*Editor’s Note: CC Biz Buzz is a monthly column series that will feature insightful commentary from a member of the Columbia College Robert W. Plaster School of Business faculty.
In the ideal world of Adam Smith’s pure capitalism, government played a limited role. The forces of the markent would ensure that greed would be balanced by competition, that the acquisition of private property would motivate hard work, and that the accumulation of capital would provide the means for an ever-growing economy—an economy that would increase and flourish without intervention, as if on automatic pilot. However, economic history has shown that the path of an economy is not always upward or smooth. There can be many zigs and zags, lurches and bumps, ups and downs.
Because of the inherent instability of capitalism, government’s role expanded to perform a stabilizing function. The architect of economic stabilization policy was John Maynard Keynes, a British economist whose writings became the blueprint for the New Deal policies of the 1930s. Stabilization comes in two forms: fiscal policy and monetary policy. Fiscal policy involves actions by the executive and legislative branches of government to use taxes and spending to strategically impact economic performance. An increase in taxes and decrease in spending will slow an economy, while a decrease in taxes and increase in spending speed up an economy. Monetary policy is controlled by the Federal Reserve, an independent agency tasked with regulating interest rates, the money supply, and financial markets. A change in interest rates will impact lending and borrowing and, in turn, affect the level of spending in an economy.
The U.S. economy has experienced many periods of instability over the decades: stagflation (low growth and high inflation) of the 1970s; recession and high interest rates of the 1980s; the tech bubble, boom, and bust of the 1990s; the housing crisis of the 2000s; the pandemic economy of 2020. In each of these times, government has sought to use the power of monetary and fiscal policy to steady a wobbling or faltering economy.
Monetary and fiscal policy is not overtly coordinated—i.e., the branches of government do not sit down together to craft their plans. Rather, Congress and the Fed independently determine the policies they believe are needed given the economic circumstances. Sometimes the result is stellar—as in the 1990s when higher taxes and lower spending by the federal government was complemented by lower interest rates of the Fed to stimulate business investment. Sometimes, policies created by one entity are contrary to those of the other, as in 2011 when fiscal-policy austerity to reign in the federal deficit worked against the Fed’s efforts to continue to bring the economy back from the depths of the Great Recession. One can liken the workings of monetary and fiscal policy to a dance. There is a beauty and grace to behold when the movements of monetary and fiscal policy complement each other. However, this policy dance can also result in stepped-on toes and clumsy moves as partners pull in opposite directions.
The health response to the 2020 pandemic resulted in shutting down large segments of the U.S. economy. This forced recession prompted the need for fiscal and monetary policy measures to stabilize the economy. Both Congress and the Fed rose to the occasion. The Fed aggressively initiated monetary policies that calmed financial markets and dropped interest rates to zero while flooding the markets with cash, making loans to large businesses readily available. Fiscal policy has provided loans to small businesses, augmented the incomes of American workers, funneled money to cash-strapped states and municipalities, and provided increased unemployment benefits. The monetary/fiscal dance was in harmony. A downturn that could have resulted in a 21st Century depression was averted.
However, not all parts of the economy have recovered—witness contrasting recent news headlines: “Dow Eclipses 30,000 for First Time” … “S&P 500 and Nasdaq are setting new closing records” … “Rebounding Corporate Profits Fortify Stock Market Rally” … “Big U.S. companies have trounced expectations this earnings season” versus “jobless claims rose to 778,000” … “Personal income decreased $130.1 billion (0.7 percent) in October” … “Nearly 100,000 establishments that temporarily shut down due to the pandemic are now out of business” … “10 million people remain unemployed” … “588,000 workers are discouraged and have dropped out of the labor force” … “the ‘real’ unemployment rate-U6-stands at 12.1%” … “one in five households experiences food insecurity.” It’s almost like we are living in alternate realities, experiencing a sort of economic schizophrenia. The situation is poised to get worse.
As the pandemic began, the partners in our stabilization dance swayed and moved to the music of the crisis in perfect rhythm. However, while monetary policy continues to dance, our fiscal partner has taken a seat. Our economy needs continued fiscal stimulus to augment incomes through unemployment benefits and to provide childcare benefits needed so women can rejoin the workforce and jobs programs to employ idled workers and aid to state and local governments to pay teachers and firemen and police. Without a fully-engaged fiscal partner, the economic pain from this pandemic will continue for many years and our society will bear the scars of increased inequality, poverty and lagging growth. Let’s crank up the music and bring the fiscal partner back on the dance floor.
Dr. Diane Suhler is a Professor of Business Administration at Columbia College. She holds a Master of International Affairs degree from Columbia University in New York City, and a Ph.D. in finance with minors in economics and quantitative methods from the University of Maryland. Her research interests are in the areas of economic development and microfinance, and has taught at Columbia College since 2000.