If monetary policy won't work then let's try Keynes

We have to agree to a number of provisos, accept for the sake of argument a number of assumptions, for this to be true. But let us do so - monetary policy is exhausted and therefore cannot deal with the economic effects of the coronavirus or other such matters. Therefore we should go back to Keynes:

Today, central banks in Japan, the UK and the US vowed to help stabilise financial markets by promising to ease the economic impact, causing stock markets to rebound. However, following the financial crash, central banks have few tools at their disposal to soften economic shocks. Interest rates are close to their floor and central bank balance sheets are still swollen by post-crisis quantitative easing, and it is not clear whether further asset purchases would be effective or politically possible. The burden of responding to the macroeconomic effects of the virus is therefore going to have to fall mainly on governments, using tax and spending tools, and not on central banks. Politics impeded the response of fiscal policy to the 2008 crisis in the US, the euro area and the UK; we have to hope that politics does not prove to be such an obstacle now.

Fair enough. As assumptions that is. So, given those assumptions, what’s the answer?

Well, it’s not spending more money. Obama wandered the country with $800 billion for two years, hunting for shovel ready projects - and found not a single one. We’re all still thinking about HS2 over here and that’s been going on for an entire business cycle already with less than 10% of the money spent as yet. Whatever we might think about infrastructure investing we have proven that it’s not a useful response to immediate variances in aggregate demand.

Any other form of government spending is either just the start of a permanent program or a simple distribution to the populace.

At which point we should do what Keynes himself advised:

You are able to show fluctuations in income of an order of magnitude which is significant in the context… So far as employees are concerned, reductions in contributions are more likely to lead to increased expenditure as compared with saving than a reduction in income tax would, and are free from the objection to a reduction in income tax that the wealthier classes would benefit disproportionately. At the same time, the reduction to employers, operating as a mitigation of the costs of production, will come in particularly helpfully in bad times.

Cut both employers’ and employees’ national insurance contributions - while still piling up the rights derived from them - when that boost to aggregate demand is required. One benefit is that it’s immediate, it flows through into pay packets within the month. A second is that the spending is not subject to politics, it’s what the people themselves want that gets bought.

A possible objection is Ricardian Equivalence, that people will simply save in order to pay the obvious future higher taxes to make up for everything. Yet this has been tested. The Bush Administration reacted in 2007/8 in two ways. Cutting checks for a few hundred dollars and sending them to everyone - these were largely saved, the equivalence held. The smaller in each payment once a fortnight (yes, American wages are largely fortnightly) but cumulatively similar cuts in FICA taxation were largely spent - equivalence did not hold.

Excellent, we have our Keynesian cure to monetary policy being at that zero lower bound. Cut social security taxation and watch the economy bounce back.

Fortunately, the current PM was recommending this very course of action back when he was just Boris. So there’s even a possibility that politics will get around to doing the right thing. Eventually, only 70 years after Keynes first pointed it out.