PRAIRIE VIEW, Texas (April 6, 2020) – U.S. Congress has unanimously approved, and the President has signed, a $2.2 trillion package of grants and loans targeting individuals and businesses across America. The main goal of this historic bipartisan package is to soften the blow to American workers, families, and businesses, large and small, from the economic shock caused by the fast-moving coronavirus (COVID-19) pandemic, which, as of today, has already infected over 300,000 Americans and caused over 9,500 deaths.

Does this gargantuan stimulus package financed by taxpayersā€™ dollars make good economic sense?

In the coming days, we expect media coverage, debates, and criticism over the size of the bill, the speed and lack of transparency in crafting it, the role of lobbyists and special interest groups, and the actual allocations ā€“ who benefits and who does not. This is appropriate, since we know from Econ 101 that there is no free lunch.

Perhaps, a few lessons from economic history will inform this discussion and help answer a few questions. Why is this bipartisan bill a step in the right direction? Why did the bill not encounter major resistance in either chamber, or from politicians with widely differing economic philosophies and values?

How did presidents and Congress respond to past shocks? For this essay, I am particularly interested in the policy prescriptions of John Maynard Keynes, whose ideas in the early part of the 20th century revolutionized economic theory and policymaking. His influential ideas led to aggressive government policies, widely credited for rescuing the global economy from the 1930s Great Depression.

Keynes (1883-1946) is widely considered to be among the greatest economists of the 20th century. His analysis and particularly his policy recommendations on how to free an economy stuck in a prolonged depression helped his native England, the U.S. ā€“ under President Roosevelt, who launched the New Deal ā€“ and many other nations deal with a global slump. Although he was writing decades before the Depression, these ideas formed the core of his book, The General Theory of Employment, Interest and Money, which was published in 1935. It continues to be relevant today. Nearly everyone who has taken a college course in macroeconomics has read about the Keynesian model.

In 1923, Keynes wrote powerfully about the significance of short-term policy intervention:

ā€œBut this long run is a misleading guide to current affairs. In the long run, we are all dead. Economists set themselves too easy, too useless a task if, in tempestuous seasons, they can only tell us that when the storm is long past, the ocean is flat again.ā€ [A Tract on Monetary Reform, Ch. 3, p. 80]

With reference to the U.S. Civil War, Keynes was pleading against the restoration of the gold standard, where a country would fix the value of its currency in terms of a specified amount of gold, thus linking the nationā€™s money supply to gold. The gold standard was favored by the reigning school of economic thought, which also favored laissez-faire, which stood for nonintervention by the state ā€“ based on the belief that markets, once disturbed, eventually return to equilibrium, and intervention by the state or the central bank to stimulate the economy is unnecessary and perhaps harmful.

Keynes wrote persuasively that these ideas built on discredited assumptions were problematic, especially in times of economic distress. They led to policies (or lack thereof) that would damage a nationā€™s economic and social welfare, causing unnecessary suffering for the poor and the unemployed. The state must be pragmatic, acting forcefully to reduce the suffering of the poor from twists and turns in the national economy. It has the resources to stimulate the wider economy and rebuild consumer and business confidence, and importantly, governments have a moral imperative to act in a timely manner.

Based on his path-breaking research, Keynes had reached a conclusion, diametrically opposite to those of the followers of the influential classical school of economics. He argued in favor of a policy with a laser-like focus on the ā€œshort run,ā€ or real time, when the suffering of the common citizen is most acute. Perhaps over the long run, things will return to normal, but how long should we wait? How is inaction helpful if no one survives the crisis to enjoy the calm seas after the storm?

Keynes recommended urgent government action to boost demand and jumpstart the economy as a crisis-management strategy. Although this is accepted wisdom today, a hundred years ago, this view was heresy ā€“ very much a contrarian view. Keynes believed that a policy of nonintervention was dangerously wrong-headed since it would lead to loss of economic production and continued suffering of millions of citizens.

His recommendations for an interventionist policy was revolutionary for the times. He argued that governments can and must borrow to finance emergency spending in order to employ millions of unemployed. His recommendations led to massive spending, including the New Deal in the U.S. and an early end to the Great Depression.

