The Great Economic Leap Forward Experiment

While medical researchers race against time to find effective treatments for COVID-19, we have launched ourselves headlong into an economic experiment in federal policy on effectively treating a recession.

The experimental treatment so far is the recently signed $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act. Money for big businesses. Money for small businesses. Money for individuals. Is it too much? Is it not enough? Will it prove to be – in a phrase now used in many contexts – “a cure that’s worse than the disease?” 

A primary mission of mine – as a writer – is provide language and categories around which we can discuss financial matters, as citizens. In vastly simplified terms, we could identify 3 theoretical approaches to fiscal and monetary policy in response to a COVID-induced recession, from the right, the middle, and the left. 

On the right, the Austrian School and its most famous 20th Century theoretician, the Nobel Prize-winning Freiderich Hayek, would encourage limited government spending and a cautious central bank, in favor of freedom, individual action, efficiency, and ever-vigilance around inflation. Writing in the middle part of the 20th Century, Hayek warned against creeping Socialism and the centralization of economic power as threats to humanity. Bank lending of fiat currency – rather than relying on the solidity of an anchor-currency like gold – tends to artificially lower interest rates and overly expand the money supply.

The policy implications of the Austrian school is to interfere the least in business cycles, as they will work themselves out over time.

In the middle, policymakers advocate along themes established by John Maynard Keynes, who argued for a combination of robust government spending and easy money from the Central Bank, originally in response to the Great Depression of the 1930s. Fed Chairman Ben Bernanke, a careful researcher of the Great Depression, followed that playbook in the 2008 Great Recession. And I would say – from a monetary policy standpoint when all was said and done – very successfully.

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Craig Richards 1 year ago Member's comment

Great read, highly recommended.

Moon Kil Woong 1 year ago Contributor's comment

Indeed we are looking at a change in economics. I believe that we have moved beyond Keynes and are now looking into a great leap more akin to dealing with the problems and solutions in the "The Affluent Society" by Harvard economist John Kenneth Galbraith. How we do this while remaining firmly tied to capitalism is yet to be seen. For one thing we must remain a consumer driven society so a universal basic income sure beats a command economy where government manufactures jobs and the economy by supporting specific businesses to create jobs.

We need demand not supply to remain steady and balanced. We will see what the future hold. Hopefully it will be better than before.

Angry Old Lady 1 year ago Member's comment

Well said.