Stop and go
If we're going to try to smooth out the economic bumps, let's do it in the smart ways.
On the very long road to a future without combustion engines, hybrid electric cars are playing a significant role. One of the most interesting features of hybrid power systems is regenerative braking, which captures the kinetic energy of the moving vehicle and uses some of it to recharge the battery. It is a clever way of taking energy that would have otherwise gone to waste by heating up the brake pads and converting it instead into future kinetic energy.
■ Sometimes you're slowing down for a red light, sometimes you're accelerating away from a green light. Saving the energy from the red light and putting it to work when the stoplight turns green is both smart and efficient. We're not as good at applying that seemingly-obvious logic to other aspects of life, and that's a mistake.
■ From time to time, it appears to be in the public interest to take action to nudge the economy to heat up or cool down, and government officials (and quasi-governmental officials, like those at the Federal Reserve) have tools at their disposal. Whether, how, and when to apply those tools -- and in what amounts -- is the art of economic judgment.
■ In reaction to the 2008-2009 economic pinch, the Federal Reserve pumped giant quantities of money into the US economy. Even bigger mountains of money were infused in response to the Covid-19 crash in 2020: Just utterly staggering sums.
■ Whenever people see a lot of money moving into an economy that isn't getting much bigger in real terms, the natural reaction is to expect inflation. Yet, massive inflation didn't follow the 2008/09 response. Part of the reason is attitudinal: People and businesses are sitting on their money in a way we haven't previously recorded in America. There's a whole lot of hoarding going on. So does that mean the old rules are dead and government can spend (literally) freely, as proponents of "Modern Monetary Theory" have argued?
■ No, it really doesn't. Just because we've been fortunate to avoid inflation doesn't mean it can't still happen. The old constraints on government spending (and borrowing) are still out there; we just don't see all of the consequences because other behaviors have changed in dramatic ways, too -- like all that money that's sitting still when it would usually be circulating around.
■ Prices are rising enough in some sectors for people to take notice, and if people are inclined to start spending more freely, then prices may rise -- especially as goods and services are harder to find because of very real supply-chain capacity shortages and tight labor markets. It's premature and unwarranted to panic, but it's not unwise to think about the economy in the same terms as a regenerative battery.
■ Intervention made sense in both of this century's panic situations to keep hard times from becoming calamities (with very real social consequences). Fear is contagious. But just as a driver might have to punch the gas to climb a hill, that same driver may need to hit the brakes to keep from rolling too quickly downhill. It can be very sensible to capture some of the excess in good times and shift it to expenditure in hard times -- just like regenerative braking. But it's tough to get the "battery" part right. The best stimulative investments are the ones that build capacity for future growth or (even better) take precautionary measures against problems that could turn out to be costly in the future.
■ Building capacity helps because it helps reduce the overall cost of the intervention (in other words, if you can spend $1 now to make the economy grow by $2 in the future, then the $1 "costs" less in those future terms). And steps taken to stave off future costs are even better, because they prevent future waste.
■ One thing we shouldn't do, though, is to think of stimulative spending as a substitute for paying for necessary things as we go. Money doesn't remain free forever, and the very experience of two crises in two decades should be enough to remind us that we have to recharge the battery from time to time.