The $1.9 trillion American Rescue Plan recently passed by the U.S. Congress for economic relief during the pandemic not only represents a major expansion of the American social safety net; it represents a major overhaul of long-held economic beliefs about budget deficits, government debt, inflation, and government spending. Back in March 2020, when Congress unanimously passed the CARES Act, more than 3 million Americans had become unemployed in a single week, and economists were predicting that America’s GDP would plummet by 25 percent in the second quarter of the year. Now, though, the country has three effective vaccines against COVID-19, the unemployment rate is down to about 6 percent, and President Joe Biden has affirmed that the country is on track to reopen this summer. With hiring and economic activity gaining momentum, even some prominent economists aligned with the Democratic Party are worried that the new spending bill will drive up prices and interest rates, leading to a dangerous spiral in the ratio of government debt to GDP. What’s the risk that putting nearly $2 trillion into the economy will lead to bad inflation and potentially a new economic crisis?

According to Randall Wray, a professor of economics at Bard College and one of the founders of modern monetary theory—which now has major influence in government thinking—the answer is no. Prices will stay low, he believes, because of the uninterrupted stream of cheap consumer goods from Asia, and most people will use the government funding to pay off debts or replace lost income, not to create new demand that would push prices up. Interest rates will stay low, Wray anticipates, because the Federal Reserve has already promised to keep them low—and that policy can go on as long as the political will to keep it going remains.


Michael Bluhm: Does the response to the pandemic reveal a new way of thinking about government spending in an economic crisis?

Randall Wray: Finally, yes, we’ve abandoned the austerity that has guided policy for 40 years. In a very severe crisis, as in the 1930s, you see that the government must play a bigger role. That is what we’re doing.

I wouldn’t call it stimulus, though that is frequently the term used. It’s relief. It’s not going to stimulate the economy. We’re not in a position to stimulate the economy.

Bluhm: Yet the word stimulus has probably been the more common term for the new law. What’s the distinction?

Wray: Most of the items in the package are relief. Homeowners are behind in their mortgages, renters are behind in their rent payments, students are behind in their student-debt payments. Many people are behind in their utility bills, in their credit card payments, in their auto loan payments.

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