Keynes’s Fearless Stimulus

Political Economists
Political Economists
8 min readAug 7, 2021

by Max Ronquillo and Michael Greenwald

The Granddaddy of Modern Economics

People have a lot to fear in 2021. Death by virus. Mass unemployment. Social isolation. Long gone are the days of paying 10 dollars a month for your favorite shows; streaming services are dividing up our beloved content and selling it back to us, one shitty sitcom at a time. And on top of everything, nobody knows how long this economic recession will last. Naturally, people are saving their paychecks to take care of their family in case the crisis worsens. John Maynard Keynes, the father of macroeconomics, understands our compulsion to avoid spending in times of crisis; but during the Great Depression, urging federal governments to enact aggressive fiscal and monetary policies encouraged Americans to spend their way out of the depression. This core philosophy of government intervention was mirrored in FDR’s New Deal programs, and along with the mass-production demanded by our allies in WWII, propelled America out of the Great Depression and into economic prosperity. We will discuss how Keynes encouraged FEARLESSNESS to overcome the Great Depression and how lessons learned from the New Deal programs’ success can be applied to future Coronavirus stimulus relief.

Keynes and the Great Depression

In 1929, the stock market took a bit of a tumble (1). When the market crashed, Americans rushed to the banks to withdraw their money, but because the banks had loaned and invested 100% of all of their money, they didn’t have enough cash on hand to pay them back. This happened frequently before banking regulations were enacted by FDR, and standard procedure dictated banks to take loans out from other banks, but there were so many loan requests that ALL of the banks ran out of money. People’s entire savings accounts disappeared overnight, and there was no process for Americans to recover their money or to hold banks responsible for their reckless investments. This was an unprecedented crisis in American history, and Keynes was intent on finding an explanation and providing a solution (2).

In his 1936 book The General Theory of Employment, Interest and Money, Keynes discussed not only how to build a strong economy, but how to prevent it from failing. He argued that individuals are inherently fearful people, and in times of crisis our fear drives us to hold onto our wealth instead of spending it. The most dangerous part of a crisis is its ability to dissuade consumers from spending and investing because a healthy economy depends on wealth circulation. Keynes understood that something needed to override people’s natural instinct to hoard their wealth and encourage normal spending to avoid financial disasters, and his solution was a deeply controversial and untested economic policy of government intervention (3): either using fiscal policy (stimulus checks), monetary policy (lowering interest rates), or a combination of the two (4). America got its chance to put this theory into practice in 1933.

New Deal

The New Deal was a series of programs, public work projects, financial reforms, and regulations enacted by President Franklin D. Roosevelt between 1933 and 1939. These programs focused on what historians refer to as the “3 R’s”: relief for the unemployed and poor, recovery of the economy through spending, and reform of the financial system to prevent a repeat depression. Notable federal programs include the Civilian Conservation Corps (CCC), the Civil Works Administration (CWA), the Farm Security Administration (FSA), the National Industrial Recovery Act of 1933 (NIRA) and the Social Security Administration (SSA). Over the course of six years, these programs provided economic relief for the lower-class Americans who were most affected by the Great Depression, specifically farmers, the unemployed, youth, and the elderly. The New Deal also included new regulations for the banking industry and aggressive fiscal and monetary policies with the intention to re-inflate the deflated economy. These programs were enacted by both Congress and FDR’s executive orders. The New Deal programs were the perfect model of Keynesian economics, and its success encouraged Keynesian solutions to economic crises around the world.

2020

Speaking of crises, I’m sure you’re all wondering how this relates to our current situation. I hate to break it to you, but the federal response to the COVID Crash of 2020 has been… half-assed. In Q2 2020, U.S. unemployment reached a record high of 14.7%, and GDP shrank 32.9%, four times more than during the 2008 housing crisis! (5) Because of Keynes’s proven policy of government intervention in times of crisis, the sharpest economic contraction since the Great Depression merited a response. Over the course of the following year, Congress responded with a series of relief bills (6), but only ONE FIFTH of the money went to the people via direct checks and unemployment benefits. Keynes is disapprovingly shaking his head.

The stimulus checks are not being used to stimulate the economy: they are going straight to the elites. An article from the Peter G. Peterson Foundation shows that households making $99,999 or less ended up spending 70% OR MORE of their stimulus check exclusively on essential living expenses. This isn’t the type of spending that claws us out of economic ruin; consumption, or consumer spending, is seventy percent of America’s GDP and the most important sector of the economy. When the consumption sector contracts, its effects ripple through every industry in America. When wealth flows disproportionately to landlords and banks instead of consumption, the consequences are REAL: record evictions, high unemployment, and supply shortages all hit during the COVID Crash. Wealth redistribution isn’t just about taking money from the richest Americans and giving it to the poorest, it’s about circulating wealth around the economy. The strength of the economy isn’t determined by how much money we have saved, it’s how we’re willing to consume. If richest Americans are fearful and hold onto their wealth, then there’s significantly less circulation, so redistributing this stagnant money into the hands of people more willing to spend it is essential to a healthy economy, whether it be through taxation or other incentives. Consumption is 70% of our country’s economy, so promoting consumption promotes a strong economy. Keynes understood that a strong economy benefits everyone, so the government should find ways to promote consumption when fear inhibits it among all classes to bolster the economy and better our country.

