Home Economics Barry Eichengreen Is Getting Himself Terribly Confused Here

Barry Eichengreen Is Getting Himself Terribly Confused Here

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The basic economic analysis here has moments of good sense. It is, for example, true that if people just save stimulus money then it doesn’t do any stimulating. In fact, we tried this first time around in 2009. Giving people checks that seemed like substantial money – hundreds of dollars – didn’t work because they just paid down debt with it. There’s little point in the central bank creating new money through QE which then gets used by households to destroy money by paying off loans. Sure, the money creation is M0 and the payoffs are M4 but still, it’s all a little useless.

What we did find was that giving people money on a drip feed meant they did go spend it. Cutting social security, or FICA, payments meant spending and stimulus. A few tens of dollars every two weeks gets spent that is.

So, worrying about people saving not spending is fair – it’s just that we already know the solution.

However, there then arises an error:

But putting $2,000 cheques in people’s bank accounts won’t solve this problem because unspent money doesn’t stimulate demand. With interest rates already near zero, the availability of additional funding won’t even encourage investment. Sending out $2,000 cheques to everyone thus would be the fiscal equivalent of pushing on a string.

Fortunately, there is an alternative: the president-elect Joe Biden’s $2tn infrastructure plan would mean additional jobs and spending, which is what the post-pandemic economy really needs. Better still, under the prevailing low interest rates, this option would stimulate job creation without crowding out private investment.

It’s not even obvious – let alone true – that the economy requires stimulus. The problem is, rather, that the world has changed. Therefore what we do in this world – home working, online shopping – also needs to change. This being a process that isn’t even affect by, let alone promoted by, stimulus.

And then Eichengreen jumps into the deep end:

Obviously, the “well targeted” part is important. President Donald Trump was right that the Coronavirus Aid, Relief, and Economic Security Act was loaded with pork, not least his own “three-martini lunch” tax deduction for businesses. There’s every reason to question whether Congress can do better when crafting an infrastructure bill.

But you’re just defining the system as being the one that won’t do better. Pork barrel is just another name for politics. So, if it’s to be the political system spending the money then it’s going to be pork barrel, isn’t it?

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