The Coronavirus Killed the Gospel of Small GovernmentRoundup
tags: economics, John Maynard Keynes, COVID-19, Keynesianism, Economic Theory
Zachary D. Carter is the author of The Price of Peace: Money, Democracy, and the Life of John Maynard Keynes.
This article is part of The Week Our Reality Broke, a series reflecting on a year of living with the coronavirus pandemic and how it has affected American society.
Suddenly, it was everywhere.
On March 1, 2020, Gov. Andrew Cuomo of New York announced the first confirmed case of Covid-19 in his state, following reports of local outbreaks up and down the West Coast in February. The avalanche began, with states across the country shutting down and caseloads surging into the thousands. American life had been upended.
While the stock market is rarely a reliable guide to human affairs, in this case, investors proved prescient. On Feb. 10, they had started dumping shares of just about everything at some price, any price. By the end of March, the Dow Jones industrial average had lost a third of its value — enough to erase all of the gains accrued through three years of tax cuts and stock buybacks under President Donald Trump.
But it wasn’t just the stock market: On March 9, fearing a wave of corporate losses and bankruptcies, investors piled into government-backed paper, driving down the yield on 10-year Treasury bonds to just 0.54 percent. On March 15, the Federal Reserve announced that it would begin offering ultracheap emergency loans to banks, reviving the rescue mind-set during the 2008 financial crisis. That same day, it cut a key interest rate to near-zero, reducing financing costs for businesses and consumers. Two days later, it resurrected another 2008-era program to provide cheap longer-term loans to big banks and securities dealers.
The speed and scale of the economy’s collapse was staggering: In March, nearly 10 million were out of work, with 6.6 million people applying for unemployment benefits in the month’s final week alone. By the end of April, 30 million Americans would be jobless.
There has been no economic disaster like the coronavirus crash in American history. By the metrics that matter most, the U.S. government’s response to the crisis has been catastrophic: The number of lives lost to the virus in this country — more than 500,000 — far surpasses the number of U.S. soldiers killed in World War II and may yet eclipse the number killed in the Civil War.
But by many other measures of social well-being, we have fared surprisingly well. Americans’ cumulative after-tax personal income was actually higher by November 2020 than it was before the pandemic. Total economic output, measured in real G.D.P., fell last year, but by only 3.5 percent — a bad year over all, but nowhere near the depths of the Great Depression. There has been no cascade of bank failures, no run on the dollar. By the end of the year, the stock market had even recouped its losses from last spring.
How did so much go so wrong and yet so right?
Over the past year, we have been relearning the lessons of the British economist John Maynard Keynes. In 1937, Keynes wrote that serious economics was not a realm for “pretty, polite techniques, made for a well-paneled board room and a nicely regulated market.” The real world is messy, the future uncertain. And the genius of profit-maximizing entrepreneurs does not automatically arise to provide solutions when calamity strikes. For Keynes, the economy was not a self-sustaining engine of prosperity — it was something that societies created to meet social needs and that had to be actively managed to function properly.
An economic crisis demands a confluence of coordination, expertise and judgment that governments alone can provide. If the government gets out of the way, everything falls apart. And when the government gets out of the way for decades, it can transform a manageable emergency into a national calamity.