Projected Economic Outcomes of the American Rescue Plan
The American Rescue Plan Act (ARPA) went into effect on March 11th, 2021. ARPA essentially injected $1.9 trillion into the economy, designed to put money directly into the pockets of individuals — most notably, the Economic Impact Payments of $1,400 to those making less than $75,000 per year and an extra $50 billion to beef up the Federal Emergency Management Agency (FEMA) Disaster Relief Fund. Numerous loans and grants have also been made available to small businesses and venues, from the Paycheck Protection Program to the Restaurant Revitalization Fund.
In short, President Biden has responded to the economically disastrous pandemic with large cash infusions.
ARPA aims to revitalize the economy, but the impact of these economic stimuli remains to be seen and the influx of capital could have potential negative effects for public debt.
Debt sustainability measures a country’s ability to repay the money it has borrowed from its creditors. If the country can “afford” the regular payments on the borrowed money, then the debt is considered sustainable. American COVID-era spending is intended to jumpstart the economy, while avoiding an unsustainable ratio of debt to gross domestic product (GDP).
The US Treasury has stated it may have a more difficult time servicing the US debt that has ballooned as a result of the recent economic boosts, and as a result, Washington may raise the debt ceiling again.
Without a commensurate increase in GDP, raising the debt ceiling — and borrowing up to it — can lead to unsustainable long-term debt.
ARPA (and the proposed American Families Plan and American Jobs Plan, if enacted) intend to provide short-term economic boosts. So far, the economic forecasts for 2021 are good: economists expect 6.5% growth in 2021. (By comparison, the economy contracted by 3.5% in 2020.) The goal is for the ARPA to help stave off the risk of recession, and is predicted to help create 600,000 jobs in 2021.
Despite these positive projected outcomes, the large cash infusions are bound to make some people uneasy.
What if printing all this money leads to inflation?
Economists agree that there will be a spike in inflation, but the Federal Reserve believes it will pass within several months.
Core Personal Consumption Expenditure (core PCE) is used to gauge inflation rates by measuring the amount someone might spend on personal expenditures minus their food and energy expenses. This provides a better idea of how the cost of a “basket of goods” might vary over time, without including items such as gas prices, which fluctuate often. The projected core PCE inflation rate for 2021 is 2.1%, but is expected to slow down somewhat (to 1.9%) in 2022. The Fed uses core PCE, amongst other economic indicators, to set interest rates and currently expects to keep interest rates rather low for the foreseeable future.
ARPA, along with other economic stimulus packages proposed by the Biden Administration, might be a cause for concern on many fronts, including debt stability, debt ceilings, and inflation, however, the influx of capital will boost the economy in the short-term, and the inflation spike will be transitory.
No one can completely predict the future, but the stimulus packages are expected to produce positive economic outcomes in 2021.
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