Paul Krugman writes tonight about using deficits to pull ourselves out of a recession:
A dozen years ago, just before Barack Obama was sworn in as president amid the Great Recession, I wrote a disconsolate column titled “The Obama Gap.” At a time when many viewed the president-elect as a transformational figure, I lamented the caution of his economic policy. His proposed stimulus, I argued, would fall well short of what was needed.
....The good news — and it’s really, really good news — is that Democrats seem to have learned their lesson. Joe Biden may not look like the second coming of F.D.R.; Chuck Schumer, presiding over a razor-thin majority in the Senate, looks even less like a transformational figure; yet all indications are that together they’re about to push through an economic rescue plan that, unlike the Obama stimulus, truly rises to the occasion.
If you click the link in Krugman's column, he appears to have suggested in 2009 that we needed a stimulus of about $2 trillion in actual public spending. The stimulus we got had only a third of that, plus some tax cuts.
Our current recession is totally different. If Biden's plan passes, we will have approved more than $5 trillion in spending divvied up among consumers, businesses, schools, local governments, hospitals, and more. In other words, even though the 2009 recession was the worst in nearly a century, we're spending close to ten times more on today's recession than we did back then.
This ought to be something of a destruction test of a perfect Keynesian stimulus. Stimulus money (or "rescue money" if you prefer, though it doesn't matter since money is money no matter what you call it) started being pumped into the economy almost immediately after the recession started; it's continued throughout; and Biden's plan will keep it going until after the pandemic is over. It's based almost entirely on public spending, not on tax cuts; the Fed is not trying to sabotage it with interest rate hikes; and it's enormous. There is really nothing more that anyone could ask for on a purely macroeconomic basis.
As long as the pandemic is active, none of that matters. The economy is going to stay in a rut for reasons having nothing to do with fiscal or monetary policy. But when it's over, the economy should be in terrific shape. Really terrific shape. And I suspect it will be. But if it's not, conventional stimulus theory will have something to answer for.
Why would it? Why isn't the fact that it saved millions of people from economic ruin enough? If the economy is in just OK shape after all of this then that's still great, contextually speaking.
Also, conventional stimulus theory doesn't really account for an engineered recession like this. It's uncharted territory. It's not just that there's a lack of demand and ability to spend, like in the previous recessions.
Has that ever been enough to bat Republicans?
See also, 2016.
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Great point. As Krugman has pointed out, it's not a stimulus - it's a war against the virus. You fight a war with everything you can muster till the enemy is defeated. Sometimes fighting a war stimulates the economy, like fighting the Second World War pulled us out of the Great Depression. But that wasn't the primary objective or even the anticipated result.
I think ppl are thinking about the recovery wrong. As more people get their vaccine shots, the more likely people will return to normal activities. Rather than a surge, we should be expecting steady, strong economic rebound over the next three years.
That was certainly my thinking a few months ago. But as our behavior in terms of dealing with the pandemic remains unchanged at the state level, it's entirely possible that some variation of how we're living now will become the new normal. That's because by creating a super-hospitable environment for the virus, we're risking mutations that the vaccines do not protect against.
In several states, the governments are eliminating the public health measures such as mask mandates and the closure of dangerous indoor spaces that would be absolutely essential if were serious about controlling Covid-19. And even in places like NY, they are opening indoor dining even though there are studies that make it clear this is an activity that cannot be done safely, regardless of the percentage of capacity.
So even if we were to successfully vaccinate the 80% of the population necessary for "herd immunity" it is entire possible, perhaps likely, that we would very quickly find ourselves back where we were in January of last year—facing a virus for which there's no vaccine and no cure.
And, in our interconnected world, it's not just the nutters in South Dakota and Florida that are going to kill us; there's large countries in the world that are incapable of controlling the virus without massive help (South Africa, for example) or that have simply made the decision (Brazil and Tanzania, for example) not to try. So far, the random mutations in those places have been more virulent but the vaccines are still effective—but the longer the plagues continue unchecked here and abroad the greater the likelihood that one of these mutations will simply restart our nightmare.
I'm not discounting the possibility of new mutants making it harder to achieve herd immunity. But, with mRNA-based vaccines, turnaround from identifying the key mutations to the ACE2 protein receptor and then creating a vaccine is relatively quick and vaccine manufacturers will be able to produce updated booster shots in a matter of months -- mRNA vaccines are a massive paradigm shift forward.
As for the notion that the length of a pandemic is related to a higher probability of a more virulent/infectious mutant, that's not really true. Such a variant could have popped up 8 months ago or 3 years from now, but the probability remains the same.
Let's take the case of a 6-sided dice. No matter how many times you roll it, the probability of coming up with any given number is exactly 1:6. It wouldn't matter if you rolled that number 4x in a row, the probability remains the same.
Two points:
First, the vast majority of the damage to the economy has come less from the closing of businesses and more from the inability of our society to organize itself as well as it might have done in the past. The half baked and inept system for delivery of the vaccines has nothing to do with the mechanisms for delivery and everything to do with our inane political system.
