Tags: economics | inflation | spending | stimulus | debt

We're All Keynesians Now

We're All Keynesians Now
Steve Heap/Dreamstime

By    |   Wednesday, 24 February 2021 01:45 PM EST

Among the many strange, unforeseen changes of the last year is a new respect for Keynesian economic theory.

Practically everyone in power now agrees that deficit spending produces GDP growth. They differ only on its expected magnitude and duration. The few exceptions are mostly outside the halls of power.

This matters because deficit spending, already higher than ever, is set to grow even more when Congress passes President Biden’s pandemic relief package.

I take it as given they will pass it, since Democrats have the necessary votes and look united on the major items. They may tweak some details, but the final amount will be somewhere close to the desired $1.9 trillion.

That comes on top of trillions already authorized in prior bills, a budget deficit that was already approaching $2 trillion before the pandemic, and the Federal Reserve stimulating in its own ways.

Is it too much? The answer depends on the “gripping hand” of the coronavirus.

  • On the one hand, those relief dollars might be excessive if the vaccines work well enough — and get administered widely enough — to stop the new variants and enable economic normalcy later this year.
  • But if the pandemic continues into summer, it will mean the gripping hand is still squeezing us. Employment won’t recover and more small businesses will fail. This relief package, as large as it is, may prove necessary and maybe even too small.

The experts I trust are split on this question, and of course no one really knows. But the debate is important philosophically.

Nothing underscores this more than the comment from Modern Monetary Theory exponent Stephanie Kelton. Asked whether she was worried about the stimulus bill causing inflation, she said:

"Do I think the proposed $1.9 trillion puts us at risk of demand-pull inflation? No. But at least we are centering inflation risk and not talking about running out of money. The terms of the debate have shifted."

This is precisely what should concern us. No one is afraid of growing the debt, save for a few old classical economists.

That argument is seemingly over. Its absence may be the real story here.

I predict an unprecedented crisis that will lead to the biggest wipeout of wealth in history. And most investors are completely unaware of the pressure building right now. Learn more here.

New York Times best seller and renowned financial expert John Mauldin predicts an unprecedented financial crisis that could be triggered in the next five years. Most investors seem completely unaware of the relentless pressure that’s building right now. Learn more here.

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JohnMauldin
Among the many strange, unforeseen changes of the last year is a new respect for Keynesian economic theory.Practically everyone in power now agrees that deficit spending produces GDP growth. They differ only on its expected magnitude and duration. The few exceptions are...
economics, inflation, spending, stimulus, debt
429
2021-45-24
Wednesday, 24 February 2021 01:45 PM
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