Making Fact-Based Policy Choices

10/20/20

Much in economics may be probabilistic and therefore debatable. Not so, however, about this statement: increasing taxes is contractionary policy, increasing government spending is expansionary policy, and vice versa. Those are unassailable truisms that should be embraced by all. Moreover, understanding these foundational principles should guide the way we think about any policy alternatives that might be offered for our consideration.

A second economic lesson has to do with the fact that we live in a complex world, where multiple causal factors are constantly at work, often with competing or offsetting consequences. For example, when a political agenda calls for both higher taxes and higher government spending, the two effects will be offsetting, at least to some degree. One or the other of these competing influences will win out, depending on their respective scales, as well as other exogenous considerations.

So how is it that the public at large doesn’t seem to appreciate these basic axioms? Or at least they weren’t appreciated after the last recession, in connection with an assessment of the American Recovery and Reinvestment Act of 2009.

You’ll recall that Obama started his presidency in the midst of what has become known as the “great recession,” which started in December 2007, a little over a year before Obama took office. Just a month after his inauguration, Obama signed a bill authorizing $831 billion of federal aid. This policy was a classic Keynesian response to economic weakness — i.e., an expansionary fiscal policy. Subsequently, the recession ultimately ended in June 2009.

Seven months after the official end of that recession, the Pew Research Center released results of a survey that showed more than three-fifths of Americans holding the view that the relief bill had not helped the job situation. Only a third of respondents viewed the federal aid as being positive. As you might expect, Republicans were more critical of the policy than were Democrats, with only 21% of Republican’s characterizing the aid as being helpful, while the percentage for Democrats was 51%.

Perhaps those findings were colored by the way the questions were posed; but if they are to be believed, they’re appalling. They fly in the face of reason and demonstrate a startling level of economic ignorance. Conceivably, some may have been critical of the legislation for being too timid and not spending enough (an unlikely explanation for the Republicans’ response), but to say that they didn’t help defies logic. Of course they helped; and without that aid, it’s a virtual certainty that the great recession would have been deeper and longer. All partisanship aside, if we can’t agree on this conclusion, there’s little hope for a constructive dialogue in connection with the current economic situation.

At this point, the debate isn’t whether to have additional federal stimulus funds to counter the effects of the current economic weakness, but rather how much to spend, with a wide gap between the Democrats and the Republicans. Democrats clearly want to enact a larger package, and Republicans want less — a lot less. Nothing seems likely to be decided before the election, and the stalemate might very well continue until after the new Congress is seated in January. At that point, however, even if some compromise legislation is enacted beforehand, we should expect yet another stimulus aid package to be on the table.

Undoubtedly, when the issue gets debated in 2021, the Democrats will continue to favor the more generous aids package, which would provide the bigger boost to the economy. The design of any such package is, of course, an important consideration; but the overriding Keynesian principle is that more money spent means more rapid economic growth and a faster pace of job creation. The choice is clear.