No, the relief bill won’t cause inflation (with Austan Goolsbee)

Episode Summary

Executive Summary: The episode argues that fears of inflation in response to the $1.9 trillion COVID relief bill are overstated and often politically motivated. Austin Goolsbee contends the package is largely disaster relief, not traditional stimulus, and that any inflation risk is small, manageable, and far less dangerous than doing too little during a pandemic recession.

Main Topics: Inflation fears and political opportunism (Priority: 5/5): The hosts frame renewed deficit and inflation alarmism under a Democratic president as cyclical, selective, and often driven by power politics rather than economic analysis. What inflation is and when it happens (Priority: 5/5): Goolsbee explains inflation as a sustained rise in the overall price level, typically associated with overheating, wage-price spirals, and large shocks like the 1970s 'guns and butter' era. Why COVID relief is not conventional stimulus (Priority: 5/5): The conversation distinguishes disaster relief from standard countercyclical stimulus, arguing that payments preventing evictions, bankruptcies, and permanent damage have a low measured GDP multiplier. Historical comparisons to prior overheat periods (Priority: 4/5): Goolsbee compares the current plan to past episodes when the economy ran above potential output without major inflation consequences, including the 2017 Trump tax cuts and the late 1990s boom. Lessons from the Obama stimulus (Priority: 4/5): They revisit 2009, noting that policymakers misread the recovery as likely V-shaped and split the package among short-term aid, tax cuts, and longer-term spending under political constraints. Inflation, wages, and distributional effects (Priority: 3/5): The discussion examines who gets hurt by inflation, noting that the 1970s hit workers hard partly because tax brackets were not indexed, while borrowers and firms with pricing power can sometimes benefit. Policy tradeoff: do too little vs. do too much (Priority: 5/5): Goolsbee argues that the current downside risk is insufficient support during an ongoing pandemic, while inflation, if it appears, can be addressed later by the Fed using conventional tools.

Key Arguments: The $1.9 trillion package is not $1.9 trillion of immediate stimulus; much of it is relief that prevents losses rather than boosts demand. A temporary, spread-out relief package is unlikely to create the kind of sustained overheating associated with serious inflation. Inflation hawks have repeatedly been wrong for over a decade, warning of hyperinflation that never materialized. The COVID recession is unusual: it is service-sector and contagion-driven, not a normal business-cycle collapse centered on autos, housing, or investment. The proper economic response to pandemic recession is to stop the virus; without controlling contagion, the economy cannot fully recover. If inflation does emerge, the Fed has tools to restrain it by raising interest rates and ending extraordinary accommodation. The political use of inflation rhetoric by Republicans and some centrist economists is partly aimed at constraining Biden’s ability to govern effectively. Historical episodes show the economy can run modestly above potential output for extended periods without triggering serious inflation. In 2009, stimulus design was compromised by competing goals: short-term demand support, long-term investment, and political vote-counting. A small amount of temporary inflation is less harmful than the risk of prolonged unemployment, bankruptcies, and deflation. Data Points: COVID relief package size: $1.9 trillion - The Biden administration’s proposed COVID relief bill under debate in the episode. Annualized GDP collapse: -32% - Used as a benchmark for the pandemic shock and to argue it did not produce deflation. Jobs lost in a single month: 21 million - Goolsbee cites the pandemic labor-market collapse to argue the economy remains far from overheating. True unemployment rate: 9%–10% - Goolsbee estimates unemployment remains extremely high even after some recovery. Over potential output under current plan: About 1% for a year - Referenced from an external calculation to suggest inflation risk is modest. Trump tax cuts: $2 trillion - Compared to current relief as an example of prior fiscal expansion with less concern from deficit hawks. Late 1990s economy above potential: 2% for four years - Historical example of a strong economy running above potential without comparable inflation alarm. Mid-2000s economy above potential: About 1% for almost three years - Used to show the economy has previously operated above potential for extended periods. 1970s inflation target comparison: 2% to 3% to 4% and higher - Describes the slide into the inflation spiral during the 1970s. Fed inflation target: 2% - Mentioned as the long-standing target the Fed has struggled to consistently hit. TIPS-implied inflation: About 2.1% - Market-based inflation expectations cited to argue investors are not pricing in major inflation. Historical 60s 'guns and butter' run: 7 consecutive years above potential; peak 5.5%–6% of GDP - Used to contrast past overheating with the much smaller scale of today’s risk.

Pivotal Quotes: "It wasn't about inflation, it's about politics and power." — Nick Hanauer: A central thesis of the episode: inflation concern is being deployed selectively to limit Democratic policy success. "This isn't about trying to generate a big multiplier on government spending... This is absolutely disaster-relief." — Austin Goolsbee: He distinguishes relief spending from conventional stimulus and argues its inflationary effect is overstated. "The bigger risk right now is doing too little." — Nick Hanauer: The hosts’ bottom-line policy takeaway: the danger of under-supporting the economy outweighs modest inflation risk.

Implications: Listeners should expect continued inflation debate to be as political as economic. The episode suggests policymakers should prioritize pandemic relief and virus control now, trusting the Fed to respond later if inflation actually appears.