Pandemic relief is an economic leap of faith

Pandemic relief is an economic leap of faith

Democrats are closing their eyes and throwing the dice. Congress is passing President Joe Biden's $1.9 trillion pandemic relief bill with shockingly little information about whether the US economy can safely absorb it. The Federal Reserve isn't helping. Its signals to markets, businesses and households have been surprisingly blasé about the possibility of the economy overheating and inflation accelerating. Predictions are always difficult, but they are harder than ever to make now. The economy has been hit by a once-in-a-century pandemic. People have been cooped up at home for a year. Congress has already spent over $3 trillion supporting the economy. The Fed is more comfortable with rising inflation than it has been in decades. This is a moment without precedent. The standard tools of economics offer scant clarity on how another $1.9 trillion of stimulus will affect the economy. Given how little economists understand about the probable paths of prices, output and employment over the rest of the year, policymakers should be cautious. Let's discuss the demand side of the economy first. How will households react to the end of the pandemic? Will this summer feel like Mardi Gras? It's easy to answer in the affirmative. But moving beyond