Let's talk today for a while about how governmentscan and should deal with recessions.
This is an important question right now.
The unemployment rate is skyrocketing.
More than 20 million people, 20, 24, 23 millionpeople have lost their jobs in the last five weeks.
We learned today that GDP was down almost5 percent in the first quarter of the year.
We are seeing some ideas that second quarterGDP could be down as much as 20 percent or even more.
So we have a serious situation here, recession, depression.
And we need to think about what are the optionsfor what governments can do.
What has Trump done and is he doing a goodjob or isn't he doing a good job? And what I want to suggest to you today.
Is that given the circumstances? Donald Trump has actually used most of thecorrect measures that are available under the paradigm of Keynesian economics to dealwith the recession.
But he's done it in a completely incompetentcrony and slow way.
And these are policies that are direct contradictionsto what Republicans claim are the policies that a government should institute.
So there's also an element of hypocrisy.
But we'll get to that.
So to start with.
Governments have two major sets of sort oftools at their disposal, monetary policy and fiscal policy.
And very simply, when we say fiscal policy, we mean government spending to influence the economy.
And when we say monetary policy, we're talkingabout treasury management.
In our case, it's whoever manages the currency, treasury management of the money supply and of interest rates.
So fiscal policy would include things likespending on infrastructure during a recession to create jobs, hire businesses to fix bridges, the businesses, pay those employees that are doing the work.
Those employees then go and spend that moneyin the economy, helping the grocery store and the landscaping company then hire andthey hire and so on and so forth.
So it's fiscal policy.
Then you've got monetary policy.
Monetary policy would be, for example, cuttinginterest rates to encourage loans, making loans cheaper so that people will go and borrowmoney with which they can pay for expenses, buy things, maybe pay employees, et cetera.
When Corona virus hits, businesses start toclose.
People stop traveling.
A bunch of things happen without governmentinto an intervention that aren't good.
This increases unemployment.
Naturally, there is a demand collapse.
People stopped going to restaurants.
So the restaurant no longer needs their workers.
So they lay them off, which means the restaurantowner isn't making any money.
They can't pay their rent or maybe they can'tpay their utilities.
So that affects their landlord.
The restaurant doesn't have customers, soit doesn't need to buy food.
So they stop spending with the food supplier.
The food supplier doesn't need to buy as muchstuff from farmers.
The farmers no longer need as many employees.
I think you can sort of understand that.
Now, the food example is a more interestingone because you see a demand reduction at restaurants, but an increase at grocery stores.
But as we've learned with toilet paper, oftentimesthe personal and commercial supply chains for some of these goods are separate.
So that's sort of a detail.
But I think you generally understand the theidea here.
The other thing that can happen in a recessionis that you get a deflationary spiral.
So in the same way that if everybody wantshand sanitizer, the price of sanitizer gets driven up, up, up, which we saw about seven, eight weeks ago.
If, for example, nobody's driving around, this leads to a drop in oil and gasoline prices, which we've seen now.
We may not care that much about oil pricesbeing low.
It sounds intuitive that lower prices arejust good, right? I mean, if we're in a recession and stuffcosts less, that's good.
It means people can afford more of it.
The problem is that it can cause more unemploymentif you run a business.
And suddenly not only do people want lessof your stuff, but you have to lower the price because people aren't willing to pay as muchfor it.
That further is not being able to keep employeeson.
So you lay people off, which means they don'thave money to buy stuff, which means the deflation continues.
That's why it's called a spiral in a healthyeconomy.
You might see some deflation because we getbetter at making something.
So if we become much more efficient at makinga particular product, we lower our cost to make each one of those items.
And as companies compete with each other, whoever can increase productivity and lower costs can maybe gain more market share.
So that's OK.
That's a good example of prices coming down.
Deflation deflationary spirals in a recessionaren't good.
So let's now look at the things Donald Trumphas done or things that that have been done, if not by Donald Trump personally.
So the Fed cut interest rates.
Great.
That's monetary policy.
That's the right thing to do.
The Treasury has created these P.
P.
programs, paycheck protection plan programs where the interest rate is its effect, effectively negative.
You get money.
And as long as you use it for the right things, the loan doesn't have to be paid back in full.
That's the correct thing to do.
Now, the problem is they did it in the cronycapitalist way that Trump always seems to do.
It took too long.
There were all sorts of logistical failures.
The system didn't actually start distributing.
Money for a month or longer.
Money ran out too quickly.
A lot of the money went to really large corporationsand other institutions instead of small businesses.
Small businesses ended up not being able toget money.
Trump has to scramble.
Ask for more money and ask for money back.
Total disaster in its implementation.
But it is policy that makes sense.
Now there's a practical way in which peopIeis kind of a blend of monetary and fiscal policy.
It's sort of like low interest loans, whichis monetary, but forgivable loans to business are sort of like government spending, whichis fiscal policy, but that's kind of a detail in terminology.
Another important monetary policy componentis expectations management.
This is part of why, remember, we talked lastweek or the week before we get bad unemployment news.
And yet the stock market sometimes goes up.
What's going on? Managing expectations is part of monetarypolicy.
You tell the public in advance what you expectto see happen so that it more smoothly.
This is the goal, right? It more smoothly gets priced into the markets.
And then when the news hits, it's not a shockto the system because the markets were expecting it anyway.
That is a form of monetary policy.
Expectations management.
So let's now talk about fiscal stimulus.
You can do fiscal stimulus by cutting taxes.
So when Trump proposed, that didn't happen.
But Trump proposed what if we do a waiveror a moratorium on the payroll tax until the end of the year? That would be a form of fiscal stimulus througha tax cut.
