Champions of QE argue that things would have been even worse without it. That is impossible to prove or disprove. The fact remains that recovery from the 2008-09 financial shock was far from complete when the new COVID-19 shock occurred in 2020, because a lot of QE money was hoarded, not spent.
The COVID-19 pandemic impelled governments to fall back on “fiscal Keynesianism,” because there was no way that just increasing the quantity of money could lead to the reopening of businesses that were prevented by law from doing so. Fiscal Keynesianism in the big lockdown meant issuing Treasury payments to people prevented from working.
But now that the economy has reopened, the practical rationale for monetary and fiscal expansion has disappeared. Mainstream financial commentators believe the economy will bounce back as if nothing had happened. After all, economies fall into foxholes no more often than individuals normally do. So, the time has come to tighten both monetary and fiscal policy, because continued expansion of either or both will lead only to a “surge in inflation.” We can all breathe a sigh of relief; the trauma is over, and normal life without unemployment will resume.
The relationship between theory and practice is thus not as Bernanke saw it. Monetary policy works in theory but not in practice; fiscal policy works in practice but not in theory. Fiscal Keynesianism is still a policy in search of a theory. Acemoglu, Laibson, and List supply a piece of the missing theory when they note that shocks are “hard to predict.” Keynes would have said they are impossible to predict, which is why he rejected the standard view that economies are cyclically stable in the absence of shocks (which is as useless as saying that leaves don’t flutter in the absence of wind).
The supply and demand models that first-year economics students are taught can illuminate the equilibrium path of the hairdressing industry but not of the economy as a whole. Macroeconomics is the child of uncertainty. Unless economists recognize the existence of inescapable uncertainty, there can be no macroeconomic theory, only prudential responses to emergencies.
Robert Skidelsky, professor emeritus of political economy at Warwick University and a fellow of the British Academy in history and economics, is a member of the British House of Lords. The author of a three-volume biography of John Maynard Keynes, he began his political career in the Labour party, became the Conservative Party’s spokesman for Treasury affairs in the House of Lords, and was eventually forced out of the Conservative Party for his opposition to NATO’s intervention in Kosovo in 1999.