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Can America Escape the Stimulus Trap?

The United States risks locking itself into a recurring cycle of expansionary monetary and fiscal policies, rising asset prices, and redistributive measures that weaken investment and job growth. Avoiding this scenario will require three complementary reforms to accompany future economic stimulus packages.

NEW YORK – As US President Joe Biden’s proposed $1.9 trillion economic stimulus package works its way through Congress, former Treasury Secretary Lawrence Summers (a Democrat) and many Republicans argue that the plan is too big. But perhaps a more important question is whether the United States is falling into a “stimulus trap,” and, if so, how to get out of it.

The Biden rescue plan is the federal government’s third attempt within a year to help the US economy recover from the pandemic-induced recession. The previous two stimulus packages have caused asset prices, especially those of stocks and housing, to increase much faster than wages. Because the rich hold more assets than the poor, both in absolute terms and as a proportion of their income, America’s already large wealth gap will likely be widened further.

Rising inequality will spur demands to address it – including through higher tax rates, higher legally mandated minimum wages, and more generous social-transfer programs. A proposal to more than double the federal minimum wage from $7.25 per hour to $15 per hour within four years, even if it does not become a part of this stimulus package, will likely receive more public and Congressional support once the facts about the widening wealth gap sink in with the public.

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