The Most Important Economic Lesson from the COVID-19 Crisis

It’s time to ditch “pay-for” politics.

By Yeva Nersisyan and L. Randall Wray | May/June 2020

This article is from Dollars & Sense: Real World Economics, available at

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This article is from the May/June 2020 issue.

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In early spring of 2020, the richest and most powerful country in the history of planet Earth was brought down by a virus. What the crisis made crystal clear is that the nation was monumentally unprepared to deal with an epidemic that scientists knew was a near statistical certainty—the question was never “if,” but only “when.” And when hit by a global pandemic, the U.S. health care system, which accounted for 17% of the nation’s spending in 2018 (compared to an OECD average of 8.8%), was unable to either slow its spread or to deal with its consequences. There were 30 cases of the disease in the United States on March 1. By the end of April, that had exploded to nearly a million confirmed cases and over 50,000 deaths.

By the beginning of April, New York City’s hospitals had already reached full capacity—and the expectation was that the peak demand for beds was still three weeks away. New York State had 47,439 confirmed cases on April 1, a quarter of the U.S. total at that time—and at the then current rate of expansion, New York City’s prospects looked worse than those of the Chinese city of Wuhan. By the end of April, it had nearly 300,000 cases and over 17,000 deaths. By the end of April, all but six states had more than 1,000 cases, each ensuring that New York’s plight was a harbinger of the fate of cities across the country.

The pandemic brought to the surface the issues masked by our previously “roaring” economy, from lack of federally mandated sick leave, to lack of access to health care, and the folly of tying retirement security to the stock market. It exposed our “just-in-time” economy, manifested in businesses (such as hospitals) operating with the minimum amount of personnel and barebones inventories and with tens of millions of workers living one paycheck away from homelessness. A failure of global supply chains threw the system into disarray as hospitals are struggling to procure protective equipment, just as the shut-down of the economy threatens to leave workers without food and shelter.

The crisis also exposed the hypocrisy of deficit hawks and supply-siders. Suddenly the U.S. government could spare $2 trillion for companies big and small, as well as for helicopter drops of cash for the rest of us. Suddenly the government is not the problem, but the solution. Leave it to the notorious supply-sider, Larry Kudlow, director of the United States National Economic Council, and a Republican administration to preside over the largest peacetime spending bill in history—in reaction to a monumental failure by our government to prepare for the calamity that had long been predicted.

From the beginning of the epidemic, the Trump administration declined to ramp up federal government involvement, preferring to rely on the market system. President Donald Trump suggested that American entrepreneurs ought to profit from the disaster. Even as the nation’s governors begged the administration to take a leading role, he deferred to a highly decentralized response to a national disaster (arguing, implausibly, that large parts of the nation would somehow escape). With medical supplies in short supply, the states started bidding against each other, driving the prices ever-higher. Early February Congressional offers of emergency funding were declined by administration officials. Weeks of broken promises to provide simple testing kits in sufficient quantities to assess the virus’s spread ensued. Part of the reason the United States was slow to provide tests was because the administration refused to use tests developed abroad before domestic tests could be developed (which eventually turned out to be defective anyway).

Decades of Austere Budgets Created This Crisis

A Washington Post headline from March 29 said it all: “Desperate for Medical Equipment, States Find a Beleaguered National Stockpile,” reflecting the catastrophic failure to prepare for a rapidly spreading crisis. As the article reported,

States desperate for materials from the stockpile are encountering a beleaguered system beset by years of underfunding, changing lines of authority, confusion over the allocation of supplies and a lack of transparency from the administration, according to interviews with state and federal officials and public health experts.

The problem with our health care system extends well beyond the dearth of medical supplies, hospitals beds, and caregivers to a payments system that relies far too heavily on for-profit private insurance. Even those with coverage fear seeking help because of the uncertainty of coverage, high deductibles, and out-of-pocket costs. And despite Obamacare, over 27.5 million people had no health insurance in 2018. The number of uninsured is sure to skyrocket as workers lose their jobs and health insurers drop coverage in the crisis. (Those insurers are making out like bandits as almost all medical procedures unrelated to the coronavirus are being postponed, and they are pushing costs associated with the virus onto patients. They’ve already discussed steep insurance rate hikes next year.)

