I found this post by Ryan Cooper at American Prospect depressing. His main point is that fiscal stimulus “works”. After a lengthy discussion of the 2009 America Recovery Act he adds:
In the future, austerity politics is going to rear its head. President Biden is already starting to boast about cutting the budget deficit like Obama constantly did. It’ll be critical to remember this period the next time a recession rolls around—we may have some inflation now, but that only proves that stimulus works, and anyway modestly rising prices are better than mass unemployment. John Maynard Keynes was right all along.
What do I find depressing about it? First, his flat dismissal of actual events:
The Great Recession saw one stimulus under President Bush of $152 billion, and the $831 billion Recovery Act—or about 7 percent of 2008 GDP put together.
What is missing from his account is that the Great Recession was over by the time the ARRA had disbursed a single penny. If fiscal stimulus did anything about the recession, it was that provided by the Economic Stimulus Act of 2008 under George W. Bush, not the ARRA. Any effect of the ARRA is conjecture. I think it’s likely that it produced asset inflation.
The second thing is that Keynes never taught that debt-financed fiscal stimulus was always good. Quite to the contrary Lord Keynes’s proposal was that a shortfall in aggregate demand could be remediated by debt-financed fiscal stimulus up to the limit of aggregate product. More spending after that would just produce inflation. We’re living the empirical evidence of that right now.
He also said that the debt incurred by fiscal stimulus during economic downturns should be paid down through taxation during expansions. As I read it the primary difference between Keynesianism and modern monetary theory is that MMT advocates don’t believe that, since the U. S. is a fiscal sovereign, we don’t ever need to pay down that debt. In other words what Mr. Cooper proposes isn’t Keynesianism or modern monetary theory. It’s what I have characterized as “folk Keynesianism” and it’s not just wrong but dangerous.
What is the correct conclusion from the last 20 years? A correctly timed, sized, and structured fiscal stimulus can, indeed, make up for a shortfall in aggregate demand but poorly timed, sized, or structured stimulus does none of that.
What should we do? We should produce more.
