“[W]ith forecasters looking for the economy to grow an additional 3.3% next year, by the end of 2022 GDP could be 2.7% above the Congressional Budget Office’s estimate of its ‘potential,’ or the level it can sustain without running too hot. The last time GDP got that far above potential was 1973, when the U.S. was experiencing a serious inflation problem that wouldn’t be snuffed until the early 1980s.
“The seeds for the 1970s experience were sown in the 1960s, when spending on social programs and the Vietnam War boosted growth. However, the $5 trillion in relief that has been passed since the Covid crisis struck is a shorter-term phenomenon than the government spending of that era. As a result, a more apt analogy may be the economic boost that occurred during the Korean War, argues Joseph Gagnon, a former senior Federal Reserve economist now at the Peterson Institute for International Economics…”
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