This pandemic was not the first time the government botched the response to a crisis. On a more localized scale, the nation’s lack of preparation for disaster had already been exposed numerous times—by hurricanes Katrina (2005) and Maria (2017), by tornadoes in Tuscaloosa, Alabama (April 2011) and Joplin, Missouri (May 2011), and the Yarnell Hill Fire (2013), Cedar Fire (2003), and Camp Fire (2018). In every case, these disasters were foreseen and not only caused death and destruction, but also wrecked economic havoc that took years to overcome. In the case of these “natural” disasters, the economic destruction was localized—and largely borne by those least able to do so. In the case of the coronavirus, the economic effects have already been felt across the entire nation—and it is going to get much worse.

But how could the country that became the “Arsenal of Democracy” during World War II in a matter of a few short years be so unprepared to deal with foreseen disasters big or small? The answer lies in the rise of the twin ideologies of free markets and balanced budget conservatism. It started with Reaganomics in the 1980s, but has since become the dominant approach to the economy espoused by both political parties. Over the past few decades we have witnessed the gradual dismantling of government institutions put in place during the New Deal and soon after World War II to control unfettered capitalism. While some of the destruction of public institutions has been explicit, such as the deregulation of finance and cuts to government programs (e.g., the welfare reform of 1996), a lot of it has taken the form of underfunding programs to support the claim that government programs don’t work (e.g., the Veteran’s Administration).

The Neoliberal Balanced Budget Conservatism That Created This Disaster

For generations Americans have been told that our government doesn’t have the money to pay for public services, provide healthcare, invest in our infrastructure, or provide income for seniors and low-income families. Just like a household, we are told, the government must balance its budget or else risk running up inflation and high levels of debt—and ultimately bankrupting our nation. We are at the mercy of bond markets and our biggest creditor, China, for our continued ability to borrow and keep the government open.

Republicans never really believed it—as evidenced by a long stream of targeted tax cuts, courtesy of Presidents Ronald Reagan through George W. Bush to Donald Trump. Each gave lip service to the Laffer curve—which is supposed to show that tax cuts for the rich will goose growth and increase tax revenues, just as jobs trickle down to the poor—but there’s no evidence that any of their tax cuts did that; indeed inequality continued to grow on trend and the tax cuts never “paid for” themselves. The Republican anti-deficit stance is based purely on a desire to constrain government—what they call a “starve the beast” strategy: cut taxes to increase deficits that can then be used as justification for cutting social spending.

Paradoxically, Democrats—supposedly the Keynesian party—are the true believers of fiscal austerity. When they are in power, they really do aim for smaller deficits—and insist on “pay-fors” to offset any desirable proposals to help average folk. The original PayGo (Pay As You Go) legislation, enacted as part of the Omnibus Budget Reconciliation Act of 1990, required that legislation be “paid for” either through tax increases or cuts to other spending; otherwise it would trigger a sequestration, a process of across-the-board cuts in most government programs. It expired in 2002 but was renewed in 2010 by President Barack Obama with the support of the majority of Democrats. While some Democrats see PayGo as a way to prevent Republicans from cutting taxes without paying for them, in reality it never prevented “unfunded” tax cuts—with Trump’s recent tax cuts for the rich the latest example.

Even some progressive economists maintain that spending has to be “paid for.” They resist the call for a payroll tax holiday out of the fear it will bankrupt Social Security. They insist on tying popular progressive policies to new taxes on the rich or on financial transactions. They believe that while deficits may be necessary in times of crises or emergencies and low interest rates, it is irresponsible to run up Federal government debt. Even in the case of the Green New Deal—something that is literally critical to human survival—some progressive economists have formulated “pay-fors” as, for example, Robert Pollin does in his 2019 American Prospect article “How Do We Pay for a Zero-Emissions Economy?” There he worries about “where to get $100 billion a year in new federal government funds” to pay for a U.S. Green New Deal, arguing that “these funds will need to come from someplace.” He proposes to finance the Green New Deal—capable of delivering a zero emissions U.S. economy by 2050—through three public funding mechanisms: 50% of the funds through Federal Reserve green bond purchases; 25% through shifting funds out of the military budget; and 25% through a carbon tax. By contrast, our MMT approach argues that the challenge ahead is not to find the funding for the GND, but rather to move resources to the GND. We could support taxes, transfers of funds out of defense, or bond sales if they released resources to be used for the GND effort. But in our view, the issue is one not of finding funds but of finding and mobilizing real resources through spending.

The MMT Approach to Living Within Our Means

These economists are wrong. Government spending doesn’t have to be “paid for” in the same way that households must finance their spending, as Modern Monetary Theory (MMT) has long explained. MMT, a macroeconomic theory which has risen to prominence since the Global Financial Crisis, holds that this difference between households and the sovereign issuer of the currency holds true in times of crises and also in normal times, regardless of the level of interest rates and existing levels of outstanding government bonds (i.e., national debt). The sovereign can never run out of finance. Period.

