"We're All Keynesians Now"
In 1971, President Richard Nixon is reputed to have said, “We’re all Keynesians now.”
(He didn’t actually say that, it turns out. But don’t let the truth get in the way of a good narrative!)
Nixon’s point (or whoever’s point it may or may not have been) was that in times of economic trouble, a government can assuage the damage by embracing deficit spending — aka fiscal policy.
The idea first took root in the Great Depression, thanks to the work of John Maynard Keynes, the founder of modern macroeconomics.
It was also in the Great Depression that these ideas were first tested, through President Franklin D. Roosevelt’s New Deal, a series of government-financed programs that, literally, put Americans to work.
These included the Lincoln Tunnel, connecting New Jersey to Manhattan; the Grand Coulee Dam in eastern Washington; and the Overseas Highway, running from Miami to Key West.
All these projects were overshadowed, however, by the grandest example of fiscal policy ever — World War II — which finally lurched the U.S. economy out of the Depression.
Most people associate Keynesianism with Democratic administrations. But as we’ve seen this year, it’s embraced just as ardently by Republicans.
Today, we’re witnessing yet another test of that economic theory.
The U.S. economy collapsed in early March, after the federal government declared the Covid-19 pandemic to be a national emergency. By the end of the second quarter, nearly a third of economic output had vanished.
Yet, you’d never know this by looking at consumer spending among those most vulnerable to a recession. As of Aug. 23, total spending by low-income consumers is up 1.1% compared to January.
This is a testament to the CARES Act, which, among other things, provided enhanced unemployment benefits of $600 a week to people who lost their jobs and sent $1,200 stimulus checks to individuals earning less than $99,000 per year.
The net result, as JPMorgan Chase’s Jamie Dimon noted on the bank’s second-quarter earnings call, is that for at least a little while, 60% to 70% of unemployed people were making more money than they did while working.
This is why policymakers at the Federal Reserve are so insistent on fiscal support continuing through the pandemic — beyond the initial round, that is.
Early last week, Fed Governor Lael Brainard identified additional government spending as a key factor influencing the pace of recovery.
“As was true in the first phase of the crisis, fiscal support will remain essential to sustaining many families and businesses,” she said.
To Nixon's (or whoever’s) point: We’re all Keynesians now.
John J. Maxfield, editor in chief of Bank Director