“There are pros and cons,” she said. “Running the economy hot might be a good thing, but there also might be a painful adjustment with a period of slow growth on the other side of the mountain.”
In an economy running hot, employers face shortages of workers and must bid up their wages to attract staff. This, along with potential shortages of various commodities, can, in theory, fuel a vicious cycle of rising prices.
For the last 13 years, arguably longer, the United States has had the opposite problem. Large numbers of Americans of prime working age — 25 to 54 — have been either unemployed or outside the labor force altogether. Wage growth has been weak most of that time, and inflation persistently below the levels the Federal Reserve aims for.
Some argue that estimates of potential output by the C.B.O. and private economists are too pessimistic — that Americans should dare to dream bigger. “We don’t really know what the G.D.P. output gap truly is,” said Mark Paul, an economist at New College of Florida. “Economists for decades have erred and been too cautious, thinking that full production is significantly lower than it actually is. We’ve been consistently running a cold economy, creating massive problems for social cohesion.”
In a paper published in December, he said a pandemic aid package of more than $3 trillion would be justified based on the scale of job losses that have been endured. The output gap looks worse based on employment than it does when you look at G.D.P., in part because job losses have disproportionately occurred in sectors that generate relatively low economic output per worker, such as restaurants.
Still, the scale of the pandemic aid already in train helps explain why Mr. Biden faces a tricky road toward finding a Senate majority for the next bill, even among Republicans who are not dead set against stimulus spending conceptually.
“It’s hard for me to see, when we just passed $900 billion of assistance, why we would have a package that big,” Senator Susan Collins, the Maine Republican, said recently. “Maybe a couple of months from now, the needs will be evident and we will need to do something significant, but I’m not seeing it now.”