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Keynes to Democrats: Major Government Infusions Needed to Rescue this Economy

by Steven Pressman

Feb 2, 2021 | Coronavirus, Economy

Leah Rodgers. A boarded up storefront in Austin, Texas.

Developed by John Maynard Keynes during the Great Depression, Keynesian economics provides a blueprint for combating economic stagnation and helping people survive difficult economic times. It advocates government spending programs and tax cuts for the poor and middle class, aiding those in greatest need. Spending by the masses would then generate economic growth and more jobs.

History has shown that Keynesian economics works. The New Deal and spending to fight World War II ended the Great Depression in the United States. After the war, the GI Bill provided a college education, medical benefits, and low-interest mortgages to veterans. Demand for college, medical care, and housing soared; the U.S. economy boomed. And LBJ’s War on Poverty and Great Society programs, including Medicare and Medicaid, led to a booming economy in the late 1960s and early 1970s.

Keynesian economics dominated policymaking until around 1980. Then things changed. Republicans pushed tax cuts for corporations and the rich, although neither group needed the extra money and didn’t spend most of it. In 2018, corporations used the windfalls gained from Trump’s Tax Cuts and Jobs Act of 2017 to buy outstanding shares of their stock. Share prices rose; spending barely changed. Wall Street gained. On Main Street things remained the same (see Trump Economics Embrace Usual Fare of Tax Cuts for the Wealthy and False Promises for the Middle Class in the September 2020 Washington Spectator).

Even worse, Republicans have used Keynesian insights to sabotage the U.S. economy for political ends. When they controlled the government, Republicans ignored the large budget deficits stemming from their tax cuts. When Democrats were in the White House, deficits suddenly became a problem that could only be solved by cutting government spending, largely on needed social programs. Less spending would in turn reduce economic growth and job creation, making it harder for Democrats to win the next Presidential election.

This strategy underpinned Covid-19 relief bills in 2020. Congress passed the $2.2 trillion CARES Act in March, helping small businesses, state and local governments, and the unemployed. Also, a $1,200 check bearing Donald Trump’s signature was sent to Americans making under $100,000 a year. All this was aimed at keeping the U.S. economy from collapsing and improving Trump’s re-election chances (sic).

But these assistance programs were either one-offs (the check) or they expired after a few months. In May, House Democrats passed a $3 trillion Covid relief bill. The Republican-controlled Senate dithered from June to October. As it became more and more likely that Joe Biden would win the 2020 Presidential election, they increasingly balked at another relief bill, claiming Congress had done enough already and the U.S. didn’t need additional debt. Their real goal was to cripple “the Biden economy” in 2021 and into 2022, making Republican victories in the 2022 midterms and the 2024 presidential election more likely.

In late December, Congress finally passed a $900 billion Covid relief bill which President Trump signed into law on December 27. $900 billion, however, was shamefully inadequate given the headwinds facing the U.S. economy in 2021. Consumer confidence and retail sales both fell in October, November, and December. Employment fell by 140,000 in December 2020, the first such drop since April. New weekly claims for unemployment benefits during January have been nearly 1,000,000, compared with 200,000-250,000 at this time a year ago. Millions of small businesses are ready to throw in the towel in addition to those that have already done so. Debt-ridden state and local governments are ready to slash spending and lay off many hundreds of thousands of workers.

The December Covid relief bill was also seriously flawed. Most of the money went to help small businesses ($285 billion), extend unemployment benefits ($290 billion), and deliver $600 checks to most Americans ($170 billion). As with the CARES Act, checks went mainly to people who remain employed and didn’t need them. Sending the checks to everyone doesn’t focus help where it is needed most, and so a large portion of the $170 billion effectively went to waste.

Much of this money will be saved rather than spent, adding little demand to the economy. Another $82 billion went to state and local governments to fund education (K-12 and college). The remaining funds were directed to help produce and distribute Covid-19 vaccines, give tax breaks to business firms, provide food aid to the poor (although significant portions of this money has gone to those not experiencing hunger or in great need of food—see Amid Widespread Hunger and Poverty, Republicans in Alabama divert Covid Relief Funds to Donors in the October 2020 Washington Spectator), and help build the President’s wall. Little here is Keynesian.

