Moisés Naím / El País

Economists agree that the devastating economic aftermath of the pandemic calls for a substantial increase in government spending. An injection of public spending will help individuals, families, businesses and other organizations that suddenly lost their incomes. Even the most conservative economic institutions, such as the International Monetary Fund (IMF), the European Central Bank (ECB) and other central banks, as well as top economists, not only recommend increasing public spending, but doing it in a big way. “Act big” was US Treasury Secretary Janet Yellen’s message to her fellow ministers from the world’s biggest economies. Furthermore, leading experts such as Paul Krugman, a Nobel laureate in economics, say they are not concerned about the enormous fiscal deficit, the booming debt, the heightened risks of financial instability, or the inflation that could result from an excess in public spending and the printing of money. This is in stark contrast to the financial crisis of 2008, when experts called for spending cuts, “deleveraging” and restraint. Austerity was their mantra. Now, it’s to go big, spend what you have and what you don’t have too – deficits and debt don’t matter.

While there is agreement that the dire economic situation requires massive government intervention, there are also profound differences with respect to the appropriate size of such intervention and its inflationary consequences. Larry Summers, another influential economist who is close to the Democratic Party, believes the Biden administration has gone too far. Summers stressed that the stimulus package “will set off inflationary pressures of a kind we have not seen in a generation.” He also emphasized that the Biden package leaves many important questions unanswered, such as “how will political and economic space be found for the public investments that should be the nation’s highest priority?” Olivier Blanchard, one of the world’s most cited economists and former IMF chief economist, also thinks that the size of the approved stimulus is excessive and that it will likely “overheat” the US economy, thus causing an outbreak of inflation.

Indeed, the numbers are extraordinary. When Biden’s economic stimulus is added to the amount approved in December by former President Donald Trump, it will be equivalent to 14% of the gross domestic product (GDP), the indicator that measures the size of the economy.

It is normal for governments to spend more than they bring in. But this year in the US, the gap between income and expenses – the fiscal deficit – has reached astronomical levels. In the last 50 years, the fiscal deficit was, on average, 3% of the size of the economy. Last year it reached 15%, the highest in history. This year it is estimated that it will be more than 10% of GDP.

All this public spending has seen public debt balloon. This year, the size of the public debt of the United States exceeds the size of the entire economy.

Fortunately, the interest rates that apply to this debt remain very low. Still, the government must pay its creditors $1 million (€840,000) every 1.4 seconds, according to Washington Post columnist George Will.

All of this points to the likelihood that the US central bank, the Federal Reserve, chaired by Jerome Powell, will be printing more money. Which it already is. The money supply has been growing at an annual rate of 30%, a rate three times higher than the highest rate reached in the last 60 years. In January of this year, the money supply reached its highest level in history.

What can we make of all this? First, that it’s a done deal. Biden’s massive financial package has already been put in place and will help millions of Americans desperately in need of assistance. The need for a large-scale government intervention program in response to the economic emergency is not in doubt.

Second, the measures contained in the stimulus package were shaped by the inevitable political haggling that takes place in the process of approving any spending bill. Critics argue that, as a result, the package that was eventually approved was larger than necessary and its execution is likely to be problematic. Third, the gigantic increase in public spending, the ramping-up of the vaccination campaign, the return to a certain pre-pandemic normalcy and other factors will combine to make the US economy grow significantly this year and the next. Fourth, this is all a big gamble. The Biden administration is betting is that an increase in public spending on this scale does not set off a spurt of inflation. Another risky bet is that if inflation does indeed appear, the government and the Fed have the tools to “fine tune” the economy and will thus be able to mitigate the negative effects of higher prices.

Let’s hope they are right.