MMT has been thrust into the limelight with the response to the pandemic. Not only have Democrats and Republicans alike suddenly discovered a love for trillions of dollars of “unfunded” spending, but they are invoking MMT arguments, to boot. Even President Trump argued in defense of an unprecedented fiscal stimulus, saying that “[i]t’s our money… it’s our currency.”

As they say, in the foxhole, there are no atheists. Everyone now suddenly seems to be a believer. But what many of the people now believe is not really MMT. Those who’ve jumped on the bandwagon take one of two positions (or both) on what MMT supposedly says:

  1. That deficits are okay in a recession;
  2. That deficits should be financed by “helicopter money” printing by the central bank.

As MMT has long demonstrated, a government with its sovereign currency is not financially constrained, since it has a monopoly over the issuance of its currency. It’s nonsensical to say that the government has run out of money, since a sovereign government spends its IOUs into existence. Further, there is no such thing as a “helicopter money” alternative to financing a fiscal stimulus package. “Helicopter money,” a term coined by Milton Friedman, originally implied direct central bank payments to households. Today people use the term mostly to mean fiscal spending financed by “printing money.” MMT does not propose to finance government spending by “printing money.” Government spending always happens in the same way: Congress appropriates, then the Treasury and its fiscal agent—the Fed—ensure that the necessary payments are made. This involves the Fed crediting bank reserve accounts at the Fed, and banks crediting the demand deposits of recipients of Treasury spending. (Tax payments, on the other hand, lead to debits to both checking accounts and bank reserve accounts at the Fed.) A deficit implies a net credit to both checking and reserve accounts, while bond sales simply convert these into government bonds (i.e., savings accounts at the Fed). Government never spends by dropping bags of cash from helicopters. And it never spends by running the printing press. All government spending—including the stimulus spending that is already showing up in people’s bank accounts—takes the form of credits by the Fed to bank reserves, and credits by private banks to the accounts of recipients.

Further, for MMT, a budget deficit is an outcome, not a goal or even a policy tool to be pulled out of the closet during a recession. Government should formulate its budget to pursue the public purpose: rising living standards, greening for sustainability, accessible health care for all, a social safety net for those who need it, and a job guarantee program to ensure that anyone who wants to work can find a good one at a living wage.

Most progressives also advocate for a strongly countercyclical role for spending (rising in bad times, falling in good)—and MMT agrees, and, indeed, sees the job guarantee as an essential component of that. Tax policy should also be set to achieve the public purpose: to promote equity and fairness (this means imposing progressive taxes), to incentivize behavior (promote the good, punish the bad), and to prevent inflation. That last one also plays a cyclical role: taxes should rise in robust expansions to dampen demand and fall in recessions to reduce “fiscal drag.”

If spending is countercyclical (moving in the opposite direction of the business cycle) and taxing is procyclical (moving in the direction of the business cycle) to stabilize the economy, this does mean that the government’s budget will be strongly countercyclical (moving toward surplus in expansions and toward deficit in recessions). This is desired by Keynesians and MMTers alike. But MMT argues that there’s no such thing as some special kind of “deficit spending” to be used in a downturn or even a crisis. Indeed, when tax law and the budget are formulated, there is no way to know what the budgetary outcome will be—whether balanced, in surplus, or in deficit. We won’t know until the end of the fiscal year (and even then, it will just be a first estimate) as the outcome will depend on the performance of the economy. And the spending will already have occurred before we even know the end-of-the-year budget balance.

The only sense in which government “pays for” spending is in terms of mobilizing real resources; a nation always pays for things in terms of the real output it can produce or can net import from others. When the economy is below full employment, as it certainly was even before the current crisis, government spending creates “free lunches” as it utilizes resources which would otherwise be left idle. Only at full employment does a country face trade-offs for real resource uses. Unemployment, therefore, indicates that a country lives below its means, leaving real output that could be produced “on the table.” Full employment—the only measure that matters—means that the nation is living up to its means.

The Coronavirus and MMT Lessons

So what are some of the lessons we should learn so far from the coronavirus crisis?

Everyone now accepts that in a time of crisis, we throw fiscal austerity to the wind. It would be literally insane to let the economy crash and to doom millions of people to untimely death on the argument that we need “pay-fors” before we can attempt to counter the destruction wrought by the virus.