Today, the world faces a ferocious and invisible enemy, which, unlike the 2008 meltdown of the financial markets, has mounted an attack on the ā€œreal economy,ā€ also known as Main Street.Ā  The policy used by Feds in 2008 to strengthen the tottering financial institutions on Wall Street seemed sensible and worked, since the crisis emanated largely from the financial institutions. However, monetary policy does not carry the same punch in a sick economy laid waste by the virus. The pandemic has caused unprecedented disruptions on Main Street, leaving banks and other financial sector companies ā€“ ā€œWall Streetā€ ā€“ largely intact so far. However, given the intricate links between the two, the pain will soon spread to the financial sector.

The real economy is suffering from convulsions and seizures as local, state, and national governments impose draconian restrictions on gatherings and movement of the people with no exceptions. Factory workers, small and large businesses, consumers, tourists, travelers, and students in schools and colleges ā€“ all are affected. No sector has escaped.

The coronavirus has upended the best defenses that science and public health could offer against pandemics. It has ravaged the stock market and businesses across America and brought global travel and commerce to a screeching halt. Much like the Great Depression of the 1930s, this pandemic has ushered in a major economic crisis, and therefore a full-throated intervention to boost aggregate demand is warranted following the Keynesian prescription.

Keynes would have argued not to worry about how the nation will pay for this stimulus package.Ā  The need of the hour is to provide a lifeline to the millions of small businesses and workers, to avoid bankruptcies and the inevitable destructive chain reaction as bankruptcies and foreclosures multiply. The good news is the ā€œmultiplier effect,ā€ a distinctively Keynesian concept, will propel the initial injection of $2.2 trillion in transfers and loans to create new waves of spending and economic activities, so that the total impact will be significantly greater than the original stimulus. This would certainly help reboot the economy and jump-start the recovery once the pandemic is over.

In the midst of this unprecedented pandemic, it is imperative that world leaders remember lessons from economic history, especially how governments have dealt with past economic disasters and upheavals. We have learned that when faced with an economic catastrophe, governments have moved aggressively to reduce the suffering of their most vulnerable citizens and engineer an economic recovery.

In this case, because we are dealing with a pandemic, the first task is to stop the spread of the disease. We must do all that is necessary, and for as long as necessary, to flatten the curve so that the health care system can handle the flow of the sick and save more lives. Success at this stage will provide a powerful psychological boost to the nation. Efforts and strategies should be science-based and transparent. Trust and credibility in government is of the essence here.

The second task, which can be implemented simultaneously, is to provide immediate relief to the most vulnerable, and those who are most affected ā€“ the workers who have been laid off, the millions who work in the gig economy (short-term or freelance), the self-employed, the poor, and the homebound elderly. This is a form of disaster management. Most people do not wish to receive handouts, government or otherwise, so loans to small businesses, extensions of rental deadlines, and other manner of relief will be welcome and effective.

The next task is to provide an economic stimulus to enable entrepreneurs and small businesses get back on their feet. Given the magic of the multiplier, when the government injects one dollar into the economy, it has a bigger impact as it circulates and creates new income and spending.

Munir Quddus, Ph.D.

Munir Quddus, Ph.D.

We must learn the lessons from this dire experience with the coronavirus pandemic. We must set aside ā€œrainy dayā€ or disaster management funds. We must be pro-active and plan, because there will be another health crisis, and perhaps many more in the future. If politicians are wiser, we would use the enormous scientific and managerial talent we possess as a nation to create smart response systems and stockpiles to effectively combat future pandemics. If past governments had been pro-active with planning and preparations, we could have dealt with this pandemic more efficiently, with fewer lives lost and fewer economic disruptions, at a fraction of the price of this large relief package.Ā  We must also learn from other nations.Ā  For example, in Europe, it seems the policymakers have tried to ā€œfreezeā€ the economy to ride out the storm.Ā  Their relief and stimulus package send the checks directly to the employers in order to keep the workers on the payroll, avoiding the massive layoffs and the ten million claims for unemployment benefit we have seen in the United States.Ā  This seems a superior policy given the nature of the current crisis.

The current pandemic is a good time to learn from economic history. Nearly a hundred years ago, Keynes laid the intellectual foundations of the policy for government intervention in times of economic crisis.

Munir Quddus, Ph.D., teaches economics in the College of Business at Prairie View A&M University. He also serves as the dean of the business school.