Stimulus spending was not necessary
In a recent letter, President Biden’s use of Keynesian economics was extolled. In effect, the government stimulus he laid on was necessary to address the economic crisis caused by COVID-19.
Biden’s stimulus, unlike the stimulus passed in 2020 on a broadly bipartisan basis, was not necessary, while salutary in the sense that spending more money is always stimulative to someone. The economy was righting itself as people returned to work and supply chains were restored. The unemployment rate peaked at 14.8% in April 2020. It had dropped to 6.4 % by January 2021, at the end of the Trump administration, and continued to drop to 6.1 % by March 2021. Annual inflation for 2020 was 1.2 %.
On March 11, 2021, Biden signed the $1.9 trillion American Rescue Plan largely on party lines. This was followed the next year by the $1.2 trillion Infrastructure Investment and Jobs Act. This massive stimulus spending on top of the 2020 stimulus led directly to inflation, which required the Fed to raise interest rates.
The effects of high inflation and interest rates are clear. The wages of lower-and middle-income workers are not keeping pace with rising costs and higher borrowing rates. The economy has slowed, layoffs are increasing, households are struggling to pay for necessities and consumer debt defaults are rising.
This is not Keynesian economics at work; it is Bidenomics in a nutshell.
Steven R. Wolf
Washington