You can also do fiscal stimulus by the governmentspending money.
This can be buying things.
This can be hiring companies to do stuff.
It can also be just the government sendingpeople checks could be a one time payment, which we've seen could be by increasing unemploymentbenefits.
What we're talking about is deficit spending.
There are sort of people on the right wholike the cartoon ify this as printing money.
We talked last week with Stephanie Keltonabout that.
Calling it printing money is not really anaccurate term.
What we're talking about is deficit spending.
We're talking about digitally adding moneyto people's accounts.
Now, again, Trump is doing this.
He's boosting unemployment benefits.
That's fiscal policy.
It's getting money to people which peoplecan then spend increasing aggregate demand, maintain prices relatively level more levelthan they otherwise would be.
When Trump cuts twelve hundred dollar checks, really the Treasury does.
That's fiscal policy.
It's government spending.
Now, they also sent billions to some industries, airlines, cruise companies.
That's also fiscal stimulus and it is theright tool.
But the problem has been, again, implementationtook way too long.
Not nearly enough money for the average individual.
A ton of the spending was done with companies.
That really shouldn't be the priority.
Should've been more money for individuals.
We heard last week from billionaire investorTomas Polish Pedia who said that, you know, some of the companies being bailed out, theseare really bailing out.
These are bailouts of the billionaires whoare speculating, not the employees.
If you really want to bail out employees, you can do it in a much more direct way.
In addition, Trump has done it in a completelycrony capitalist way.
He's reduced oversight, which has turned someof these bailout funds into essentially slush funds.
He's used government money to buy things likeventilators and PPE.
That's stimulus.
Except there's always something weird whenTrump does it, like the company that is bankrupt with no employees, which has gotten a bigcontract to essentially just middleman the purchase of a bunch of masks way above marketvalue.
So it's the right tool.
It's being done in a crony capitalist way.
The focus is often wrong.
It took forever.
Millions have still got nothing.
The you know, the unemployment insurance supplementshave still not been received by a lot of people.
So in short, Donald Trump has used the righttools under the Keynesian paradigm.
And I'll talk more about that in a second.
Fiscal policy, monetary policy.
But he's done it in an incompetent way.
And it, of course, is, of course, massivehypocrisy, because what we hear from the right year in and year out is, one, we don't havethe money for this.
That's clearly untrue.
We found it right.
And again, it's not really finding it.
That's a misnomer.
But we were able to do it despite Republicanssaying it's not possible.
So there's the hip, hip hypocrisy element.
And number two, you often hear Republicanssaying that these types of techniques don't actually work.
And yet here they are saying we've actuallygot to do it.
So incompetence and hypocrisy, but the righttools have been used.
Now, what hasn't Trump done that he couldhave done infrastructure spending? Trump has talked about doing infrastructure spending.
It would be important to do six solid monthsof infrastructure spending.
So have the government.
Spend on fixing roads, bridges, tunnels, theelectric grid could be bolstered.
Water supply could be better protected.
There's tons of things that could be done.
They would boost employment.
They would inject money.
And when we come out of this, whenever itis, we would be better prepared.
We would have better infrastructure to resumeall of that economic activity.
It's not been done.
It's time to do it.
Trump should have already gotten this going.
He talks.
Maybe it'll happen in the next phase.
We don't know.
That certainly has been a mistake.
Now, let's zoom out from all of this.
Why? Everything I've been talking about, thesefiscal policy tools, these are what we call Keynesian tools.
They're from the School of Fiscal Policy founderJohn Maynard Keynes.
Our government has these tools available insteadof other tools, because Keynesian economics are sort of the orthodoxy.
And this is based on you see a recession fundamentallyas a demand shortage.
And you then take these reactions of fiscalpolicy that we've described.
That is not the only way to see the role ofgovernment before and during a recession or depression.
A more progressive economic worldview wouldsay, all right, David, you accurately described the Keynesian tools, but those tools are notproactive.
They are reactive.
So I'll give you some examples of what a moreprogressive, proactive perspective would be.
A more progressive economic perspective wouldsay the federal government should always be bolstering state unemployment insurance.
So if they did that all along and people gotmore money from unemployment insurance, if more money was available at the state level, then you wouldn't see this panicked scramble to do it now.
But you wouldn't see the decrease in demandthat you are seeing now because people don't have money.
Another perspective, the federal governmentshould always be funding more education and other government jobs so that when you havea recession, a lot of those jobs just continue and you avoid having to bail out as many companieswith loans.
You avoid having to send as many people.
Twelve hundred dollar checks because a lotof these government jobs, including in education, can simply continue.
Now, there's a that's that's a political perspectivethat right wingers often disagree with.
Others would say if we had permanent universalbasic income, we would obviate the need for as much of this desperate spending becausepeople would already be getting that baseline income from the government.
And thus this pandemic recession would beless of an emergency.
It would still be one, but it would be lessof an emergency if we had.
Here we go now.
Government run health care.
You wouldn't need Trump negotiating with insurancecompanies to waive co-pays on corona virus testing or treatment.
It would simply be done because the governmentis more involved in health care.
So that exceeds our time today.
But the seed I'm planting is Trump has usedthe right tools given the system we have.
He's used them incompetently, but there aremore progressive economic perspectives which would say if we had much more government involvementall along in employment, in fiscal policy all the time, it would prevent as much ofan emergency need for that to be done right now.
Many people don't want more government involvementand that's a political debate.
So I hope that this is useful to people.
There's been a clamoring for more policy stufflike this.
I'll produce what the people want.
Let me know.
Let me know.
Your thoughts on this particular segment onTwitter at The David Pakman Show David Pakman.
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