By Jason Welker
With the passage of the CARES (Coronavirus Aid, Relief, and Economic Security) Act, signed into law by President Trump on March 27, the United States has just entered a new era of macroeconomic policy, in which decades of conservative, small government, anti-deficit doctrine have been thrown out the window to save both the US economy and the Republican party from total collapse.
To truly understand the extent to which the $2 trillion coronavirus stimulus bill pulls back the curtain on a half century of Republican economic ideology, we need only look back to the first months of President Obama’s first term, during which unemployment was climbing towards 10%, millions of Americans were defaulting on their mortgages, and economic output turned negative as the country spiraled into its deepest recession since the 1930s. The American Recovery and Reinvestment Act, a Democrat-sponsored stimulus package, passed the House of Representatives without a single Republican vote and the Senate with just three Republicans voting to save the US economy.
How could the country ever afford the $831 billion price tag, asked Republicans? The Obama stimulus sparked such outrage that it gave rise to an entire movement grounded in fiscal responsibility and small government. The Tea Party would go on to place dozens in congress whose primary objective was to promote small government and balanced budgets, achieved, of course, not by raising revenues but by slashing government spending on social programs and entitlements. Dismantling the social and economic welfare state became the guiding principle of the Republican party throughout the Obama years.
Yet in the first year of a Republican administration, conservatives in Washington revealed their true motives. Balanced budgets and fiscal responsibility were never their concern; Trump’s tax cuts of 2017 added over $2 trillion to the national debt, yet Republicans voted almost unanimously for it. While only three Republicans supported an $831 billion stimulus package to help keep America out of a second Great Depression, almost every one of them voted to pass a tax cut costing $2.3 trillion in an economy already at full employment.
And here we find ourselves today. A Republican in the White House and a senate controlled by many of the same conservatives who voted against Obama’s stimulus 11 years ago. So what has changed? Is the economic impact of the coronavirus going to be so much greater than that of the housing market collapse and the subsequent financial crisis of 2009? Maybe; we just don’t know.
What we do know is that fiscal stimulus works, and it can be done at almost zero long-run cost to the United States economy and to the taxpayer. It worked in 2009 and it will work in 2020. What does it mean to say it will work? It means that five years from now we can expect the US economy to be humming along at or near full employment. It means that we are not going to spiral into a decade long depression characterized by falling output, deflation, and persistently high unemployment. It does NOT mean that we will avoid all economic hardship in the coming months. For sure, millions will lose their jobs and many businesses will be shuttered. But just as a ventilator can keep a sick COVID-19 patient alive, the correct dose of fiscal stimulus can keep the US economy on life support until this disease has passed.
In the coming months, the US government will inject roughly 10% of our country’s annual income into the economy as additional spending and as cash payments to Americans, and when the current stimulus has worked its way through our economy, another will likely be needed to keep the economy alive.
So you are probably asking, what about the cost? Where will this money come from? Won’t we collapse under the resulting burden of debt? Let me assure you, these are not, nor have they ever been, genuine concerns. That’s right, the entire basis on which the Tea Party was formed, the objections to Obama’s stimulus in 2009, and all arguments that our country somehow cannot “afford” to support our businesses and households during economic crises are bogus.
Money, it turns out, is one resource that is not scarce, particularly in a country like the United States: the world’s largest economy with a currency that is acknowledged the world over as the reserve currency, the “gold standard,” and the safest haven during economic downturns. As the world’s stock markets fall, much of that wealth is being pumped into the US economy by investors seeking to hold US government bonds, meaning the US government can borrow at almost zero interest during economic crises. Furthermore, our Treasury Department, with the help of the Federal Reserve, can lend money directly to the US government and essentially inject cash into the system without having to collect taxes or issue new debt.
In fact, the only reason our government even needs to collect taxes is NOT to finance government spending (we can print all the money we need, after all!) but to control inflation. Someday, years from now, when we’re back at full employment and economic growth is ticking along like it was until three weeks ago, taxes might be raised, but not to reduce the deficit or to pay down the debt, rather to keep inflation in check. For now, however, our country faces an unprecedented economic crisis and, just as in 2009, fiscal stimulus is an absolutely correct and necessary response.
So just a message to all those small government conservatives out there whose economic ideology was articulated by President Reagan in his first inaugural address, in which he said, “Government is not the solution to our problems, government is the problem.” Your government (led by Republicans) just voted unanimously to massively increase its role in our economic lives, and thereby put our economy on life support until this pandemic has passed. If you truly believe that government is the problem, then I suggest you tear up that $1,200 check you’re about to get in the mail and put your faith in the free market to solve our problems!
Welcome to socialism, America!
Jason Welker is an economics teacher. You can view his lessons on his YouTube channel, www.youtube.com/JasonWelker
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