Since the days of Ronald Regan, the primary focus of economic policy has been to leverage monetary policy to climb out of a recession or avoid one, if possible, by keeping inflation low and controlling the supply of money. It was taken as a given that fiscal policy, which is primarily driven by government spending, would not make a large enough impact to be useful and would instead just lead to inflation. It has been the consensus ever since, that monetary policy and its various levers are indeed the ones to pull in a recessionary environment. Well, thank you COVID-19 for yet another unlikely revelation — fiscal policy seemed to have worked far faster and far more effectively than monetary policy did in 2008, or following any other economic downturn of the last 4 decades.
It seems we at least learned something from the Great Financial Crisis — you can bail out wall street, but ultimately main street pays the price. So instead, this time around, the US decided to have an immediate fiscal response — forget the budget, forget inflation, just don’t worry about it — right now get money directly into the hands of families and individuals who lost their income and let’s see what happens. Well, America had the largest “impulsive fiscal response” of any country in the world, with 9.1% of GDP shelled out to as many hands as possible (while doing its best to ensure those most deserved were receiving the money.)
This was then followed up by increased unemployment benefits such that many people were making the same amount, and in many cases making more money by not working — yet again an unprecedented experiment. A lesser-known strategy used by the previous administration that was very effective was $50B in tax credits for retaining employees. Additionally, small businesses could apply for an economic disaster grant (not a loan) for up to $10k which was increased to $15k just a few weeks ago.
Although we need more time for the data to unfold and ensure we did not, in fact, shoot ourselves in the foot only to start showing symptoms down the line, at the present moment what should have resulted in a multi-year recovery was shrunken down to a matter of months, followed by an economic boom.
This begs a set of key questions: 1) is it indeed true that fiscal policy is more effective than monetary policy? And if so, and there are no long-term ramifications of the fiscal stimulus, 2) why not just replace the lost income of those laid-off during a recessionary period to dramatically reduce recovery time and perhaps even induce an economic boom?
Jake Greenwald, Business Development
The IMF estimates that the global economy shrunk 4.4% in 2020, marking the worst decline since the Great Depression. Yet, in looking at the S&P 500 you would never know it, with prices booming well above pre-COVID levels.
Check out this list of the top 10 ways in which our world has been dramatically changed over the last 15 months.
If you want some further insight into how modern economic theory has changed (and on our company’s namesake) read The World is Flat: A Brief History of the Twenty First Century by Thomas L. Friedman.
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