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Tags: recession | economy

Economic 'Flywheels' Can Protect Us From Recessions

quarter dollars inside gears

Paul F. deLespinasse By Tuesday, 23 March 2021 11:53 AM EDT Current | Bio | Archive

The flywheel in internal combustion engines stores part of the energy supplied in the power strokes of the pistons and returns it during other strokes. It smooths out the inherent jerkiness of the pistons and delivers power to the wheels smoothly. By analogy, economic "flywheels" can help stabilize an economy, minimizing pain caused by recessions.

Social Security, for example, acts like a flywheel, providing recipients with dependable incomes even during recessions. Social Security benefits differ from wages, which disappear for people losing their jobs, and dividends, reduced or eliminated when a company faces hard times.

Social Security's income dependability is extremely important. During recessions, even people remaining employed may hesitate to spend money which they might need if they, too, get laid off. And the less they spend, the worse the recession gets.

The Great Depression of the 1930s began before Social Security was enacted and ended before that program had fully kicked in. Social Security may help explain why more recent recessions have been shorter and less severe.

The current recession's severity has also been mitigated by other economic flywheels like food stamps and unemployment insurance, which work automatically when covered workers lose their jobs.

But the current recession has also been offset by special programs enacted by Congress — additional unemployment compensation and the stimulus checks sent to most Americans, employed or unemployed.

For maximum effect, special payments should be made quickly when the need arises. Waiting for congressional action inevitably slows payments down. And recipients of one-shot stimulus payments may not rush to spend them, since they cannot be certain Congress will provide another one.

Once the current emergency is behind us, Congress should therefore consider providing for such special continuing payments whenever circumstances defined by the law exist.

As it happens, the pandemic created conditions in which Congress — probably unwittingly — experimented with a policy uncannily similar to Andrew Yang's proposed Universal Basic Income: the stimulus checks sent to most members of the public. Of course a basic income guaranteed to every member of the American public would be a tremendous economic flywheel if it were ever enacted.

Even if we don't move quickly to Yangism, we could enact permanent legislation that would not limit itself to large stimulus checks or none at all. Stimulus need not be all-or-nothing. It could be designed to be more or less depending on economic conditions stipulated in the legislation.

By way of analogy, consider a system used by some diabetics: an insulin pump which continuously injects varying amounts of insulin, connected with a Continuous Glucose Monitor (GCM) that automatically monitors the patient's current blood sugar level. Like the thermostat on a heating system, the feedback system created by this combination increases or decreases the insulin supplied so as to maintain a stable blood sugar level in the patient.

Like diabetics, whose blood sugar level fluctuations can be caused by a large number of different things — diet, exercise, etc. — modern economies are highly complicated systems in which cause and effect can't easily be sorted out. But some overall indicator of the economy, analogous to an individual's blood sugar level, could be measured and the amount of continuing stimulus payments (analogous to the insulin dose) automatically determined on that basis.

As Obama confidant Rahm Emanuel has said, “You never want a serious crisis to go to waste.” Like the Great Depression, the current pandemic and our experience of trying to cope with it should at least be something from which we can learn.

Market economies in general are very beneficial, but their downside is that they sometimes undergo great fluctuations which can be painful for many people.

The Great Depression brought us Social Security and unemployment insurance. The current pandemic could bring us additional economic flywheels that can save Americans from great misery during future emergencies.

Paul F. deLespinasse is Professor Emeritus of Political Science and Computer Science at Adrian College. He received his Ph.D. from Johns Hopkins University in 1966, and has been a National Merit Scholar, an NDEA Fellow, a Woodrow Wilson Fellow, and a Fellow in Law and Political Science at the Harvard Law School. His college textbook, "Thinking About Politics: American Government in Associational Perspective," was published in 1981 and his most recent book is "Beyond Capitalism: A Classless Society With (Mostly) Free Markets." His columns have appeared in newspapers in Michigan, Oregon, and a number of other states. Read Prof. Paul F. deLespinasse's Reports — More Here.

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Once the current emergency is behind us, Congress should therefore consider providing for such special continuing payments whenever circumstances defined by the law exist.
recession, economy
Tuesday, 23 March 2021 11:53 AM
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