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Claudia Sahm

Fears of a Too Hot Economy Ignore Racial Inequality

Those worried about the negative consequences of exceeding potential output ignore the chronic underemployment of Black and Hispanic workers.

Is it even possible for the economy to become too hot?

Is it even possible for the economy to become too hot?

Photographer: Chris Hondros/Getty Images

President Joe Biden recently unveiled his $2.25 trillion American Jobs Plan that proposes investments in transportation, manufacturing, caregiving, and research and development, as well as universal access to safe drinking water and high-speed Internet. The policy wonks are scrambling to evaluate its economic effects, as well as the proposed increases in corporate tax rates to pay for it. Many are sounding the alarm about pushing gross domestic product past “potential output,” and that’s before Biden’s American Family Plan, the details of which are expected later this month.

After spending almost $6 trillion to fight the pandemic and bolster the economy, inflation hawks see anything that spurs a spike in demand as an existential risk. But be wary of arguments that wield “potential output” as a club. Its framework is discredited, and it is time for new tools and new thinking.