This commentary was written by Dr. Daniel Thornton of D.L. Thornton Economics. Thornton spent over three decades at the St. Louis Fed as vice president and economic advisor.

Help Versus Economic Stimulus - 02.21.2020 Fed mask cartoon

Below find a letter I submitted to the Wall Street Journal in response to an editorial by Justin Furman here. In a conversation with the WSJ’s letters editor, Timothy Lemmer, on March 12, I was told that the WSJ would publish shorter version of the letter on March 17. For some reason he decided not to publish the letter.

My letter was focused solely on Mr. Furman’s contention that fiscal policy was fast and effective, not his specific recommendations. One of his recommendations, providing households that are most affected by economic effects of the coronavirus with cash, is essentially what Congress and the President have agreed to do. As Mr. Furman noted, this is a more generous version of what President Bush did in 2008. This will provide some modest help for those affected. But like Bush’s cash giveaway, it will not “stimulate the economy.”

A better idea for helping those in need right now is the one suggested in the WSJ by former Fed Governor, Kevin Warsh (here). Mr. Warsh suggested the Federal Reserve invoke Section 13(3) of the Federal Reserve Act to make direct loans to individuals and businesses with sound credit using its network of banks. This would be faster and more effective, and not add trillions to the national debt. Of course, we won’t do this. It will not make citizens as beholding to the President and Congress for “saving them.”

If the President and Congress really want to have a program that would stimulate economic growth, they should support a flat tax of say 10-12 percent applied to all income above the medium income, which is currently about $31,000. No deductions of any kind. No social engineering. Tax filing would be super simple. Total your income from your 1099’s multiply by the tax rate and you’re done. Indeed, since employers would withhold that amount, most would not have to file tax returns at all. Since workers would keep about 90 percent of all of the additional income it would greatly incentivize work. Of course, this won’t happen. As with Warsh’s proposal, it doesn’t make people beholding to Congress for helping them. It won’t let Congress do social engineering. They would not be able gain favor and financial gain from those who benefit from provisions Congress inserts into the extremely complicated tax code.

The only way this can happen is if an enormous group of citizens amass and stand on the steps of Congress and around the White House’s gate and demand it. This is the way women got the right to vote and civil rights legislation got passed.

The Letter:

Justin Furman’s contention that fiscal policy is fast and effective (“The Case for a Big Coronavirus Stimulus,” Mar. 6, p. A15) is at odds with the facts. For example, of the $700 billion of the TARP funds appropriated on October 3, 2008, only $364 billion had been allocated by September 30, 2009—three months after the recession ended; far less had been spent. Indeed, not all of the $454 billion that was ultimately allocated was spent by September 30, 2013. TARP spending was not a factor in ending the recession.

It also didn’t stimulate economic growth. The economic growth rate during the current economic expansion is the most anemic in history in spite of the fact that federal deficits have been by far the largest during any peace-time economic expansion. Indeed, the economic growth rate has trended down since 1970 in spite of the fact that the government has had fiscal deficits every year since then, with the exception of four years under the Clinton administration. This is not a compelling record for fiscal policy enthusiasts like Mr. Furman. This is probably why he didn’t point to evidence to support his assertion fiscal policy is fast and effective.

Then there’s the fact that the 2018 tax cut failed to produce the 3 to 4 percent economic growth rate some economists and the Trump administration had predicted. Indeed, research show the famed Keynesian spending multiplier, which some economists believe is large, is more likely slightly less than 1—every dollar of government spending produces slightly less than 1 dollar of GDP.

Fiscal policy redistributes income and wealth. But the redistribution is from future generations to the current generation. Future generations will have to deal with a debt that is already more than 105 percent of GDP and growing. It will be much larger if Mr. Furman gets his way. If future generations had the opportunity to weigh in on Mr. Furman’s big coronavirus stimulus package, I bet they’d vote against it.


This is a Hedgeye Guest Contributor piece written by Dr. Daniel Thornton. During his 33-year career at the St. Louis Fed, Thornton served as vice president and economic advisor. He currently runs D.L. Thornton Economics, an economic research consultancy. This piece does not necessarily reflect the opinion of Hedgeye.