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    European Central Bank Tweaks Strategy to Fight Inflation

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    The European Central Bank said Thursday it would adjust the guideposts it uses to set monetary policy, giving its more room to deploy crisis measures even if inflation rises above its official target. The bank also said it would begin using its clout in bond markets to fight climate change.After concluding an 18-month review of its strategy, the bank’s Governing Council said Thursday that it would no longer aim to keep inflation below, but close to, 2 percent. Rather, it would simply aim for 2 percent and be ready to accept “a transitory period in which inflation is moderately above target.”The seemingly minor change gives the bank space to keep pumping credit into the eurozone economy even if annual inflation rises above 2 percent, as long as policymakers think the jump is temporary.That situation may soon materialize. Inflation in the eurozone has been hovering around 2 percent in recent months, and could rise above the target as economies reopen and shortages of needed products like semiconductors become more acute. According to the previous strategy, the central bank would be obligated to raise interest rates or take other measures to slow the economy, even if the crisis was not over.By law, controlling prices in the 19 countries of the eurozone is the central bank’s main priority, so any adjustment to its approach to inflation has broad implications for the interest rates that businesses and consumers pay on loans, and for employment and economic growth.The bank also said it would take climate change into account when it buys corporate bonds as part of its stimulus measures. The bond purchases, made with newly created money, are a means to stimulate borrowing and economic growth. But in the future, the European Central Bank will favor companies that have made sincere efforts to reduce the amount of carbon dioxide they produce.In practice, the central bank has already provided ample evidence it was willing to bend its own rules to fight the pandemic, or the debt crisis that nearly destroyed the euro a decade ago.“We do not expect the new strategy to shift the outlook for the E.C.B.’s monetary policy stance significantly,” Holger Schmieding, chief economist at Berenberg Bank, said in a note to clients ahead of the announcement. “Instead, it will formally codify the approach which the E.C.B. has pursued anyway. This will make it easier for the E.C.B. to communicate with markets and the public.”The European Central Bank’s new approach is sure to generate criticism from places like Germany, where fear of inflation runs deep. Jens Weidmann, a member of the Governing Council and president of the Bundesbank, Germany’s central bank, has called for the European Central Bank to begin dialing back its stimulus to ensure that inflation does not get out of control. He has also said that climate change was not a matter for central banks.But Mr. Weidmann belongs to a minority on the Governing Council. The central bank said in a statement that it believed that climate change was relevant to “inflation, output, employment, interest rates, investment and productivity; financial stability; and the transmission of monetary policy.” More

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    States and Cities Scramble to Spend $350 Billion Stimulus