Yet, note that, if anything, the real constraints on government are actually more severe in a crisis like this than they are in normal times. Tens of millions of workers are sidelined and millions of business are completely shuttered. Our nation’s ability to supply output has taken a huge hit. Our problem right now is that we may not be able to produce enough (or import enough—given that the pandemic is global) to satisfy our needs. Our problem really is not lack of finance, but lack of the real output we desperately need: hospital beds, masks, testing kits, safe places to quarantine those who are infected, and maybe even food, shelter, and clothing to support our population. In spite of all these real constraints, government has discovered that its ability to provide financial help is unlimited. Thank goodness!

In some sense we would be relearning the forgotten lessons of World War II. The war taught us that the constraint to government spending is the availability of real output—not a lack of finance. Keynes understood it and so did U.S. Treasury officials planning for the war. As Keynes aptly explained in How to Pay for the War, if available resources fall short of what is needed for the war effort and for civilian uses, the solution could not be found in finance. In this competition for limited resources, the government can always outbid the private sector. Prosecuting the war without an appropriate reduction or delay in private spending would simply cause inflation. Thus taxation and bond sales have to be implemented with a view of reducing and delaying demand, not to raise revenue for Treasury spending.

But the most important lesson we must learn is that the ability of the government to run deficits is not limited to times of crisis. We must finally accept that deficits are fine in normal times, just as we accept them to be necessary in times of crises and wars. Indeed, it was always crazy to think that in the normal times before this crisis hit, our government’s ability to mobilize underutilized resources was limited by financial constraints. The real limits faced by government before the pandemic were far less constraining than the limits faced after the virus had brought a huge part of our productive capacity to a halt.

If we can learn this lesson, it will allow us to replace our reactive, “band-aid” approach to policymaking with a proactive use of the fiscal tools of spending and taxation with a view to their functions and the goal of ensuring full employment and other public purpose. In normal times we must build up our supplies, our infrastructure, and institutions to be able to deal with crises, whatever form they may take. We must not let mistaken analogies of household budgets to government budgets prevent us from preparing for the next inevitable disaster.

Our analysis above has important implications for policy proposals, such as the Green New Deal. Once the current crisis passes, detractors will predictably claim we can’t afford the Green New Deal as government deficits and debt will surely have increased. We must not fall into that trap again; the size of the deficits or debt does not determine the nation’s fiscal space. The latter is always about real resources. Further, we can push out those real resource constraints with appropriate policies, since there is nothing natural about them. Indeed, our refusal to fully utilize our capacity, whether labor or plant and equipment, leads to a loss of capacity and productivity, thus shrinking what really matters. If we have the real capacity and know-how to implement a Green New Deal, which we do have according to the experts, then we can afford it. The affordability of the Green New Deal is about real resources, not finance. It is irrational to fear deficits more than we fear the annihilation of human civilization.

Progressives have tried for decades to play the “pay-for” game. At best this has yielded subpar policy outcomes, such as Obamacare. At worst, these half measures have prevented real solutions, such as Medicare for All, to even have a chance. Going forward, it is essential to decouple government spending and taxation and evaluate them based on their impact on the economy. Government must spend and tax with a view of achieving the public purpose, rather than abiding by some imaginary financial constraint. Disposing of the myths and acknowledging the real constraints will allow us to put our resources to work—and to keep them at work—to prepare for challenges, big or small.

is an associate professor of economics at Franklin and Marshall College.

is a professor of economics at Bard College and senior scholar at the Levy Economics Institute at Bard.

“Coronavirus in the U.S.: Latest Map and Case Count,” New York Times website (ongoing updates); Suzanne Smalley, “Senator says White House turned down emergency coronavirus funding in early February,” Yahoo News, March 29, 2020; Amy Goldstein, Lena H. Sun, and Beth Reinhard, “Desperate for Medical Equipment, States Find a Beleaguered National Stockpile,” Washington Post, March 28, 2020; President Donald J. Trump, White House briefing, March 27, 2020; Robert Pollin, “How Do We Pay for a Zero-Emissions Economy?” The American Prospect, December 5, 2019; Peter Borfinger, “Coronavirus crisis: now is the hour of Modern Monetary Theory, International Politics and Society, March 27, 2020; John Maynard Keynes, How to Pay for the War, MacMillan & Co., 1940; Yeva Nersisyan and L. Randall Wray, “How to Pay for the Green New Deal,” Levy Institute Working Paper, May 2019; Willem H. Buiter, “The Helicopters Are Coming,” Project Syndicate, March 26, 2020; Sam Levey, Modern Money and the War Treasury, Global Institute for Sustainable Prosperity Working Paper No. 123, August 2019.

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