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Move Over, Nerds. It’s the Politicians’ Economy Now.

by

It is in distinct contrast with the experience after the 2008 financial crisis.

There was a large 2009 fiscal stimulus action, but a mix of legislative politics and deficit concerns by some officials in President Barack Obama’s inner circle restrained its size. Many of its components were relatively invisible to the average voter. And when the economy remained weak into 2010 and beyond, Republicans and many Democrats focused on deficit reduction. “Stimulus” became a dirty word in Washington.

The Fed stepped in, undertaking quantitative easing (essentially, buying bonds with newly created money) and other untested strategies in an effort to keep the expansion going.

But central bankers’ tools are limited. They can adjust interest rates and push money into the financial system in hope of making credit easier to obtain. That can spur more investment and spending, which in turn can generate more jobs and higher wages.

Sound circuitous? It is — the economics equivalent of a triple bank shot in billiards.

In the 2010s, the strategy sort of worked. There was no dip back into recession, and the expansion was the longest on record, until the pandemic ended it. But it took years and years for the economy to return to health, and it was a deeply unequal recovery in which owners of financial assets saw the biggest gains. That the effort was led by unelected central bankers reduced its democratic legitimacy, by appearing as if it were merely an effort by elitist institutions to protect the rich and powerful at the expense of everyone else.

“You can do it and it can be successful, but the income and wealth inequality consequences of it will stink to high heaven,” Professor McCulley said. “You can do it that way, but it is anathema to democratic inclusion.”

By contrast, fiscal authorities can spend money directly, funneling it where it is needed, without expectation of being paid back. The United States has done exactly that over the last year on a scale with no parallel since World War II.

The new $1.9 trillion package includes, among other provisions, $1,400 payments to most Americans, a new child care tax credit that will put $300 per month in the bank accounts of most parents of a young child, help for those facing eviction or foreclosure, and billions of dollars in grants for small businesses. Public opinion polling finds it considerably more popular than other major domestic policy legislation in recent years.

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Filed Under: BUSINESS Tagged With: American Rescue Plan (2021), Coronavirus Aid, Relief, and Economic Security Act (2020), Democrats, Economic Conditions and Trends, Economy, Federal Reserve System, Interest Rates, Jobs, Law and Legislation, Money, PAID, Policy, Quantitative Easing, Republicans, United States, United States Economy, United States Politics and Government, Wages

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