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    The Biden administration is betting on the funds to keep the recovery humming, but Republicans say the money is being wasted.WASHINGTON — When Steve Adler, the mayor of Austin, heard the Biden administration planned to give billions of dollars to states and localities in the $1.9 trillion pandemic aid package, he knew exactly what he wanted to do with his cut.The remarkable growth of the Texas capital, fueled by a technology boom, has long been shadowed by a rise in homelessness, so local officials had already cobbled together $200 million for a program to help Austin’s 3,200 homeless people. When the relief package passed this spring, the city government quickly steered 40 percent of its take, about $100 million, to fortify that effort.“The inclination is to spread money around like peanut butter, so that you help out a lot of people who need relief,” Mr. Adler, a Democrat, said in an interview. “But nobody really gets all that they need when you do that.” The mayor of Austin, Steve Adler, steered $100 million of pandemic relief funding to initiatives that help the homeless population.Ilana Panich-Linsman for The New York TimesThe stimulus package that President Biden signed into law in March was intended to stabilize state and city finances drained by the coronavirus crisis, providing $350 billion to alleviate the pandemic’s effect, with few restrictions on how the money could be used.Three months after its passage, cash is starting to flow — $194 billion so far, according to the Treasury Department — and officials are devoting funds to a range of efforts, including keeping public service workers on the payroll, helping the fishing industry, improving broadband access and aiding the homeless.“It’s not like all places are rushing out to do the most aspirational things, since the first thing they need to do is replace lost revenue,” said Mark Muro, a senior fellow with the Brookings Institution, a nonpartisan Washington think tank. “But there is much more flexibility in this program than in previous stimulus packages, so there is more potential for creativity.”The local decisions are taking on greater national urgency as the Biden administration negotiates with Republicans in Congress over a bipartisan infrastructure package. Some Republican lawmakers want money from previous relief packages to be repurposed to pay for infrastructure, arguing that many states are in far better financial shape than expected and the money should be put to better use.The administration, sensitive to those concerns, has begun bending the program’s rules to allow the money to be spent even more broadly. In May, the Treasury Department told states they could use their funding to pay for lotteries intended to encourage vaccinations. In June, President Biden prodded local governments to consider using the cash to address the recent rise in violent crime, which his aides regard as a serious political hazard heading into the 2022 midterm elections.For the most part, local officials have been focused on undoing the damage of the past year and a half.Maine officials are looking to spend $16 billion to bolster the fishing industry, which is facing a combination of lobster shortages and hungry consumers, flush with money after more than a year in lockdown. Alaska is already pouring cash into its fishing sector.In North Carolina, the concerns are more terrestrial: The governor wants to direct $45 million in relief funds to the motor sports sector, which took a hit when the pandemic halted NASCAR.Maine officials are looking to spend $16 billion to bolster the fishing industry, which is facing a combination of lobster shortages and hungry consumers, flush with money after more than a year in lockdown.Greta Rybus for The New York TimesIn conservative-leaning states like Wyoming that did not incur major budget deficits during the coronavirus, officials have been freed to spend much of their cash on infrastructure improvements, especially rural broadband.Places like Orange County, Calif., that poured significant funding into fighting the spread of the pandemic are using a lot of their money to pay for huge community vaccination campaigns. And the midsize cities that make up the county — Irvine, Garden Grove and Anaheim — are directing most of their $715 million to plug virus-ravaged budgets.Last week, New York City passed its largest budget ever, about $99 billion, bolstered by $14 billion in federal pandemic aid that will be used in nearly every facet of the city’s finances, like an infusion of cash needed to cover budget gaps and an array of new programs, including youth job initiatives, college scholarships and a $1 billion backup fund for health emergencies.Local officials, especially Democrats, have tried to leverage at least some of the windfall to address chronic social and economic problems that the coronavirus exacerbated.After a series of community meetings in Detroit, Mayor Mike Duggan and the City Council opted for a plan that divided the city’s $826 million payout roughly in half, with about $400 million going to recoup Covid-19 losses, and $426 million to an array of job-creation programs, grants for home repairs and funding to revitalize blighted neighborhoods.In Philadelphia, officials are considering using $18 million of the new aid to test a “universal basic income” pilot program to help poor people. That is among the uses specifically suggested in the administration’s guidance. Several other big cities, including Chicago, are considering similar plans.The Cherokee Nation, which is receiving $1.8 billion of the $20 billion set aside for tribal governments, is replicating the law’s signature initiative — direct cash payments to citizens — by sending $2,000 checks to around 400,000 members of the tribe in multiple states.The $350 billion program has led to legal battles, with officials in many Republican-led states fighting one of the few restrictions placed on use of the money, a prohibition against deploying it to subsidize tax cuts, and partisan clashes erupting over which projects should have been given priority.And the cash has spawned partisan conflict. Gov. Mark Gordon of Wyoming, a Republican, announced this month that the state would use only a fraction of the approximately $1 billion it was expected to receive on emergency expenditures this year, and would discuss how to use the rest.“These are dollars borrowed by Congress from many generations yet to come,” he said in a statement this spring.The idea of the federal government distributing such vast sums has been charged from the start. Republican lawmakers successfully blocked a large state and local package during the Trump administration, denouncing it as a “blue-state bailout” that helped fiscally-irresponsible local governments.Not a single Republican in either house of Congress voted for the bill. Yet the vast majority of officials from conservative states have welcomed the aid without much fuss. In general, Republican governors and agency officials have tilted toward financing economic development and infrastructure improvements, particularly for upgrading broadband in rural areas, rather than funding social programs.When the administration updates the guidance for the funding this summer, they are likely to loosen the restrictions on internet-related projects at the behest of Republican state officials, a senior White House official said.One of the most ambitious plans in the nation is being formulated by Indiana, a Republican-controlled state that is using $500 million of the stimulus money for projects aimed at stemming the decades-long exodus of workers from postindustrial towns and cities.“It’s huge — it’s found money — nobody thought it was going to be there,” said Luke Bosso, the chief of staff at the Indiana Economic Development Corporation, which has been working on the effort for years. Cleveland-Cliffs steel mill in Burns Harbor, Ind. Indiana is using its stimulus funds on projects aimed at stemming the exodus of workers from postindustrial towns and cities. Taylor Glascock for The New York TimesWhile lawmakers in Washington debate the scope of a new infrastructure bill this year, the package that passed in March already represents a major down payment for a variety of infrastructure projects.Christy McFarland, the research director of the National League of Cities, said that many cities across the country were preparing to put money into infrastructure projects that had been delayed by the pandemic, and investing in more affordable housing and spending on core needs such as water, sewer and broadband.However, she said she was also seeing creative ideas such as recurring payments to the poor and investments in remote work support emerge as cities look to expand their safety nets and modernize their work forces.“We’re also seeing communities that never recovered from the Great Recession, have an opportunity to think much bigger,” Ms. McFarland said. “They’re asking what they could do that would be transformational.”The slow pace of recovery from the last recession has been a driving force behind the White House’s push. Mr. Biden has been eager to avoid a mistake that hobbled the last recovery’s pace — underestimating the drag that faltering local governments would have on the national economy. Gene Sperling, a former Obama adviser now overseeing Mr. Biden’s pandemic relief efforts, said not providing help to local governments meant annual economic growth “of about 2 percent versus growth of 3 percent.”The effort also serves Mr. Biden’s political objectives by bypassing national Republicans to build trust with voters in rural counties, small towns and midsize cities in the Midwest and elsewhere.“Something like this creates a space for a White House to be talking to governors and mayors of both parties about the basic mechanisms of governing that just cuts through the politics,” Mr. Sperling said. “That’s a good thing.” More

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    U.S. Deficit Expected to Hit $3 Trillion in 2021, Budget Office Says

