Boost Supply, Not Demand, During the Pandemic

Chris EdwardsCOVID-19 is battering the U.S. economy, causing many businesses to cut back and close down. Policymakersare considering a huge $1 trillion stimulus package with an array of subsidies designed to boost consumption. Pundits often say things like “70 percent of the economy is consumption” and “America has a consumer ‐​driven economy.” That leads them to think that reviving growth rests on inducing people to spend.Consumer spending is 70 percent of aggregate demand, but that is only one side of the economy. The other side is supply —the production of goods and services. The government can stimulate demand all it wants, but it won’t move the needle on GDP if production is halted because of health fears. Instead, governments need to give producers certainty that it’s doing everything it can to help people safely get back t o work.The first issue with a stimulus plan is that federal budget deficits already top 1 trillion dollars a year, and deficits will increase further even without such a package as the economy enters recession. Piling on more debt from a stimulus would risk triggering a financial crisis on top of the health care crisis. A fiscal stimulus won ’t help the economy, because the Keynesian notion that consumption is the driver of growth is false. President Obama pushed through an $800 billion stimulus after the financial crisis a decade ago and the U.S. suffered the slowest recovery sinc...
Source: Cato-at-liberty - Category: American Health Authors: Source Type: blogs