Keynes Then; Keynes Now
7/24/20
Thinking back to my introduction to economics as a college freshman, I was enthralled by the Keynesian prescription for addressing slow economic growth and high unemployment — expansionary economic policy. For the first time, I saw the keys to the kingdom. Keynes offered a logical roadmap for addressing concerns that were fundamental to western economies’ wellbeing. Somehow, before Keynes, policy makers simply didn’t know how to get us out of a depression, but all that changed with The General Theory of Employment Interest and Money.
In years since its original publication in 1936, the breadth of economics literature has exploded, but I think if fair to say that no other economics text has been as influential as The General Theory, and few if any treatises have stood the test of time as well. Keynes explained how fiscal and monetary policy could (should) be used contracyclically. In terms relevant to today, when unemployment is high and when economic growth isn’t sufficient to alleviate that situation, government should increase government spending and grow the money supply more rapidly. It’s up to the congress to deal with the government spending (fiscal policy) and the Federal Reserve System to deal with the money (monetary policy). Thus far in the current situation, I believe the Fed deserves high marks for shouldered its responsibility appropriately. The Congress, not so much.
The initial phases of the Cares Act appropriately injected massive amounts of stimulus into the economy; but in my judgment the package left too many vulnerable people with inadequate protections while at the same time supporting wealthy individuals and businesses that should have been expected to draw down on their own wealth and savings before accessing federal dollars. Still, the expanded unemployment benefits and grants to individuals and households served a critical need and were tremendously effective.
The problem now is that we’ve yet to see the light at the end of the tunnel — happy talk of the president notwithstanding. Given the upswing of Covid-19 cases, hospitalizations, and deaths in increasing numbers of states, indications point to a worsening prognosis for the economy. It’s disheartening to hear calls for cutting back financial support to households and individuals in the face of these exceedingly dire indications. An overly parsimonious aid package will be shortsighted, leaving us with even bigger problems to cope with down the road as a growing population of households is unable to pay their rents and mortgages.
To those protesting that the negotiations in Congress are leading to a fiscally irresponsible outcome, I challenge you to support a consistent proposal: Agree to claw back portions of the 2017 tax cut that went to the wealthiest Americans to fund at least some portion of prospective federal support payments. That action would certainly put money where their mouths are, but I don’t expect to see it happening anytime soon.
Keynes had if figured it out in 1936 during the height of the depression. His prescription worked then, and it’ll work now. Let’s follow his advice.
