The fiscal and monetary response to COVID‐19: What the Great Depression has – and hasn't – taught us

Abstract

Although some regard the New Deal of the 1930s as exemplifying an aggressive fiscal and monetary response to a severe economic crisis, the US fiscal and monetary policy responses to the COVID‐19 crisis have actually been far more substantial – and, so far, much more effective in reviving aggregate spending. Although many fear that these responses, and the large‐scale increase in bank reserves especially, must eventually cause unwanted inflation, the concurrent sharp decline in money's velocity has thus far more than offset any inflationary effects of money growth, while forward bond prices reflect a general belief that inflation will remain below 2 per cent for at least another decade. Notwithstanding the growth of the Fed's balance sheet, Fed authorities can always check inflation by sufficiently raising the interest return on bank reserves. Nonetheless, recent developments have heightened the risk of ‘fiscal dominance’ of monetary policy at some point in the future.

Rejoinder

“…In an article by Selgin in the February 2021 issue of Economic Affairs , he dismissed “dire warnings” about the USA's inflation prospects made by myself and other people in spring 2020. Instead he took comfort from “bond speculators”, since on 21 October 2020 the ten‐year breakeven inflation rate derived from relative bond pricing was a tiny 0.142 per cent (Selgin, 2021, p. 13). I am afraid Selgin's February 2021 complacency – and that of the bond speculators – has been wrong too.…”

A Summary Report on the Government’s Strategy for Economic Recovery During the COVID-19 Period

“…It can be concluded that some policies that were useful at that time may not be applicable today, while others may not be useful at that time, but maybe useful now. A particularly important difference between the great depression and the current economic downturn is that today's crisis did not involve the collapse of the financial system [14]. Although the government has provided relief to the unemployed, the effect may not look good.…”

“…Moreover, the United States government adopted a specific COVID-19 credit policy. The Federal Reserve provides loans to ordinary enterprises through its own "ordinary people" loan tool and providing credit to banks participating in the paycheck protection program of the small business administration; It provides short-term funds to state and local governments through municipal financing facilities; Through the enterprise credit arrangements in the primary market and the secondary market, the securities of large enterprises are purchased directly from the secondary market to provide credit for large enterprises [14]. However, there is a problem of racial discrimination in the implementation of these policies.…”

If ‘money matters’, what about the monetary base?

“…To quote:

Although many fear that [monetary and fiscal] responses to [the Covid pandemic], and the large‐scale increase in bank reserves especially, must eventually cause unwanted inflation, the concurrent sharp decline in money's velocity has thus far more than offset any inflationary effects of money growth … Notwithstanding the growth of the Fed's balance sheet, Fed authorities can always check inflation by sufficiently raising the interest return on bank reserves. (Selgin, 2021, p. 3)

…”