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    WASHINGTON — The U.S. economy is rebounding from the pandemic downturn faster than expected and is on track to regain all the jobs lost during the coronavirus by the middle of next year, partly as a result of enormous amounts of federal spending that will push the budget deficit to $3 trillion for the 2021 fiscal year, the Congressional Budget Office said on Thursday.New forecasts that incorporate the $1.9 trillion stimulus package that President Biden signed into law in March give little credence to warnings by Republican lawmakers and some economists that runaway inflation from all that spending could cripple the economy. Instead, the budget office predicted that a recent spike in prices for cars, airline tickets and other products would be temporary and begin to recede this year.Administration officials downplayed the deficit projections and focused instead on the predictions for economic growth, saying the strong numbers validate Mr. Biden’s push to douse the economy in stimulus and reinforce their view that inflation poses little threat to the recovery.The budget office, which is nonpartisan, predicted the economy would grow 6.7 percent for the year, after adjusting for inflation. That would be the fastest annual growth in the United States since 1984. It is significantly faster than the budget office and the Biden administration had each projected this year.The unemployment rate is also estimated to fall below 4 percent next year and remain historically low for years to come, signaling a significant acceleration in job gains from what the office predicted in February. The C.B.O. said then that unemployment would not fall below 4 percent until 2026.Budget office officials said the uptick in growth and employment forecasts stemmed in large part from aggressive government stimulus. But the economy is also benefiting from consumers, who are rapidly spending savings they built up during the pandemic. Households were buttressed by multiple rounds of stimulus, including direct checks, passed under President Donald J. Trump, and by a faster-than-anticipated return to normalcy in the economy as vaccinations have spread.Mr. Biden’s aides claimed credit for many of those developments. They said the president’s push to accelerate vaccine production and distribution had fueled the reopening of the economy. David Kamin, a deputy director of the White House National Economic Council, said in an interview that Mr. Biden’s stimulus package, the American Rescue Plan, was intended to drive a more rapid return to low unemployment, and that the budget office’s projections were evidence it was succeeding.“This report really goes to the very theory of the case as to why we pursued a rescue plan,” he said.Administration officials also heralded updated projections from the International Monetary Fund, released Thursday afternoon, which predicted the U.S. economy would grow 7 percent in 2021 after adjusting for inflation. In April, the I.M.F. forecast 4.6 percent growth for the year in the United States.Mr. Biden’s stimulus plan will push the federal budget deficit near record highs for the fiscal year, the budget office projected, but it will eventually leave the country in slightly better fiscal shape.The spending approved by Mr. Biden is projected to increase the deficit by $1.1 trillion for the fiscal year, which ends in September. The total deficit of $3 trillion would be the second-largest since 1945, in nominal terms and as a share of the economy, behind the 2020 fiscal year.But the increased growth that is accompanying the larger deficit this year will slightly improve the country’s fiscal outlook over the next decade, with the total deficit falling by about 1 percent, the budget office said.“Projected revenues over the next decade are now higher because of the stronger economy and consequent higher taxable incomes,” it wrote in its report.Mr. Biden’s rescue plan included direct payments of $1,400 each to low- and middle-income Americans, $350 billion to help states and municipalities patch what were expected to be budget shortfalls and hundreds of billions of dollars to accelerate vaccines and more widespread coronavirus testing. It also extended supplemental federal payments of $300 a week to unemployed workers through September, a benefit that Republican governors across the country have ended early as business owners complain of difficulties finding workers.The budget office cited those benefits as “dampening the supply of labor,” along with workers’ health concerns. It said the expiration of the benefits, along with less worry about contracting the virus, would help bolster employment growth in the second half of this year.Inflation, which has been a big topic in Washington, is projected to moderate in the months to come. The office forecast inflation rising above recent trends to hit 2.6 percent for the year, which is stronger growth than the February projection, yet officials see those price pressures subsiding in the second half of the year, as a variety of supply constraints ease in areas like lumber and automobiles.The forecasters expect economic growth to continue at a strong pace in 2022, hitting 5 percent in real terms. But they see it declining quickly in the years to follow, as the labor force grows more slowly than is typical. Budget office officials said that reflected, in part, the effects of more restrictive immigration policies adopted under Mr. Trump. By 2023, the office predicts, growth will slow to 1.1 percent.That forecast does not account for any additional economic policies Mr. Biden might enact in the intervening time. He is currently pushing Congress to approve as much as $4 trillion in spending and tax cuts meant to create jobs and aid growth by improving the productivity of workers and the broader economy, like repairing bridges and subsidizing child care costs to help more parents, particularly women, work additional hours.Fiscal hawks said the report’s long-term deficit projections underscored the need for any additional economic investments to be fully paid for, and not financed with federal borrowing. Debt held by the public rises to nearly $36 trillion by 2031, the budget office now predicts. That would be slightly larger — by just over 6 percent — than the size of the total American economy that year.“While it made sense to borrow to weather the pandemic and jumpstart the recovery,” said Maya MacGuineas, the president of the Committee for a Responsible Federal Budget in Washington, “the strong economic growth projections from C.B.O. show that it is time to pivot away from further deficit-financing and towards paying for things and, ultimately, decreasing the national debt from its current path.” More

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    Fed Unity Cracks as Inflation Rises and Officials Debate Future

