The media seem confused about what to call the $2.2 trillion legislation coming our way.
We might see it depicted as a “relief” package, and then see that it is a “stimulus” package. Whether or not this new legislation brings necessary relief is yet to be determined. But we must be clear that it is NOT a stimulus package.
A stimulus is required when an economy is suffering from slack and languid aggregate demand. Perhaps consumers are reluctant to spend money because they fear for their job (sound familiar?). Perhaps consumers are trying to pay down some of their credit-card debt and are more discerning about what they think they need. In such cases, the Federal Reserve may take steps to reduce interest rates so that credit—for instance an auto loan—is less burdensome. Banks can be encouraged to reduce lending rates by several steps. These efforts will stimulate spending. If demand for gasoline is suffering a downturn and the oil industry is suffering, the government can purchase crude oil and place it in the Strategic Oil Reserve. The point here is to “prime the pump” so that spending will gradually pick up.
The new legislation is not intended to stimulate aggregate demand since most commercial firms are closed—or on a “war footing.” Here we are trying to mitigate the harmful effects of a severe drop in aggregate demand. And that drop has two sources: (1) millions of individuals have lost their job and are told to stay home; and (2) others, with more stable incomes (retirees, salaried workers with secure earnings), cannot go out and spend as they otherwise might.
As we will now see, the relief will come in several forms: (1) debt forbearance (not forgiveness); (2) income replacement for lost wages (checks in the mail); (3) augmentation of state-run unemployment insurance programs; and (4) some loan-based (not grants) relief for businesses—with conditions attached (no payouts to executives, no stock buy-backs, etc.).
The point is not to stimulate anything—it is to protect people and businesses.
Some may object that this is a mere semantic quibble. I disagree, and so does Confucius.
He said that “The beginning of wisdom is to call things by their proper name.” More recently, the philosopher Robert Brandom stated, exquisitely, that “Grasping a concept is mastering the use of a word.” The concept of a stimulus is, as above, very different from the concept of relief. They have a different purpose, they are used under different circumstances, and they are expected to have different results.
If the program is called a “stimulus,” and if we think of it as a stimulus, it will be too easy, when this thing is over, for some skeptics to look back and complain that all of that massive spending did not do much stimulating of the economy. They will be correct. That was not its purpose.
Those with a more honest grasp of the situation will ask, instead, “did the program provide relief?” And, of course, the answer will be that, indeed, the program provided a great deal of relief. Was it “enough” relief? We must wait and see.
Dr. Daniel Bromley can be contact at firstname.lastname@example.org.