One of the world’s leading liberal economists dealt Joe Biden a blow in recent days, warning that the president’s $1.9 trillion covid relief legislation could ignite an inflationary conflagration.
Olivier Blanchard, the former chief economist of the International Monetary Fund and perhaps the most cited economist in the world, spelled out his case against the Biden bill in a series of tweets on Saturday.
Blanchard’s argument is that the size of the stimulus injected into the economy would be too large, especially when added to the measures taken last year. The additional spending power created by the additional $1.9 trillion budget deficit would drive up prices and force the Federal Reserve to hike interest rates.
If this increase in demand could be accommodated, it would lead to a level of output at 14% above potential. It would take the unemployment rate very close to zero.
This would not be overheating; it would be starting a fire.