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    Federal Reserve officials are debating what to do as price risks loom, even as its leaders and the White House say today’s surge will most likely cool.Federal Reserve officials spoke with one voice throughout the pandemic downturn, promising that monetary policy would be set to full-stimulus mode until the crisis was well and truly behind America. Suddenly, they are less in sync.Central bankers are increasingly divided over how to think about and respond to emerging risks after months of rising asset values and faster-than-expected price increases. While their political counterparts in the White House have been more unified in maintaining that the recent jump in price gains will fade as the economy gets past a reopening burst, Washington as a whole is wrestling with how to approach policy at a moment of intense uncertainty.The Fed’s top officials, including Chair Jerome H. Powell, acknowledge that a lasting period of uncomfortably high inflation is a possibility. But they have said it is more likely that recent price increases, which have come as the economy reopens from its coronavirus slumber, will fade.Other officials, like James Bullard, president of the Federal Reserve Bank of St. Louis, have voiced more pointed concern that the pickup in prices might persist and have suggested that the Fed may need to slow its support for the economy more quickly as a result.Unwanted and persistent inflation seemed like a fringe possibility earlier this year, but it is becoming a central feature of economic policy debates as prices rise for used cars, airline tickets and restaurant meals. For the Fed, the risk that some of the current jump could last is helping to drive the discussion about how soon and how quickly officials should slow down their enormous government-backed bond-buying program — the first step in the central bank’s plan to reduce its emergency support for the economy.Fed officials have said for months that they want to achieve “substantial further progress” toward their goals of full employment and stable inflation before slowing the purchases, and they are just beginning to discuss a plan for that so-called taper. They are now wrestling with the reality that the nation is still missing 7.6 million jobs while the housing market is booming and prices have moved up faster than expected, prompting a range of views to surface in public and private.The bubbling debate reinforces that the central bank’s easy money policies won’t last forever, and sends a signal to markets that officials are closely attuned to inflationary pressures.“A pretty substantial part — or perhaps all — of the overshoot in inflation comes from categories that are directly affected by the reopening of the economy,” said Jerome Powell, the Fed chair.Al Drago/The New York Times“I see the debate and disagreement as the Fed at its best,” said Robert S. Kaplan, who is president of the Federal Reserve Bank of Dallas and is one of the people pushing for the Fed to soon begin to pull back support. “In a situation this complex and this dynamic, if I weren’t seeing debate and disagreement, and there were unanimity, it would make me nervous.”The central bank’s 18 policy officials roundly say that the economy’s path is extremely hard to predict as it reopens from a once-in-a-century pandemic. But how they think about inflation after a string of strong recent price reports — and how they feel the Fed should react — varies.Inflation has spiked because of statistical quirks, but also because consumer demand is outstripping supply as the economy reopens and families open their wallets for dinners out and long-delayed vacations. Bottlenecks that have held up computer chip production and home-building should eventually fade. Some prices that had previously shot up, like those for lumber, are already starting to moderate.But if the reopening weirdness lasts long enough, it could cause businesses and consumers to anticipate higher inflation permanently, and act accordingly. Should that happen, or if workers begin to negotiate higher wages to cover the pop in living costs, faster price gains could stick around.“A new risk is that inflation may surprise still further to the upside as the reopening process continues, beyond the level necessary to simply make up for past misses to the low side,” Mr. Bullard said in a presentation last week. The Fed aims for 2 percent inflation as an average goal over time, without specifying the time frame.Other Fed officials have said today’s price pressures are likely to ease with time, but have not sounded confident that they will entirely disappear.“These upward price pressures may ease as the bottlenecks are worked out, but it could take some time,” Michelle Bowman, one of the Fed’s Washington-based governors, said in a recent speech.The Fed’s top leadership has offered a less alarmed take on the price trajectory. Mr. Powell and John C. Williams, president of the Federal Reserve Bank of New York, have said it is possible that prices could stay higher, but they have also said there’s little evidence so far to suggest that they will.“A pretty substantial part — or perhaps all — of the overshoot in inflation comes from categories that are directly affected by the reopening of the economy,” Mr. Powell said during congressional testimony on June 22.Mr. Williams has said there is even a risk that inflation could slow. The one-off factors pushing up prices now, like a surge in car prices, could reverse once supply recovers, dragging down future price gains.“You could see inflation coming in lower than expected,” he said last week.Which take on inflation prevails — risk-focused, watchful, or less fretful — will have implications for the economy. Officials are beginning to talk about when and how to slow down their $120 billion in monthly bond-buying, which is split between $80 billion in Treasury securities and $40 billion in government-backed mortgage debt.The Fed has held a discussion about slowing bond-buying before, after the global financial crisis, but that came during the rebound from a deep but otherwise more standard downturn: Demand was weak and the labor market climbed slowly back. This time, conditions are much more volatile since the recession was an anomaly, driven by a pandemic instead of a financial or business shock.In the current setting, officials who are more worried about prices getting out of hand may feel more urgency to dial back their economic stimulus, which stokes demand.“This is a volatile environment; we’ve got upside inflation risk here,” Mr. Bullard said at a separate event last week. “Creating some optionality for the committee might be really useful here, and that will be part of the taper debate going forward.”Mr. Kaplan said he had been vocal about his preferences on when tapering should start during private Fed discussions, though publicly he will say only that he would prefer to start cutting policy support “sooner rather than later.”“I see the debate and disagreement as the Fed at its best,” said Robert S. Kaplan, a Fed official who is pushing to start easing support.Edgard Garrido/ReutersHe thinks moving more quickly to slow bond purchases would take a “risk management” approach to both price gains and asset market excess: reducing the chances of a bad outcome now, which might mean the Fed doesn’t have to raise interest rates as early down the road.Several officials, including Mr. Kaplan and Mr. Bullard, have said it might be wise for the Fed to slow its purchases of mortgage debt more rapidly than they slow bond-buying overall, concerned that the Fed’s buying might be contributing to a hot housing market.But even that conclusion isn’t uniform. Lael Brainard, a Fed governor, and Mary C. Daly, president of the Federal Reserve Bank of San Francisco, have suggested that the mortgage-backed purchases affect financial conditions as a whole — suggesting they may be less keen on cutting them back faster.The price outlook will also inform when the Fed first raises interest rates. The Fed has said that it wants to achieve 2 percent inflation on average over time and maximum employment before lifting borrowing costs away from rock bottom.Rate increases are not yet up for discussion, but Fed officials’ published forecasts show that the policy-setting committee is increasingly divided on when that liftoff will happen. While five expect rates to remain unchanged through late 2023, opinions are otherwise all over the place. Two officials see one increase by the end of that year, three see two, three see three and another three see four. Two think the Fed will have raised rates six times.Both Fed policy debates will affect financial markets. Bond-buying and low rates tend to pump up prices on houses, stocks and other assets, so the Fed’s pullback could cause them to cool off. And they matter for the economy: If the Fed removes support too late and inflation gets out of control, it could take a recession to rein it in again. If it removes its help prematurely, the slowdown in demand could leave output and the labor market weak.The Fed will be working against a changing backdrop as it tries to decide what full employment and stable prices mean in a post-pandemic world. More money from President Biden’s $1.9 trillion economic aid bill will soon begin to flow into the economy. For example, the Treasury Department in July will begin depositing direct monthly payments into the accounts of millions of parents who qualify for an expanded child tax credit.But expanded unemployment insurance benefits are ending in many states. That could leave consumers with less money and slow down demand if it takes would-be workers time to find new jobs.As the trends play out, White House officials will also be watching to see whether the economy is hot or not. The administration is trying to pass a follow-up fiscal package that would focus on longer-term investments, and Republican opposition has centered partly on inflation risks.For Mr. Kaplan at the Fed, the point is to be watchful. He said it was important to learn from the lessons of the post-2008 crisis recovery, when monetary policy support was removed before inflation had meaningfully accelerated — but also to understand that this rebound is unique.“Realizing that this is a different situation is a wise thing,” Mr. Kaplan said. More