A first order of business in 2021 must be to enact policies to help those struggling most—state and local governments, small businesses, and the unemployed.

Unlike the Federal government, states can’t print money and must balance their budgets annually. State and local governments project deficits exceeding $250 billion in 2020, in 2021, and again in 2022, mainly because of reduced tax revenues. Local governments have already cut their spending sharply, laying off firefighters, teachers, trash collectors, etc. State and local government employment is down over 1.3 million since February 2020, and will sharply decline again without substantial Federal support. If state and local governments reduce spending by only $300 billion, one-third of the entire $900 billion Covid relief package passed in December will be countered by the actions of lower levels of government.

A Keynesian remedy is simple and easy here. The Federal government must give a large sum of money (at least another $400 billion) to state and local governments so that they don’t lay off their workers. President Biden’s $1.9 American Rescue Plan proposes $440 billion in aid to state and local governments.

High unemployment also calls for Keynesian remedies. During recessions, the Federal government typically extends eligibility for unemployment and picks up the added cost. However, this doesn’t help one-third of the labor force—those not qualifying for unemployment benefits because they are self-employed or fail to meet stringent state requirements regarding past work history. Nor does it deal with the problem of insufficient assistance. U.S. unemployment insurance replaces just 57% of after-tax wages ($320 per week, on average). Some states (Arkansas, Louisiana, and Mississippi) provide less than $220 per week. In Oklahoma weekly unemployment benefits average just $44.

The March 2020 CARES Act added $600 per week in Federal money to state unemployment benefits, and made the self-employed and gig workers eligible for unemployment assistance. Some people received more from unemployment than they could get from working, which became a Republican excuse to let this provision expire in September. The December Covid relief bill provided an extra $300 per week until mid-March. With only a small fraction of the U.S. population vaccinated against Covid-19 by then, and the economy likely to be in recession during the first half of 2021, this is insufficient. Again, President Biden’s $1.9 trillion Covid-19 assistance plan makes things better by increasing the $300 extra per week to $400 extra per week, and extending eligibility for this money through September.

Helping small business is also necessary. Small firms (with under 500 employees) comprise 99% of all U.S. businesses and employ 50% of all U.S. workers. They are failing in record number. More than half of small business owners surveyed in the middle of 2020 thought they would have to shut down their business by the end of Q1 in 2021. Firms dependent on tourism and firms needing people to congregate indoors (like restaurants) are especially vulnerable.

The Paycheck Protection Program (PPP), part of the CARES Act, helped somewhat. It enabled small businesses to borrow 10 weeks of usual expenses with the loan forgiven if firms maintain their payroll. But PPP had many problems. Money went to firms (like the LA Lakers) that weren’t struggling, and to small businesses owned by private equity firms, wealthy individuals, or larger businesses.

Biden’s American Rescue Plan provides insufficient relief for small businesses, with proposed grants amounting to $15 billion. Implementations of the second PPP (in the December bill) and then a third PPP (contemplated in the Biden bill) are unlikely to avoid the earlier problems outlined above.

The UK developed a more Keynesian and more effective solution, helping both workers and firms, and circumventing problems associated with PPP. With the Coronavirus Job Retention Scheme the Conservative UK government gave money to furloughed workers retained as employees. It paid them as much as 80% of their usual wages, with the government covering 60% of previous wages and the firm 20%. Low-income workers were also eligible for an additional monthly payment, up to the equivalent of $500. Firms survived because their largest expense (payroll) was largely covered by the government. Thriving liquor stores got no government aid; employees of struggling pubs received a good deal of assistance.

There are lots of good provisions in the Biden relief bill. Besides the additional aid to state and local governments and the expanded unemployment benefits, there is an expansion of the child tax credit, expanded paid leave and sick leave, and mortgage foreclosure and eviction relief. But the bill fails to provide needed help to small businesses on the brink of bankruptcy. This will not keep millions of small firms from closing their doors and laying off workers, making a Republican victory more likely in the 2024 Presidential election—perhaps even with Donald Trump running again on the Republican ticket. The UK Coronavirus Job Retention Scheme would be a better model for the U.S. to follow.

Steven Pressman is professor of economics at Colorado State University, author of Fifty Major Economists, 3rd edition (Routledge, 2013), and president of the Association for Social Economics.

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