Second, I think your analogy is mistaken. The critical thing isn’t the odds of a particular copy of the virus making an error as it mutates. I think the key factor is the number of copies of the virus that are trying to replicate. The larger the number of copies of the virus replicating, the greater the risk of a mutation and unless the world is prepared to strictly quarantine (essentially to blockade) countries that are incapable (South Africa) or unwilling (USA, Brazil, Tanzania) to control the virus the risk that existing vaccines will be rendered ineffective is significant.
I think we are in an abnormal recession. It isn't that the economy is weak, but entire industries have been wiped out or decimated by the pandemic. Will we ever go to movie theaters again? Restaurants, travel and leisure, all have been creamed and may take a long time to rebound if they ever recover. The shift to people working from home will contract office space and the services needed to support that workforce. The rise of the gig economy and the exodus from cities are creating profound changes whose toll is still unknown. This coupled with the growing automation of the workforce and the threats from globalization that preceded the pandemic make for a very uncertain economic future, regardless of any stimulus.
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So far it seems we are really rich and can shovel money to people for months and it doesn’t cause huge inflation or other obvious disasters. Maybe we should decide as a culture to have a vacation month once a year or maybe a vacation year once every 5 years. Seems we can afford it.
When there is something constantly keeping the economy down, the. Yes, shoveling more fuel for it doesn't roar out of control.
As with healthcare, other countries figured this out long ago but it seems weird and radical to us.
> Stimulus money (or "rescue money" if you prefer, though it doesn't matter since money is money no matter what you call it)
Stimulus money is to make up for lack of demand. And indeed, right now there's a lack of demand to (especially) go to restaurants or to travel. Dumping money on people isn't going to change that. But it'll help those whose livelihoods have been crushed, to e.g. pay rent. I think the "money is money" mindset gives a very wrong idea of what the effects of this human, rather than bank, bailout will be.
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Very well said.
And the irony is, if it works -- which it very likely will, to a very great degree -- it will do so in many ways almost invisibly. It won't be so much that extraordinary Good Things will happen, but that extraordinary Bad Things will not, and absence is much less noticeable than presence.
Either way, for sure Republicans will take credit for the good stuff and blame Democrats for any stuff that's either bad or (in their judgment) not good enough. Any lift in the financial markets will be due entirely to the Miracle of Capitalism, and any improvement in employment will be due to the Titans of Industry and the gumption of the Hard-Workin' Murrican.
I'm glad to hear that, unlike the Obama folks, the Biden people are perfectly prepared to toot their horns loud and long. The recovery itself is the most important thing, of course, but a little media work to make sure credit goes where it's due will be most welcome.
There is little, if any, commonality between the ARRA and the stimulus that is now being proposed. The ARRA was meant to support business investment. Today's stimulus is meant to prevent a [further] demand collapse. Neither in theory nor in practice are they the same thing, and their relative "success" cannot be compared, in prospect or in retrospect.
Another mistake that is being made today is to assume that demand stimulus in the winter of 2021 will work the same way it did in the spring of 2020. Last year it could still make sense to speak of a "demand shock". Now that a year has gone by, it is no longer possible to apply that framing. People's expectations and behavior have permanently notched downward. 2019 patterns of consumption will not resume, no matter how much liquidity is injected into the consumer market. That is not to say that the money should not be injected or that it will not have a net beneficial effect, but its detailed effect will be completely different from that of last May. Economists, like generals and politicians, are always preparing to fight the last war.
We are attempting, not stimulus, but putting large parts of the economy in mothballs, while keeping their employees from falling into poverty. Supply has been deliberately suppressed, in travel, entertainment, dining out, theater and concert events, sports. Few of these sectors will see surges in demand once the pandemic ends — baseball isn’t going to play a 300-game season. Not even all retail will surge; nobody is going to buy winter clothes in June to make up for sheltering at home last fall. Normal demand will gradually resume, as others here have asserted.
But there will be alot of demand for non-home entertainment.
This is exactly right. And it's an important point, which Krugman himself frequently stresses, and which Kevin's overlooked. This isn't about stimulus and it shouldn't be evaluated in the same way—it's about disaster relief.
And, in the context of disaster relief, the government's effort is being mishandled because everyone is discussing "stimulus" and pulling out the same tired analysis when it is really "disaster relief" and help people to survive and get through this pandemic without suffering economic ruin.
https://www.nytimes.com/2021/01/27/opinion/stimulus-pandemic-rescue.html
As Kevin pointed out the other day, one of Reagan's great moves in his first term was to gleefully take credit for an economic recovery that had virtually nothing to do with his stated policies -- lower taxes/regulation. Thus was born the shibboleth that lower taxes always goose the economy. In this instance, Biden's people have a chance to tout a policy they actually favored, a large fiscal stimulus bill, as rescuing the economy after the pandemic.
I'm not convinced it is a perfect test of Keynesian economics as COVID-19 might well have plans (to the extent that viruses have plans) to become COVID-21, COVID-22, etc. If that happens, schools don't reopen, restaurants and bars stay closed, and hotels stay empty. If the vaccines can keep up or, ideally, stay ahead, of the mutations, and people stay vigilant about wearing masks and washing hands, we will get our test of economic theory. Even then, it is going to take a while to replace the businesses that have permanently shuttered.