As the COVID-19 global pandemic continues to spread and manifest itself into American ways of life, our nation’s economy has slowly been left in the hands of politicians in Washington. Struggling to keep up with the ever-changing situation, both sides of the aisle have settled on the idea of stimulus package spending. Whether that be through income relief programs, business incentives, or tax breaks, one thing remains the same: the solutions cost money. However, while the idea of injecting billions, if not trillions of dollars into the economy might sound great, especially with high unemployment and extreme volatility in our markets, we must look at all aspects of such a decision and weigh the costs.
“In The Long Run We Are All Dead”
While classical economists urge for the restriction of government intervention during times of economic unrest, it is under the Keynesian purview that our government holds the responsibility to bring the economy out of a recession. It is the very basis to Keynesian economics that economic output is heavily influenced and dependent on aggregate demand. In simpler terms, it’s the focus on consumer demand, not market demand. This is why recent legislation approving “stimulus checks” appeared so beneficial. A large amount of government spending was going directly into the pockets of Americans. By giving a “check” to much of the population, the additional money would provide people the ability to contribute to the economy more effectively. Particularly in these times of limited employment, many are in desperate need of income. So by allocating money directly to the public, the areas of consumer spending and investment would expand because now people would have funds to use. Such action would hypothetically increase aggregate demand and reduce unemployment, as consumer and investment spending are both components of gross domestic product, a measure of economic output. With a current unemployment rate of 11.1%, a decrease in unemployment would work to bring the United States back to potential production. This is because the natural rate of unemployment is typically around 4-5%, so the other 6-7% of the current value is cyclical, a result of reduced output in the status quo. However, despite all these speculative, positive effects from a Keynesian viewpoint, such benefits can also turn disastrous.
The Assumption of Spending and Investment
These expected economic benefits only happen if one fundamental assumption is true: investment and consumption increase. However, if this stage of Keynesian thought fails to occur, significant issues could arise. Principally, in times of economic uncertainty, people often don’t feel confident in the markets, meaning they don’t feel confident investing in them. So rather than boosting the economy, the stimulus checks given to the American people could simply be left in the bank, creating no output boost. Moreover, this applies to consumption too. Following former President Obama’s stimulus package, many argued that there was no increase in consumption and that the increased money supply wasn’t an incentive in changing spending behavior. Money doesn’t grow on trees either, meaning that the government has to find a way to fund such expenditures. As the purpose of stimulus package spending is to boost the economy out of a recession, it can’t come from taxes, or it will completely counteract the intended effect. This means we are likely going to increase our national debt in the process...
Deficit Spending
Assuming the federal government funds these stimulus packages without increasing taxes, they will have to do so through deficit spending (spending beyond the set federal budget). This is detrimental to the national economy in the long run in regard to debt liability, and to acquiring the needed money. When the federal government needs funds for deficit spending, they need to take the money from somewhere, which often happens in the market for loanable funds. While a high demand for loanable funds may appear beneficial, quite the opposite is true. As seen in the loanable funds market graph, an increase in the demand for loanable funds increases the quantity of loanable funds but also causes higher interest rates. When interest rates are increased, this is a disincentive to invest as people are less willing to borrow money. So by spending money to encourage an increase in economic output, this could have no, to even a reverse, impact on the economy.
Everything in Moderation
In essence, it is essential our country finds a way out of the economic hole we are in. While waiting for things to work out in the “long-run” is unviable, we must also assess the impacts of massive government spending. Although the initial effects may seem positive, excessive spending will set our economy up for failure in the future, and potentially risk even more severe recessions with no recovery.
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