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    The Pandemic Stimulus Was Front-Loaded. That Could Mean a Bumpy Year.

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    When government support fades away, there’s a risk that the affluent will sit on their cash rather than spend it.Waiting in line to file for unemployment benefits in Fort Smith, Ark., last April. Nick Oxford/ReutersThe U.S. economy is about to face a new challenge that has its roots in the arithmetic of growth: That which fiscal stimulus giveth, fiscal stimulus taketh away.The $1.9 trillion American Rescue Plan enacted in March, as well as a $900 billion pandemic aid package passed in December, are heavily front-loaded. They were set up to get money out the door fast. But one consequence of that strategy is that fiscal policy in the quarters ahead will subtract from economic growth.Economists mostly project that the economy, with strong momentum in the labor market and huge pools of pent-up savings by households, will be strong enough to keep growing despite the fading of the fiscal boost. To avoid an economic downturn, a huge handoff must occur from government-driven demand to the private sector.The mainstream view is that this will be successful. But there are aspects of this unusual economic moment that could make the road ahead bumpy.There is no modern precedent for such huge swings in sums the government is pumping into the economy. And there is a risk — recently acknowledged by a top Federal Reserve official — that if pandemic-era savings are disproportionately held by the affluent, they will sit on that cash rather than spend it.“We’re definitely going to see a huge drop-off in fiscal stimulus,” said Nancy Vanden Houten, lead economist at Oxford Economics. “The question then is how well positioned is the economy to deal with that, and we don’t really know for sure, which applies to so much about this period we’re going through.”Most Americans who were to receive stimulus checks of a combined $2,000 per person have already gotten them. The Treasury Department said this month that $395 billion of that cash is now shipped, which is slightly more than the payments in the American Rescue Plan were projected to cost when it was passed.While unemployment insurance payments remain elevated, that spending is also tapering as people return to work — and supplements to those payments are scheduled to expire in September. Much of the other spending was either near-term, focused on things like vaccine rollout, or will be spent very gradually, such as on an expanded child tax credit and grants to state and local governments.Overall, government spending added 8.5 percentage points to the economic growth rate in the first quarter, according to calculations by the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution. But that so-called fiscal impact is forecast to turn slightly negative in the second and third quarters — and then act as a meaningful drag on growth in the fourth quarter of 2021 and in 2022.By the second quarter of 2022, fiscal policy is on track to subtract 3.3 percentage points from the growth rate, considerably more than the 2.2-percentage-point subtraction in the third quarter of 2011, which was the most extreme quarter in the last post-stimulus hangover of the previous recession.That could change depending on where negotiations on infrastructure and family support policies lead, but those policies would be expected to influence fiscal policy over many years — they are backloaded rather than front-loaded — so they shouldn’t radically change the near-term future.The case for staying calm even as federal spending plummets rests on the rapid growth of the private sector in recent months.Employers are adding to their payrolls at a breakneck pace, so rising compensation ought to prop up consumer spending even as government support goes away. Businesses report being in an expansionary mood, which bodes well for investment spending. And overseas economies should start to surge ahead as other countries achieve more widespread vaccination, which would be good news for American exports.“I think the basic story is that the economy is reopening, so it can take the fact that this stimulus is coming off,” said Louise Sheiner, a senior fellow at Brookings.Moreover, Americans are sitting on a vast pool of savings from money they didn’t spend on things like travel and restaurants during the pandemic. Households have saved an average of $282 billion per month since March 2020, compared with $103 billion a month in 2019.So a big question for the economy in the second half of 2021 and 2022 is what happens to that cumulative additional savings of $2.5 trillion. Will it prop up near-term spending enough to keep growth on a strong track, or will Americans instead prefer the comfort of having a beefed-up balance sheet?That’s where the distributional concern arises. To the degree that money is held by people who are financially well-off, they may be less likely to spend it and help propel the economy.“Today’s fiscal tailwinds are projected to shift to headwinds next year,” said Lael Brainard, a Fed governor, in a speech this month. “So an important question is how much household spending will continue to support growth into next year, as opposed to settling back to prepandemic trends.”On the other hand, the rapidly shrinking fiscal surge could help moderate the inflation pressures that have been building in the economy. Whatever you think of the decision to send $2,000 to people, there won’t be any more checks that might push demand still higher and risk fueling a cycle of inflation.Ultimately, this is another example of the ways the pandemic-driven economy is an unusual one. The only real historical comparisons to the kinds of surges in government spending of the last five quarters involve the beginnings and ends of wars, which have their own economic dynamics.Which means it’s worth watching exactly what happens as the federal government pulls back, and whether American consumers and businesses and importers from around the world step up the way forecasters expect. More

