The Taiwan Banker

The United States Congress in March passed a US$1.9 trillion coronavirus relief bill, one of the largest stimulus plans in American history. The bill extends $300 per week in unemployment benefits until September 6, provides US$1,400 direct payments to most Americans and their dependents, and offers US$350 billion in relief to state, local and tribal governments. The bill also directs more than US$120 billion to K-12 schools and US$30 billion in aid to restaurants. The massive stimulus heralds a sea change in the U.S. government's approach to economic policy. The neoliberal consensus borne of the Reagan Revolution is over. President Ronald Reagan once said, "The most terrifying words in the English language are, I'm from the government and I'm here to help." Reagan meant what he said. He exalted supply-side economics. He deregulated business, slashed taxes and weakened unions. Many Americans shared his zeal for small government in the 1980s when he won two elections in a landslide - and even well into the 2010s - but the country did not face a catastrophic pandemic then. As of mid-March, 534,000 Americans had died of Covid-19 and 29.4 million had been infected. The economy contracted 3.5% in 2020, its worst performance since 1946. 4.3 million people have left the labor force since the pandemic began. President Joe Biden sees an opportunity in this crisis: to revivify government's role in economic policymaking, to make it a force for good in people's lives instead of the bane Reagan assailed. Biden's thinking is reflected in his campaign slogan "Build back better." On his official campaign website, he wrote, "Whenever America has had its back against the wall, we have acted together to lay the foundation — through public investment and a strong social contract — for the American people to pull together and push forward." That sounds like a reference to Franklin Delano Roosevelt's (FDR) epochal New Deal, which permanently expanded federal government's role in American life. The New Deal incorporated some of the ideas proposed by the British economist John Maynard Keynes, such as providing direct aid to families and creating new jobs through public-works projects. Keynes, one of the most influential economists of the 20th century, believed that in severe downturns the private sector was unlikely to drive economic recovery on its own. The government had to lead the way, instilling confidence in people that there was light at the end of the tunnel, he argued. Only then would the economy rebound. Keynes did not lose sleep over the debt that would accrue. Rather, he feared a collapse in confidence. To avert that, taking on large debt was an acceptable risk, he said. With its focus on large-scale direct aid to individuals and businesses, the coronavirus relief bill - and earlier stimulus packages enacted during Donald Trump's presidency - channel Keynesian thinking in a way unseen in America since the 1960s. The newest bill goes To be sure, the Democratic establishmentarian Biden is not the most obvious person to lead the Keynesian renaissance. After all, he had a reputation as an economic moderate during his 36 years in the Senate (1973-2009), a period that dovetailed with neoliberalism's ascendancy and zenith. Yet Biden recognizes the urgency of this moment. There is a narrow window to act decisively to prevent the downturn from becoming a depression. The large sums of direct aid in the coronavirus relief bill will help the people worst hit by the pandemic, many who do not have the luxury of working from home. At the same time, the U.S. economy's tepid recovery after the 2008-09 global financial crisis haunts the Democratic Party. Democrats then settled for modest stimulus measures to forge compromise with Congressional Republicans. The U.S. averted a recession, but the economy was sluggish for years. Labor force participation fell sharply during Barack Obama's presidency. Wealth inequality rose. These factors helped fuel a populist backlash that Donald Trump seized upon to win an upset victory in the 2016 presidential election. “The dangers of undershooting our response are far greater than overshooting,” Senator Majority Leader Chuck Schumer said in January. “We should have learned the lesson of 2008 and 2009, when Congress was too timid and constrained in its response to the financial crisis.” We are (almost) all Keynesians now Treasury Secretary Janet Yellen is playing a decisive role in the White House's embrace of deficit spending to boost the economy. Keynes' ideas inform her approach. She believes that monetary and fiscal policy should be used to achieve full employment, robust growth, and even greater wealth equality. Unlike the neoliberals, she does not see inflation control as paramount. In her confirmation hearing before the Senate, Yellen provided insights into her core beliefs about economics. She recounted how she as a child observed her father, a doctor, treat patients in his basement office located in their New York home. "He was the kind of doctor who treated the whole patient. He knew about their lives; about when they’d been fired or couldn’t pay," she said, adding, "I have always tried to approach my science [economics] the same way my father approached his: as a means to help people." She acknowledged that a large stimulus package would add to the U.S's debt burden - which exceeded US$27 trillion in 2020 - but argued that with interest rates at historic lows, the benefits will far outweigh the costs in the long run. The short run could bring the briskest GDP growth since the 1980s. The Organization for Economic Cooperation and Development reckons that the U.S. economy will grow by 6.5% this year, twice as high as the OECD's forecast in December. Gregory Daco, chief U.S. economist at Oxford Economics, thinks growth could reach 7% and 7 million jobs could be added. The relief package's focus on lower-income families will be pivotal to the economic recovery. The Tax Policy Center estimates that the plan will boost the income of the poorest 20% of families by 20%, compared to just 1% for the highest earners. The lower earners are more likely to spend the extra money. When they do, that will give the broader economy a shot in the arm. Unsurprisingly, some neoliberals worry that the stimulus juggernaut will be overkill. Larry Summers, who served as Bill Clinton's Treasury Secretary from 1999-2001 and director of the National Economic Council during the Obama administration, has been among the most vocal critics of the plan among Democrats. "I think we need to make sure we're concerned with not overheating the economy and concerned with assuring that there's room for enough public investment," he told National Public Radio in February. Summers questioned whether the U.S. needs the biggest stimulus in American history. "It's the overall scale of the stimulus and it's whether we're using any of it to build a stronger economy or just to give money to people," he said. Olivier Blanchard, an economics professor at the Massachusetts Institute of Technology (MIT) has similar concerns. "The 1.9 trillion program could overheat the economy so badly as to be counterproductive. Protection can be achieved with less," he said in a February Twitter post. The White House and Congressional Democrats, however, are willing to take an inflationary risk. After all, the risk is calculated, as Yellen pointed out in a March interview with CNBC. “Inflation has been very low for over a decade, and you know it’s a risk, but it’s a risk that the Federal Reserve and others have tools to address,” she said. On the other, the relief package could be a first step in a broader fight against inequality that could reshape the Democratic Party, helping it to build a winning coalition centered on economic fairness. It is in that area where the Democrats find the greatest support among the American people. If Democrats want to take the wind out of Trumpian populism's sails, they should heed Janet Yellen's advice. "But then there is the longer-term project. We have to rebuild our economy so that it creates more prosperity for more people and ensures that American workers can compete in an increasingly competitive global economy," she said in her confirmation hearing.