The bipartisan support for massive stimulus bills in Congress and the likely possibility that Janet Yellen becomes the next treasury secretary show broadening support for a Keynesian approach to economic recovery. There is always a catch to funding stimulus through deficit spending. Short term gains can be easily offset by higher interest rates that discourage investment from the private sector, by increased taxes that the government must levy in order to pay back taxpayers, and by inflation to the US dollar. However, the global recession and public health crisis casued by COVID-19 have called for an unprecedented level of urgency. Lawmakers in all caucuses are starting to realize that agressive fiscal stimulus is the only viable option to helping Americans across the country.
Throughout the 1920’s and 1930’s, British economist John Maynard Keynes wrote a series of books arguing that governments have a moral imperative to take decisive action in times of crisis by aggressively supporting the economy in order to correct market failure. His theory was in opposition to the conventional economic wisdom of the time—that the central bank should pursue monetary policy and allow the economy to naturally return to equilibrium. At the onset of the Great Depression, Herbert Hoover’s strategy to let the economy naturally correct itself was disastrous, resulting in a prolonged recession and a one-term presidency. After FDR replaced Hoover, he announced the New Deal, a series of programs, public work projects, financial reforms, and regulations that called for heavy government investment. This aggressive approach boosted employment and aggregate demand, saving the country from collapse and paving the way to recovery.
Decades later, in response to the 2008 recession, US policymakers leaned away from fiscal stimulus and focused their efforts on monetary policy, which was a largely successful strategy. However this success does not necessarily apply to today's public health crisis. Unlike the crash of 2008, which was caused primarily by financial institutions, the COVID pandemic has directly attacked the real economy: the non-financial elements, such as production, purchase and flow of goods and services. The monetary solution that worked in the past is therefore not necessarily an applicable response to the direct attack on the economy today. Instead, we must replicate the fiscal policy executed during the Great Depression because the present economic crash is just as grim.
The financial implications of the coronavirus pandemic on society have been staggering. In the second quarter of 2020, US GDP dropped by 32.9%, the worst report the country has ever seen. This metric means small businesses are making less and that blue collar workers have fewer options in the job market. Although unemployment rates are slowly recovering from this plummet, Black unemployment still remains above 10%.
The virus also disproportionately affects the health of individuals living in low-income communities, which perpetuates the cycle of financial loss many were already facing. According to a 2019 Federal Reserve study, 40% of Americans could not come up with $400 to cover an emergency, meaning low-income families lack the resources to stock up and prepare against COVID. Furthermore, low-income communities have a greater risk of contracting COVID because many low-paying jobs cannot be done remotely. According to the U.S. Bureau of Labor Statistics, less than one in five black workers and roughly one in six Hispanic workers are able to work from home. In addition, once these workers are exposed to the virus, they are much more likely to be uninsured for medical care and have much less space to quarantine in their homes.
Recent stimulus bills passed by Congress, which have shown bipartisan support, prove that the urgency required in solving pandemic-induced problems are leading lawmakers and concerned citizens, regardless of political affiliation, to favor a Keynesian approach to recovery. So far, opposing political parties have had to work out the details, but in America, and across the world, one thing all policymakers can agree on is that Keynes’ theory on economic recovery is the only approach to handling the COVID economic crisis.
Janet Yellen, Joe Biden’s choice for Treasury secretary, a highly respected economist, former chairwomen of the federal reserve and firm believer in Keynesian economics, believes that the free market works well, but when problems arise the government must step in to fix them. If confirmed by the senate, she will adopt a Keynesian approach to recovery, pushing for immediate aid directly to state and local government and to the pockets of citizens in need.