The Stimulus is Unlikely to Stimulate
Don’t blame John Maynard Keynes for what’s about to happen.
An economic stimulus is coming from Congress, the one the House passed almost a full week ago. The first thing that allows it is that Moscow Mitch McConnell (R-KY) finally bestirred himself to allow a floor vote in the Senate. The only delay now is the wait for the Clown Prince of the Senate, Rand Paul (R-KY), to run out of ways he can stall the vote on relief for working class Americans to extort a vote on the Afghanistan war.
I, too, despise the longest war in American history, but the irrationalities in the Hindu Kush pale beside the political question why Kentucky can’t seem to elect grownups. McConnell’s delay was breached when public opinion turned decisively in favor of some relief for those millions of people who have already lost their jobs or soon will in the fight against the spread of coronavirus. Rand Paul is still not in emergency mode, assuming he has an emergency mode.
My writing will not affect the fact of a stimulus bill or even the timing. Therefore, I should explain that my purpose is to deflect blame from John Maynard Keynes when the stimulus fails to accomplish much stimulating.
A short review of macroeconomics as practiced since the Great Depression at all times except during the Reagan Revolution, when the country veered off into the view that the steering wheel for the economy is on the supply side rather than the demand side. President Bush 41 called supply side economics “voodoo,” and I’ll just let the record of history be the judge. This is not the time for the digression, but I find Mr. Bush’s remark an insult to voodoo.
Now, back to the demand side, where even the Republicans go when they get serious. Picture a line graph and call the line the “aggregate demand curve.” It represents the amount of money chasing the goods and services available to be purchased in the entire economy. Government “steers” the economy by keeping a balance between supply and demand. Imbalance in one direction (“too much” demand) creates inflation while imbalance the other way (“too little” demand) gives us deflation.
When the economic engine is running on the deflation side, production pares down and unemployment goes up. When the economy slows to the point it quits growing entirely, we have a recession.
The Keynesian remedy is to look at the aggregate demand curve in terms of it’s major constituent parts, government spending and private spending. A fiscal stimulus increases government spending by the amount private spending has fallen off. More often than not, this is done by borrowing a/k/a “deficit spending.”
The visual metaphor is that government money is used to “prime the pump” so as to get the economy moving again. When the economy is firing on all cylinders again, it’s safe to raise taxes to pay off the deficit. Politicians find it hard to raise taxes to take in money that has already been spent, and that has caused trouble — but that’s a different problem.
The upside of deficit spending is that we have lots of necessary infrastructure — roads, bridges, airports, rail lines — that has to be maintained. We have done a terrible job of maintaining it. When the government needs cash for deficit spending, it sells bonds. The coupon on those bonds (the amount of interest they promise) is very reasonable in a recessionary economy.
So we sell the government paper to raise the cash that is immediately used to hire the workers who can fix the infrastructure. Provided we pay back what we borrow, we get the economy moving and the bridges fixed before they collapse. What’s not to like?
I write today to suggest that the pump we are about to prime may not bring forth water this time, because conditions are different. It’s true that the economic expansion out of which the U.S. just fell had been going for a long enough time that a big dose of cooling off was overdue. Still, the slowdown we are experiencing is not a natural part of the capitalist economic cycle.
There is less private money pushing that aggregate demand curve because great masses of people have lost their jobs and many of those jobs were associated with businesses that are going to die, killed by the coronavirus.
The Republican move to remedy this by cutting payroll taxes is stupid beyond the limits of human imagination. What earthly good does less payroll tax do for you if you are no longer on a payroll?
The cut in payroll tax may be stupid but it is in a way symbolic of the larger problem. Congress is working on putting money in the pockets of individuals, most of whom were working before the virus killed their jobs.
In a normal recession, businesses react to consumers having money to spend by increasing production and that cuts unemployment. Consumers with spending money prime the pump of our economy, which runs on consumer spending. This time, the pump is sitting on top of a hill of dry sand.
Put yourself in the place of a person who was waiting tables or cooking at a restaurant that no longer exists. (Yes, I understand many of you do not have to pretend and I’m sorry.) You’ve been without a pay check for a month or so and the government drops some money in your lap that appears to be a one time gift.
I suggest that you are going to pay your rent unless there is a government moratorium on evictions or your mortgage payment unless there is a government moratorium on foreclosures. Then you are going to make your car payment if you have enough left after feeding your family.
NOTE: The above paragraph does not apply to workers with small children, who will spend the first money they get on food for the children. There is no pain like the pain of not being able to feed your children.
Can you explain to me how any of those expenditures will cause any business to expand production? OK, I can see that money would have some velocity at the margins. If you are renting a house that is the source of income for a sweet widow lady, your payment of rent will enable her to increase consumption.
Generally speaking, though, in most cases, I think this so-called stimulus money will help some people stay relatively even. It will not enable them to go forward. Until the death grip of the coronavirus on the throat of our economy is broken, money given to those out of work is not stimulus money — it’s survival money. It can’t restart the economy until there is an economy to restart.
Nothing is offered here in defense of the Senate delegation from Kentucky, Moscow Mitch McConnell and Rand Paul. Congress should appropriate survival money, but understand that the unemployed can’t go back to work when they are still ordered to “shelter in place” and the small businesses that are the primary sources of jobs are dropping like flies.
This time, under these circumstances, the Keynesian remedy is likely to be futile. We are at war, and victory does not lie in the the discipline called economics but rather the discipline called medicine.