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    The Economic Gauges Are Going Nuts. Jerome Powell Is Taking a Longer View.

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    Despite the current confusion, his outlook, based on hard lessons from the 2010s, is essentially optimistic.Jerome Powell, the Federal Reserve chair, made clear that he believes the fundamentals of the economy are stable, even though the pandemic has thrown it for a loop.Eric Baradat/Agence France-Presse — Getty ImagesThe economy is changing so fast that just making sense of it is no easy task. Within a few months, the United States has gone from no jobs and depressed prices to widespread labor shortages and uncomfortably high inflation.In this most unusual recovery, the signals that economic policymakers use to inform their decisions are going haywire. What is one to make, for example, of the combination of strong growth in jobs and wages paired with millions of working-age people who seem to have no interest in returning to the work force?It’s easy to imagine Jerome Powell, the Federal Reserve chair, as a pilot in unfamiliar territory with malfunctioning gauges. He’s doing what you’d want a pilot to do in those circumstances: looking to the horizon.A recurring theme on Wednesday, as he spoke to the news media after a Fed policy meeting, was his focus on the things that haven’t changed about the economy, the lessons learned in the expansion of the 2010s. He is resisting the urge to conclude that the pandemic fundamentally changed the most important dynamics.To Mr. Powell’s mind, these are those lessons: American workers are capable of great things. The labor market can run hotter for longer than a lot of economists once assumed, with widely beneficial results. There are many powerful structural forces that will keep inflation in check. And for those reasons, the Fed should move cautiously in raising interest rates, rather than risk choking off a full economic recovery too soon.His is a profoundly optimistic view of the coming years. He does not see the labor shortages of 2021 as evidence of lasting scars to the potential of American workers, but rather as a reflection of the difficulty of reopening large sectors of the economy and reallocating labor after a pandemic.“You look through the current time frame and look one and two years out — we’re going to be looking at a very, very strong labor market,” Mr. Powell said, describing an environment of low unemployment, high rates of participation and “rising wages for people across the spectrum.”And he was dismissive of the possibility that spikes in both wages and prices would turn into a lasting 1970s-style spiral.“Is there a risk that inflation will be higher than we think? Yes,” Mr. Powell said. “We don’t have any certainty about the timing or the extent of these effects from reopening.”But he added: “We think it’s unlikely they would materially affect the underlying inflation dynamics that the economy has had for a quarter of a century. The underlying forces that have created those dynamics are intact.” These include globalization and an aging world population.If you squint, you can even see the application of lessons from three big missteps in Mr. Powell’s career as a central banker.In 2013, as a Fed governor, he helped push Chair Ben Bernanke toward “tapering” the pace of bond-buying in the Fed’s quantitative easing program, which created global financial tremors and led the central bank to reverse course. (In one sign of how deep the scars of that experience are, Mr. Powell carefully said on Wednesday that at this meeting, they merely talked about talking about tapering their current Q.E. purchases, which was itself a subtle shift from his previous guidance that it was not yet time to talk about talking about tapering.)In 2015, Mr. Powell supported a decision to begin raising interest rates to prevent inflation from taking off. This also caused global economic problems — and an under-the-radar economic slowdown in the United States — even though with hindsight the American job market had lots of remaining potential to improve.And in 2018, under his leadership, the Fed raised interest rates four times despite an absence of inflationary pressure. The last of these, especially, came to look like a mistake within days, and Mr. Powell soon reversed course.At each of those junctures, the people who argued that the American labor market was already at or near its potential — a fundamentally pessimistic view about the number of people who could be coaxed to work by the right mix of compensation and job opportunities — looked with hindsight to be wrong. So were the people who routinely predicted that an outburst of problematic inflation was right around the corner.The risk with this approach is that Mr. Powell is, in effect, fighting the last battle — applying the lessons of those episodes to a different economic environment.There are, after all, quite a few differences between then and now. Most significantly, fiscal policymakers have acted on a much larger scale now, and the trillions of dollars coursing through the economy surely create different types of inflation risks. All else being equal, looser fiscal policy — larger continuing deficits — implies that tighter monetary policy is needed to keep a lid on inflation.Moreover, there are some signs — early, but striking — of a more lasting change in the power dynamics between capital and labor. Workers appear to have the upper hand with employers in ways they haven’t in a generation.This could turn out to be a temporary result of the post-pandemic moment, and is mostly positive (Mr. Powell explicitly characterizes higher wages and more expansive job opportunities as a good thing). But if we are returning to a more 1960s-style dynamic in which workers demand pay that is higher than productivity gains would imply are justified, and employers readily give it to them and raise their prices, it will mean that Mr. Powell’s Fed is on track to get behind the curve on inflation.Ultimately, then, the question of whether the Fed is on a wise course will depend on whether the pandemic fundamentally changed things, or just created a miserable year for the economy, after which things return to normal.One trait Mr. Powell has shown, including in the 2013, 2015 and 2018 episodes, is a willingness to pivot when evidence emerges that his judgment is wrong. The best hope for the economy of the 2020s is that his pilot’s view of the horizon is correct. The second best is that if it turns out to be wrong, he adjusts quickly. More

