Fiscal Stimulus Works but We Can’t Talk About It

Anatole KaletskyAnatole Kaletsky wrote a really good article over at Reuters, The Takeaway From Six Years of Economic Troubles? Keynes Was Right. His argument is that since the financial crisis, we have seen that fiscal stimulus has greatly out-performed monetary stimulus. And the reason for this is that interest rates are already at zero. Monetary stimulus works really well when the economy is performing reasonably. But in the kind of depression we are now in, fiscal stimulus is king. This really shouldn’t be controversial to anyone who has taken Econ 101. But sadly, the field of economics has become so ideological that the basics of the science get lost, as the theory is twisted into knots to justify preexisting conclusions.

This got me thinking about monetary policy in a more general sense. I’ve long been an advocate for a higher inflation target. Our obsession with low inflation is simply a reflection of the fact that we care far more about the owners of capital than we do about workers. Allowing more inflation would encourage spending and thus create jobs. But there is more to it than that.

With the current 2% inflation target of the Federal Reserve, we are already more or less at zero inflation. This is what Alan Greenspan thought. He assumed that the official inflation numbers overstated the level of actual inflation and that a 2% inflation target would cause actual inflation to be roughly zero. This is the level at which half of all products are going down in price and half are going up. This is a very bad situation that encourages people to spend less and makes getting out of debt much harder.

When the economy tanks, it is normally because too many people are trying to pay down their debt. This normally goes along with low inflation — making the debt burden even worse. And the Federal Reserve is largely impotent, because money is already cheap. It can’t get any more cheap. This is why the Fed has been forced to do things like quantitative easing. But even that will only be done for the bare minimum amount of time required. Meanwhile, we can’t use fiscal stimulus because much of the world has decided that the most obvious way to help a struggling economy — the way that has helped economies for decades — is simply unacceptable.

We really do live in a conservative world now. The direct solutions to problems cannot even be discussed. When we wanted to reform our healthcare system, we couldn’t just nationalize the insurance industry; we had to come up with a neoliberal monstrosity where the government feeds billions of dollars through the “free” market. We can’t just give poor people money; we have to provide tax credits. And we can’t just stimulate the economy directly by, for example, hiring more teachers. No, we have to take the indirect approach and offer free money to the rich to encourage them to invest. It’s all madness.

This is sadly not the fault of the Republicans. They are who they are. All this neoliberal policy is the default because the Democratic Party has given up on liberal policy. It is now only interested in economic policy that its funders find acceptable. Hence: Obamacare, EITC, and the sequester! But none of that matters because the Democratic Party has been on the following edge of same sex marriage. All of us Democrats are so proud.

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

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