Published on
Tuesday, March 02, 2021
byProject Syndicate
Biden Must Go Beyond Fiscal Stimulus
Both supporters and critics of US President Joe Biden's $1.9 trillion
stimulus plan assume that there is a dollar amount that is just right. In
fact, no such figure exists: every possible stimulus size is simultaneously
too little and too big.
byYanis Varoufakis
"Going big" might have worked in 2009, but in 2021 Biden must go beyond
fiscal stimulus. (Photo: Shutterstock)
"Going big" might have worked in 2009, but in 2021 Biden must go beyond
fiscal stimulus. (Photo: Shutterstock)
US President Joe Biden, facing the great challenge of stimulating his
country's economy for the post-pandemic era, and haunted by then-President
Barack Obama's tepid stimulus in the face of the Great Recession a decade
ago, has decided to err on the side of overshooting. He wants to "go big"
with a $1.9 trillion spending plan
Prominent centrists like Larry Summers and Olivier Blanchard warn that
Biden's decision may prove his undoing. Their argument is that too much
stimulus will trigger an inflationary surge, resulting in an interest-rate
spike that will force his administration to slam on the austerity brakes
just before the midterm elections in 2022, costing his Democratic Party
control of Congress - just as too little stimulus cost Obama control of
Congress in the 2010 midterms.
The problem with this debate is that both supporters and critics of Biden's
stimulus plan assume that there is a dollar amount that is big enough, but
not too big. Where they disagree is on what that figure is. In fact, no such
figure exists: every possible stimulus size is simultaneously too little and
too big.
Whatever quantity of money he pumps into the US economy, he will fail unless
he does what is necessary to lift the spending power of those who have next
to none: a decent minimum wage, compulsory collective bargaining, and direct
unconditional payments.
To see why there can be no "Goldilocks" stimulus that gets the amount "just
right," it helps to engage the critics who argue that the administration's
proposal would overheat the economy and hand the Republicans the midterms.
Central to their prediction is their tacit assumption that there is also a
Goldilocks interest rate and a corresponding stimulus size that will deliver
it.
What would render any rate of interest "just right"? First, it would achieve
the right balance between available savings and productive investment.
Second, it would not unleash a cascade of corporate bankruptcies, bad loans,
and a fresh banking crisis. And there's the rub: It is not at all clear that
there is a single interest rate that can do both.
Once upon a time, there was. In the 1950s and early 1960s, under the Bretton
Woods system, an interest rate of around 4% did the trick of balancing
savings and investment while keeping bank profitability at a level that
allowed credit to reproduce itself sustainably.
Back then, if investment fell below available savings for too long, and
failed to recover despite a reduction in the interest rate, a well-designed
government stimulus raised investment back to the level of savings, the rate
of interest picked up, and balance was restored. Alas, we no longer live in
that kind of world.
The reason capitalism no longer works like that is the manner in which the
Obama administration, aided and abetted by the Federal Reserve, re-floated
the sinking Western banks. The 2008 crisis was as deep and terrible as that
of 1929.
As in 1929, sequential bankruptcies, unemployment, and falling prices meant
no one was willing to borrow. Interest rates nosedived to zero and
capitalism fell into what John Maynard Keynes referred to as the "liquidity
trap." Once at zero, the interest rate could not go much lower without
destroying what was left of the banking sector, insurance companies, pension
funds, and other financial institutions.
The great difference between 1929 and 2008 was that in 2008 the banks were
not allowed to fail. One way to save them was a large enough fiscal
stimulus. Direct injections of freshly minted money to consumers and
firms-to pay off debts and to increase consumption and investment-would have
re-floated Main Street and, indirectly, Wall Street. This was the road not
taken by the Obama administration.
Instead, the Fed printed trillions of dollars, and the failing banks were
re-floated directly. But while the banks were saved, the economy was not
freed from the liquidity trap. The banks lent the new money to corporations,
but, because their customers were not re-floated, managers were unwilling to
risk plowing the money into good jobs, buildings, or machines. Instead, they
took it to the stock market, causing the largest-ever disconnect between
share prices and the real economy.
Following Wall Street's near-death experience in 2008, corporations became
hooked on (almost) interest-free credit and rising stock valuations that
flew in the face of low profits. Total savings dwarfed investment, aggregate
wages were at an all-time low, and consumer spending remained subdued. And
then, suddenly, COVID-19 arrived, with the ensuing lockdowns dealing major
blows on both the supply and the demand side of the economy.
The 12 years before the pandemic arrived explain why a sizeable stimulus
today may not achieve what it could have achieved in 2009. A successful
stimulus must bring investment closer to the level of available savings. But
the moment financial markets get a whiff that this is about to happen, they
will push interest rates up to a level reflecting the better balance between
savings and investment. Immediately, corporations hooked on low interest
rates will face ruin; so will their bankers.
In theory, this can be prevented if the stimulus simultaneously boosts
incomes and consumption, so that corporations' rising income can compensate
for the rising interest rates. But, in practice, there is no time for
corporations to be weaned off their dependency on low interest rates,
because any stimulus takes a lot longer to stimulate incomes than it does to
boost interest rates.
The combination of the liquidity trap and 12 years of corporate dependency
on near-zero interest rates has, therefore, seen to it that any fiscal
stimulus now, whatever its size, is bound to fail in one or both of its
crucial aims: To boost investment and to prevent a chain reaction of
corporate failures.
"Going big" might have worked in 2009, but in 2021 Biden must go beyond
fiscal stimulus. Whatever quantity of money he pumps into the US economy, he
will fail unless he does what is necessary to lift the spending power of
those who have next to none: a decent minimum wage, compulsory collective
bargaining, and direct unconditional payments.