Welcome to the Capital Note, a newsletter about business, finance, and economics. On the menu today: Biden’s economic plan, Yellen’s debt dilemma, and deficits in a zero-interest-rate world. To sign up for the Capital Note, follow this link. CARES Act Redux We ran an editorial this morning on Biden’s stimulus plan, which looks more like a structural economic-reform package than an emergency-spending bill. The proposal includes, among other things: $1,400 checks to households, bringing the second-round total to Trump’s preferred whole number of $2,000. $370 billion in state and local assistance. $170 billion in public-education grants (essentially a backdoor top-up on state and local aid). A $400 weekly unemployment-insurance top up, extended until September, past the current March deadline. $160 billion in public-health spending, with specific allocations to vaccine distribution, testing, and emergency-response teams. A national minimum-wage hike to $15 an hour. The most striking thing about the proposal is its similarity to the CARES Act from last March. All its big ticket items — direct checks, unemployment enhancement, loan relief — were used by policy-makers at the outset of the pandemic nearly a year ago. Congress implemented these measures to provide relief during a deep economic contraction and to try to keep Americans sheltered at home. But as our editorial points out: “Now that vaccines are being administered, policy-makers face a different challenge — not keeping Americans inside, but getting them back to work as quickly as possible. In this context, President-elect Biden’s $1.9 trillion stimulus package misses the mark.” As Robert Barro wrote for us back in March: One of the main policy responses to the coronavirus pandemic has been to curb economic activity as a way of reducing the contagion’s spread. I would characterize this policy as a decision to reduce U.S. and world GDP in the short run by roughly 20 percent. In essence, this is a voluntarily implemented negative supply shock, akin to a sudden loss in productivity. Policies such as enhanced unemployment insurance and direct checks could be construed as stimulus measures insofar as they augmented GDP growth, but they were also deliberately contractionary. Congress disincentivized employment so that workers could stay at home. When you want to shrink the labor supply, it makes sense to beef up unemployment insurance and send money to households. Now, we want Americans to return to work, and the only way to do that is to accelerate the pace of vaccination. The Biden plan gives only a cursory nod to public-health measures, throwing a few billion at hospitals and testing centers and hoping the problem goes away. But public-health efforts should be the central focus for Biden’s economic team. And money alone won’t do the trick. The botched vaccine rollout is largely a result of convoluted eligibility rules. While the president-elect has voiced support for laxer eligibility requirements, one hopes his administration will be more ambitious in reducing the bureaucratic barriers to vaccination. Once the economy does open, demand-side measures won’t be enough to boost GDP growth. Especially because Biden is likely to constrain production with tax hikes. Around the Web Once a deficit hawk, Janet Yellen will soon be managing a ballooning federal debt: When Ms. Yellen served in the Clinton administration as Chairwoman of the White House Council of Economic Advisers, she was among those who pushed for a balanced budget. Today, she has joined, cautiously, an emerging consensus concentrated on the left that more short-term borrowing is needed to help the economy, even without concrete plans to pay it back. Central to the view is the expectation that interest rates will remain low for the foreseeable future, making it more affordable to finance the borrowing. The New York Times’ Nellie Bowles explores the exodus from San Francisco: “I miss San Francisco. I miss the life I had there,” said John Gardner, 35, the founder and chief executive of Kickoff, a remote personal training start-up, who packed his things into storage and left in a camper van to wander America. “But right now it’s just like: What else can God and the world and government come up with to make the place less livable?” A couple of months later, Mr. Gardner wrote: “Greetings from sunny Miami Beach! This is about the 40th place I’ve set up a temporary headquarters for Kickoff.” Random Walk On the topic of big spending, I’m excerpting part of Olivier Blanchard’s 2019 presidential address to the American Economic Association, which explains how low interest rates can bring down the fiscal cost of government debt: Not only are today’s interest rates low, they are lower than growth rates. For example, 10-year forecasts of US nominal growth rates exceed those of nominal interest rates on US government bonds by about 1 percent. The difference is even larger in other major advanced economies: 2.3 percent for the United Kingdom, 2 percent for the eurozone, and 1.3 percent for Japan. If this inequality holds in the future, then debt has no fiscal cost. Put another way, higher debt does not need to lead to higher taxes. The government can just roll over the debt, issuing new debt to pay for the interest, and debt will increase at the rate of interest. But output will increase at the growth rate and, if the growth rate exceeds the interest rate, the debt-to-GDP ratio will decline over time without the need to ever raise taxes. Second, the welfare costs are probably small. The fact that such a debt rollover may be feasible does not imply that it is desirable. Higher debt does crowd out capital accumulation, decreasing future potential output. The issue is what it does to future consumption. This is an old question in macroeconomics, explored by, among others, Paul Samuelson and Peter Diamond. The standard answer is that whether consumption goes up or down depends on whether the economy is “dynamically efficient.” This condition depends in turn on the relation of the interest rate to the growth rate. If the interest rate is lower than the growth rate, then the economy is dynamically inefficient, and while capital accumulation and output go down, consumption actually goes up. The question in the real world, however, is what “interest rate” one should use for this comparison. Should it be the average rate of return to capital, which is clearly higher than the growth rate? Or, because people are risk averse, should it be the risk-adjusted rate of return to capital, which is simply the safe rate and is lower than the growth rate? — D.T. To sign up for the Capital Note, follow this link.