How much is a trillion dollars?

Updating an old aphorism, “A trillion here, a trillion there, pretty soon you’re talking real money. But how much is a trillion dollars, really? Over the fold an extract from The Economic Consequences of the Pandemic.

The crises of the 21st century have commonly resulted in emergency spending of the order of a trillion dollars or more.

When the Bush Administration made the case for the Iraq War in 2002 and 2003, it was suggested that the venture might pay for itself as had been the case with the first Gulf War [cash contributions from allies more than paid for the direct costs of US forces]. In fact, the director of the National Economic Council, Lawrence Lindsay, was fired for suggesting that the cost might be as much as $200 billion.

By the time the US forces were withdrawn in 2009 estimates of the cost ranged from $2 trillion to more than $3 trillion. To this must be added the costs of the Afghan war and renewed campaign against ISIS.

The stimulus package introduced by the Obama Administration in response to the GFC was held below a trillion dollars in the hope of securing Republican support. Unsurprisingly, the package received no Republicans in the House of Representatives and only three in the Senate. The inadequacy of hte package ensured a weak recovery and contributed to big Republican gains in the 2010 election.

As the saying has it, ‘success has a thousand parents, failure is an orphan’ and most of those who argued for a limited response are now pretending otherwise. Nevertheless it is clear that the primary advocate of a strong response was incoming chair of the Council of Economic Advisers, Christina Rome. Her main opponents were Rahm Emanuel and Larry Summers.

The only benefit of Obama’s restraint was as a source of lessons for his vice-president Joe Biden. Most obviously, the lesson is that erring on the side of restraint is worse than erring on the side of stimulus. Second, that the likelihood of securing Republican support for anything is minimal, so there is no point in proposing an inadequate response in the name of bipartisanship. The final lesson is reflected in the fact that neither Emanuel nor Summers has been given any role, formal or otherwise in the Biden Administration.

The response to the Covid pandemic has on a larger scale than that of the ‘forever wars’ and massively greater than the failed Obama stimulus package. Adding up CARES, the November supplemental package andthe American Rescue Plan and the total expenditure amounts to more than $6 trillion. The impact on the government’s fiscal and monetary position is substantial. But it must be compared to the demands of a pandemic that has killed half a million Americans, sickened many more and shut down much of the global economy.

The Biden Admiminstration has now gone further putting long-term plans for infrastructure (American Jobs Plan) and education (American Families Plan). In each case, the proposal is for $2 trillion over four to eight years. Unlike the stimulus packages, which have been funded by a combination of debt and money creation, about half of these expenditure increases would be offset by increased tax revenues, from a combination of higher tax rates on very high incomes, higher company taxes and increased enforcement of existing laws.

But how much is a trillion dollars really? It amounts to about $3400 for every American, which sounds like a lot. But on average, major crises like those discussed above occur about once every ten years. So, a trillion dollar expenditure involves expenditure of $340 per American per year, or a little over $6 a week. That’s not much more than the price of a Starbucks coffee drink or (for the kids) a McDonalds Happy Meal.

And indeed, the multi-trillion dollar expenditures on the Iraq war, spread over many years, have not had any perceptible impact on the finances of the average household.

Another way to get an idea of scale starts with the observation that a trillion dollars is around 5 per cent of annual GDP (it’s more correct to think in terms of Net National Income, but the difference isn’t huge, and it’s an argument I’ll deal with elsewhere). So, the Covid rescue packages amount to around 30 per cent of one year’s GDP, or about 3 per cent of 10 years’ GDP. Biden’s new proposals are equal to about 20 per cent of annual GDP, which would be 5 per cent of four years’ GDP or 2.5 per cent of eight years GDP.

These are large numbers, but not so large as to imply a radical transformation of the US system.

Yet another way to think about this is to look at the gains made by those in the top 1 per cent of the income distribution as a share of national income. My preliminary estimate is that this group is getting around $2 trillion a year more than they would have if the benefits of productivity growth has been shared evenly.

In summary, the appropriate scale of the public policy response to the pandemic and its economic consequences is measured in trillions of dollars. Rather than being scared of big numbers, we should focus on making sure those trillions are used properly.