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    Stimulus Checks Substantially Reduced Hardship, Study Shows

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    Researchers found that sharp declines in food shortages, financial instability and anxiety coincided with the two most recent rounds of payments.WASHINGTON — Julesa Webb resumed an old habit: serving her children three meals a day. Corrine Young paid the water bill and stopped bathing at her neighbor’s apartment. Chenetta Ray cried, thanked Jesus and rushed to spend the money on a medical test to treat her cancer.In offering most Americans two more rounds of stimulus checks in the past six months, totaling $2,000 a person, the federal government effectively conducted a huge experiment in safety net policy. Supporters said a quick, broad outpouring of cash would ease the economic hardships caused by the coronavirus pandemic. Skeptics called the policy wasteful and expensive.The aid followed an earlier round of stimulus checks, sent a year ago, and the results are being scrutinized for lessons on how to help the needy in less extraordinary times.A new analysis of Census Bureau surveys argues that the two latest rounds of aid significantly improved Americans’ ability to buy food and pay household bills and reduced anxiety and depression, with the largest benefits going to the poorest households and those with children. The analysis offers the fullest look at hardship reduction under the stimulus aid.Among households with children, reports of food shortages fell 42 percent from January through April. A broader gauge of financial instability fell 43 percent. Among all households, frequent anxiety and depression fell by more than 20 percent.While the economic rebound and other forms of aid no doubt also helped, the largest declines in measures of hardship coincided with the $600 checks that reached most people in January and the $1,400 checks mostly distributed in April.“We see an immediate decline among multiple lines of hardship concentrated among the most disadvantaged families,” said H. Luke Shaefer, a professor at the University of Michigan who co-authored the study with a colleague, Patrick Cooney.Given the scale of the stimulus aid — a total of $585 billion — a reduction in hardship may seem like a given, and there is no clear way to measure whether the benefits were worth the costs.The study does not address the critics’ main complaints, that the spending swelled the deficit, that much of the money went to economically stable families who did not really need it and that the checks were part of a pattern of aid over the last year that left some people with less incentive to find jobs. Some analysts say hardship would have fallen anyway as a result of job growth and other safety net programs.Still, the aggressive use of stimulus checks coincides with growing interest in broad cash payments as a tool in social policy, and the evidence that they can have an immediate effect on the economic strains afflicting many households could influence that debate.Starting in July, the government will mail up to $300 a month per child to all but the most affluent families in a yearlong expansion of the child tax credit that Democrats want to make permanent.Ms. Ray had to contribute $600 to the cost of a CT scan for her cancer diagnosis. The stimulus check in April allowed her to afford it.Callaghan O’Hare for The New York TimesWhile the ability of cash payments to reduce hardship might seem obvious, Mr. Shaefer pointed out that critics of such aid often warn that the needy might waste it. He argued that the size, speed and variety of the hardship reductions vindicated the use of broad cash relief. While other forms of pandemic aid have been better targeted, some have taken many months to distribute and can be used only for dedicated purposes like food or housing.“Cash aid offers families great flexibility to address their most pressing problems, and getting it out quickly is something the government knows how to do,” Mr. Shaefer said. Extrapolating from the survey data, he concluded that 5.2 million children had escaped food insufficiency since the start of the year, a figure he called dramatic.The experience of Ms. Ray, a warehouse worker at a recycling company in Houston, captures the hardships that the pandemic imposed and the varied ways that struggling families have used stimulus checks to address them. Earning $13 an hour, Ms. Ray had an unforgiving budget even before business closures reduced trash collection and cut her hours by a third.Her car insurance lapsed. Her lights were shut off. She skipped meals, even with food pantry aid, and re-wore dirty work clothes to save on laundromat costs. When her daughter discovered that they owed thousands in rent, she offered to quit high school and work, which Ms. Ray forbid. A stimulus payment in January — $1,200 for the two of them — let her pay small parts of multiple bills and restock the freezer.“It bridged a gap,” Ms. Ray said, while she waited for slower forms of assistance, like rental aid.Then she got cancer. To confirm the diagnosis and guide her treatment, she had to contribute $600 to the cost of a CT scan, which she did with the help of a payment in April totaling $2,800.In addition to providing for the test, Ms. Ray said, the checks brought hope. “I really got down and depressed,” she said. “Part of the benefit of the stimulus to me was God saying, ‘I got you.’ Spiritual and emotional reassurance. It took a lot of stress off me.”Scott Winship, who studies poverty at the American Enterprise Institute, questioned the reliability of the census data used in the University of Michigan study, noting that fewer than one in 10 of the households the government contacts answer the biweekly surveys.He also argued that hardship would have fallen anyway, since the last round of stimulus checks coincided with tax season, which sends large sums to low-wage workers through tax credits. Between the earned-income tax credit and the child tax credit, a single parent with two children can receive up to nearly $8,500 a year.Researchers at Columbia University estimate that poverty fell sharply in March, but Zachary Parolin, a member of the Columbia team, said that about half the decline would have occurred without the pandemic relief, primarily because of the tax credits.Noting that the stimulus checks allocated as much to households with incomes above $100,000 as they did to those below $30,000, Mr. Winship called them inefficient and a poor model for future policy. “It’s not sustainable to just give people enough cash to eliminate poverty,” he said. “And in the long run it can have negative consequences by reducing the incentives to work and marry.”Analysts have long debated the merits of cash versus targeted assistance like food stamps or housing subsidies. Cash is easy to send and flexible to use. But targeted benefits offer more assurance that the aid is used as intended, and they attract political support from related businesses like grocers and landlords.Throughout the pandemic, policymakers have employed both approaches. The first round of stimulus checks, $1200 per adult and $500 per child last year, started before the Census Bureau surveys began, so it is harder to gauge its effect.With full eligibility extending to families with incomes of up to $150,000, the stimulus checks could reach nearly 300 million Americans. While that greatly increased the cost, Mr. Shaefer said it reduced the resentment that could accompany aid to the chronically needy and noted that hardships have expanded up the income ladder.Even among households that had prepandemic incomes of $50,000 to $75,000, more than 11 percent of those with children sometimes or often lacked food at the start of the year — a figure that has since fallen in half, according to the Census data.Ms. Ray said she had skipped meals and reworn dirty work clothes to save on laundry costs during the economic downturn.Callaghan O’Hare for The New York TimesWhen some people heard the latest checks were coming, they considered the news too good to be true. Ms. Webb, a St. Louis nursing aide with three young children, lost about two-thirds of her earnings when the pandemic left fewer patients seeking in-home care. She found another job but lost it after catching Covid. Food was the first casualty.“We’d have breakfast a little later than normal, and then dinner — no lunch,” she said. “Sometimes the kids would have dry cereal because we didn’t have milk.”Despite her skepticism, Ms. Webb received $8,000 for her four-person family between the two rounds. She used the money to pay back family loans and reduce her overdue rent, and she started serving lunch and an afternoon snack “to make sure the kids were full-full.”“I was like, ‘Woo!’ This is the most money I ever seen in my bank account,” she said. “I’m still in a hole, but I’m starting to see more sunlight now.”Mr. Shaefer acknowledged that other aid and an improving economy might have helped reduce hardship, but he said the timing pointed toward the stimulus checks. Among families with children, nearly 90 percent of the improvement in food sufficiency this year occurred in the two weeks after each round of payments.The study cited another direct link between cash aid and hardship: after the government stopped supplementing jobless benefits last fall, food insufficiency among families with children rose nearly 25 percent.“Throughout the crisis, the level of hardship faced by U.S. households can be directly linked to the federal government’s response,” Mr. Shaefer and Mr. Cooney wrote.Low-income families often emphasize the stress that economic uncertainty brings, especially when it threatens needs as basic as shelter and food. At the start of this year, 73 percent of households with children reported spending at least several days a week feeling anxious. That figure has since fallen to 57 percent, according to the census data.“I really got down and depressed,” Ms. Ray said. “Part of the benefit of the stimulus to me was God saying, ‘I got you.’ Spiritual and emotional reassurance. It took a lot of stress off me.”Callaghan O’Hare for The New York TimesBut mental health might have improved for many reasons, Mr. Winship said, including increasing vaccinations, falling disease rates and the socialization that has accompanied the reopening of businesses and schools. “I would really question whether that’s the stimulus checks,” he said.Still, research in recent decades has emphasized the debilitating effect that stress can have on children raised in low-income households. And recipients of the stimulus payments often describe them as an emotional balm.For Ms. Young, 40, the problems of poverty and poor mental health are deeply entwined. A Chicago woman with schizophrenia, she is raising a teenager and a baby on food stamps and disability checks. Extra help from adult children lapsed during the pandemic when they lost work. The result was a disconnected water line and two weeks of toting jugs from her neighbor’s apartment.“It’s really depressing, having to worry about losing your lights and water,” Ms. Young said. “Very stressful. It was a very, very dark path.”She did not receive the stimulus payment that most people got at the start of the year, for reasons she does not understand. She checked her bank account in April, to see if she could buy a loaf a bread, when she found it swollen with a $1,400 stimulus check.Ms. Young bought the bread — two loaves — and paid down her utility bills to avoid more outages. “I did it that day,” she said. “You just don’t know — it was such a relief.” More

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    Republicans Promise Counteroffer as Infrastructure Talks Falter

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    President Biden and Democrats are facing difficult decisions about how to move their infrastructure plan through Congress as bipartisan momentum flags.WASHINGTON — With bipartisan negotiations faltering, President Biden and Senate Democrats are facing difficult decisions about how to salvage their hopes of enacting a major new infrastructure package this year, and waning time to decide whether to continue pursuing compromise with Republicans or try to act on their own. More