Timing and Structure

I’ve mentioned this before but when I was in college, taking economics courses, Keynes was king. I continue to think that Keynes was right: Fiscal stimulus, properly structured and timed, can help to counter economic recession. Today the editors of the Wall Street Journal remark on the Biden Administration’s stimulus package:

All of this suggests that the economy is poised for a strong rebound as the pandemic eases even without new federal spending. Money for vaccines and low-income workers who are suffering the most is justified, but much of the rest will far exceed the economic or social need. As Mr. Summers puts it, if the Biden plan passes, Congress will have spent the equivalent of 15% of GDP responding to Covid before addressing any of Mr. Biden’s other priorities like public works.

Sooner or later all of this spending will have economic and political costs. The Biden spending bill is the wrong remedy for an economy that is growing. The best economic stimulus is to end the lockdowns and accelerate the vaccine rollout.

The problem with most fiscal stimulus and the Biden Administration’s approach is no exception is that it is rarely properly timed and almost never properly structured. What the editors fail to point out is that the Obama Administration’s American Recovery and Reinvestment Act of 2009 was neither. The recession was over before the first dollar had been disbursed under the act and its structure was either wasteful or targeted to political objectives. The only arguments you might make for its effectiveness rely on “animal spirits” and that it might have prevented the recession from being even deeper. The former argument is Keynesian but darned hard to make while the second is not Keynesian at all. The better explanation for its effects is that it produced asset inflation and contributed to income and wealth inequality. The available evidence supports that conclusion.