptcies would be the consequences.

Many Asia-Pacific countries have been certified by the OECD as having contained the economic impact of the pandemic through effective public health measures. Above all, these countries are participating in China's economic recovery. Global gross domestic product in 2021 will thus be driven by the U.S. and China, it said. The OECD states in its interim report that the economic outlook has "improved significantly" overall. The evaluation of leading indicators points to a further economic recovery in most major economies.

In particular, the rescue plan of the U.S. Congress with a volume of 1.9 trio. US dollars (1.59 trillion euros) and the high vaccination rate in the United States are particularly significant. The rescue package has a clear impact on other economies and thus on the recovery of the global economy. Other economic experts also expect the aid, in combination with the progress made in the vaccination campaign, to provide a significant boost to growth.

The OECD also assesses the situation in Germany as somewhat more positive than in the fall, with growth of 3.0% in the current year. The German government now also expects this figure. In the fall, Berlin had still assumed a significantly stronger increase of 4.4%. The OECD expects the euro zone to grow by 3.9% this year. The upward trend is expected to continue in 2022. A plus of 3.8% is then expected.

US President Biden has made combating the Corona pandemic an absolute priority in the first phase of his presidency. The USA has been by far the hardest hit by the pandemic worldwide. More than 528,000 people have now died there from or with the virus. In recent weeks, Biden has been pushing to get the vaccination campaign up to speed. At the same time, he urged the rapid passage of the economic stimulus package, which Republicans believe is far too high and which has also met with criticism from some Democrats.

Biden countered that the aid was unavoidable to deal with the economic consequences of the pandemic. His strongest argument: the millions of people who have lost their jobs since the Corona outbreak just over a year ago. And the most drastic economic downturn since 1946. "The bill will address inequality and poverty in a way we haven't seen in generations," a Democratic congressman touted the package before the House vote. Support for the bailout plan is strong among the public at large, with 70% of Americans:in favor of the plan.

The 1.9 trillion. U.S. dollar Corona aid package of the new U.S. administration has cleared the final hurdle in Congress. Key points are:

0 billion is earmarked for stimulus checks of ,400 per person. This would bring the total direct aid from this package and one passed in December to ,000. The checks would go to U.S. citizens earning less than ,000 a year; for couples, the threshold is twice as high.

0 billion for state and local governments. This was one of the most contentious issues in the congressional debates, with many Republicans saying that the states do not need the money.

0 billion is earmarked for schools and universities.

163 billion is intended as additional federal unemployment aid of 0 per week through Sept. 6. The first ,200 in aid is not to be taxed.

9 billion goes to public health care. Of that, billion goes to contact tracing and gene sequencing, billion to the ObamaCare health care system, billion to community health departments, billion for new health care hires and billion to Indian Nations.

Fifty-six billion dollars is earmarked for child welfare programs. In addition, certain tax breaks are to be extended, which would result in a shortfall of about 9 billion in federal coffers.

US billion is to go to various types of small businesses.

US billion is to be used as rental assistance. The government estimates that 12 million U.S. citizens:inside are in arrears, on average by ,800 in rent and utilities.

billion budgeted for food assistance programs

In total, the US federal government has launched five aid packages worth around six trillion US dollars in the past twelve months. US dollars to contain the pandemic and its economic and social consequences. This is undoubtedly a gigantic effort to prevent a downward spiral. Together, the fiscal stimulus accounts for about 25% of economic output, which is unprecedented as a societal response to the pandemic, even by international standards.

These rescue packages signal a turnaround in economic policy. In the eyes of Democrats, it is about not repeating the mistakes of the Obama administration. During the Great Financial Crisis, the Obama administration wanted not only to rescue financial institutions and the ailing real estate sector, but at the same time to combat the economic aftermath, especially unemployment. In retrospect, it turned out that the stimulus programs were already too timid in their investment and were also further limited in the political wrangling. The ARRA stimulus program of February 2009, which focused on additional government spending and tax relief, had too little effect.

From the Democrats' current perspective, the subsequent recovery was too weak and the reforms left the structures of the financialized economy untouched, which at least partially discredited the Democrats' reform policies. The middle class and lower middle class had little of the economic growth during Obama's administration. The beneficiaries were the citizens: at the upper end of the income distribution - that is, those with the highest incomes.

The Democrats' approach to the pandemic also expresses the fact that this time, help must reach the unemployed and their families. Too little effect will be achieved with monetary and credit policy tools from the Federal Reserve alone. Effects of stimulating the real economy can certainly be triggered via the Fed, but they ultimately take far longer for investment and consumption. In the Corona pandemic and its aftermath, the central bank's task was to make the enormous aid packages and the resulting dramatic increase in national debt possible in the first place by pursuing an appropriate interest rate policy.

The U.S. national debt is expected to swell to 108% of gross domestic product in the current year, surpassing the previous high of 106% at the end of World War II. In response, and because of the brighter economic outlook, yields on longer-dated government bonds have recently risen. The Biden administration is thus accepting a huge increase in government debt in exchange for a massive aid package against the economic-social consequences, which is only possible without major social resistance thanks to historically low interest rates.

According to Olivier Blanchard of the Massachusetts Institute of Technology (MIT) and other economists, the highly developed economies can afford to take on even higher debt in view of the low interest rates. Calculations using International Monetary Fund data show that in the two decades before the pandemic, government interest payments in these countries fell from more than 3% of GDP to about 2%, even as debt ratios increased by more than 20 percentage points. With negative interest rates now being paid on a large share of newly issued government bonds, the additional borrowing is likely to reduce interest expenses even further.

However, after the economic high in the current year, there is a risk of a decline to the weak rates of economic growth that were common in pre-Corona times. To avoid a relapse into economic stagnation, the U.S. would have to turn the Rescue Program into a sustained awakening. Productivity gains and new sources of real income growth not associated with government transfers could trigger such a revival.

The fear is that the Democrats have deployed a great deal of political capital in the American Rescue Plan, but without at the same time placing in it measures that will assure the country and its people a period of higher, sustainable economic growth with the corresponding incomes for the post-pandemic period as well. The spring of 2021 will be remembered as a turning point in the fight against the pandemic, but possibly also as a missed opportunity for lasting economic renewal.