Outro: Keynes’s Infrastructure Plan

Keynes would rewrite the COVID relief plans with two things in mind: short-term recovery of the economy and long-term sustainability. For the short term, Keynes would include direct payments to the American people, aka the stimulus checks. While the checks that have already passed are a good start, they are not nearly enough to immediately stimulate the economy. Allocating larger or more frequent stimulus checks encourages individuals and households to consume; allocating tax revenue directly to the American people IMMEDIATELY stimulates the economy. In its current incarnation, these tiny, unpredictable 2000 dollar checks are only causing FEAR. FEAR of not having enough money to make rent for the rest of the year. FEAR of being unable to buy your growing kids new clothes. FEAR of having to choose between which streaming services subscribe to when Hulu loses the rights to your favorite sitcom. FEAR paralyzes our willingness to consume and leaves the economy stagnant.

For long-term sustainability of our economy, Keynes would advocate for a New Deal-esque infrastructure plan. One reason why people are unable to use their stimulus checks for consumption is because living expenses are too high. We can alleviate living expenses with infrastructure! Imagine being paid to lay down the groundwork for free internet access! Or building recharging stations for electric vehicles. Or adding modular healthcare infrastructure to your local elementary school. While these are great solutions to existing problems, we have to be mindful of how we prepare for future challenges. We need to be fearful of THE RIGHT THINGS and prepare our infrastructure accordingly. Future epidemics like climate change, social disruption, or even more disease are easily preventable if we take steps now to prevent it. Of course we can’t prepare for every situation, so our country’s infrastructure needs to be flexible enough to respond swiftly with humanitarian aid to any crisis. Safe food production and commercial transportation is key. Recessions are often symptoms of our failure to address other crises, so the better equipped we are to deal with impending crises, the more sustainable our economy will be.

In our current state of affairs, Keynes would advocate for not just a FEARLESS stimulus plan, but rather a HOPEFUL one. Over the course of the past year, the entire economy and world has been frozen in the fear of many things: Covid, market volatility, politics, the future, etc. Moving forward, Americans and the world need a stimulus plan that not only reinvigorates and sustains our willingness to spend and consume, but also ignites an overflowing passion to make each generation better than the last.

Endnotes:

[1] Market crashes are an inevitable and necessary part of a functioning economy, but people didn’t know that in 1929. The federal reserve wasn’t made until 1913, by JP Morgan and other notable banking celebrities. There were NO banking laws, because America didn’t know what to expect from a central banking system. If people had ignored the stock market crash and continued to spend and withdraw money normally, would we have had a Great Depression? Perhaps not, but we wouldn’t have any banking regulations either.

[2] Although Keynes was British and lived in Cambridge during the depression, he was still directly affected by the stock market crash of 1929. Because the United States had the majority of the world’s gold, the rest of the world’s currency’s value depended on the US Dollar. The depression, or multiple fiscal quarters of recession, caused the value of currencies to plummet around the world.

[3] Previous economic thinkers like Adam Smith argued that in times of economic contraction, we should allow the economy to correct itself, by finding the equilibrium of supply and demand. However, between 1929 and 1933, the economy did NOT naturally correct itself. In reality, people were driven to starvation and suicide because they didn’t think the economic situation would ever improve. Only when FDR was elected in 1933 and he was able to implement his New Deal programs did the economy correct itself. This is proof that government intervention works and can be safely deployed as one of many tools to correct the market and save lives.

[4] Stimulus packages are billions of dollars of relief aid that is distributed through different avenues of the government. Beneficiaries can include “small” businesses, health care and vaccine aid, and other social institutions that the government deemed valuable to give relief to (farmers, schools, museums, etc.). In theory, a stimulus package NEEDS to stimulate the economy. Because consumption is the most important part of the economy to stimulate, who receives the aid is just as important as how much money is allocated; a few billion dollars in direct payments to people incentivizes a lot more consumption than a few billion dollars for Jeff Bezos.

[5] Not to downplay the 2008 housing crisis (which we will discuss further in a future writing/podcast), but that particular crisis affected the INVESTMENT side of the economy much more than the CONSUMPTION side. People were FEARFUL of their home’s value plummeting and 401k’s disappearing overnight, but were not afraid to consume. Further proof that promoting consumption ameliorates economic collapse.

[6] In August 2020, the US treasury STILL had $259 Billion left unused and untouched from the first stimulus deal. That is almost exactly what was offered to the American people in the second stimulus bill ($166 Billion for direct checks and $120 billion for unemployment benefits). While Biden’s stimulus package met steep resistance by Republican opposition, they’ve rampaged through media interviews touting their “contribution.” This further proves how our elected officials only care about the headlines generated by the relief bills, not where the money actually goes.

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Political Economists
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