About this time last year I posted on how the pandemic would change the opinion of policy makers and politicians with respect to deficits and debt , the role of the state and macroeconomic policy in the months to come.(Co vid 19 Pandemic Confirms the Critical Relevance of Keynes and His policy Tools, March 27, 2020,Haroldchorneyeconomist ) I argued that since the Federal reserve and the Bank of Canada were financing stimulus and counter cyclical deficits to fight the pandemic and financing these by monetizing debt, in other words having the central banks buy debt instruments from the state and the private sector. In now out of date Friedman quantity theory of money terms this should lead to a rise in the rate of inflation. But it has not. Instead inflation continues to be very low just under two percent and the economy still suffers from excessive unemployment and demand for holding liquid assets.

What has boomed has been the stock markets and to a much lesser extent the energy market. So the old quantity of money framework has to be set aside now unless and until we see clear signs of excessive inflation. Such a striking change in policy consensus is also reflected in the 1.9 trillion Covid relief package and its reception by journalists.

For example, the New Yorker magazine, always a staunch defender of progressive American liberalism in its March 22nd issue has a lengthy article( Nicholas Lemann Bigger and Better : The Talk of the Town pp 11-14) praising the Biden 1.9 trillion dollar American Rescue Plan package as a very progressive piece of legislation, indeed the most progressive in fifty years. It suggests that the long period of Neo-conservative anti deficit ideology is coming to an end. That would also be my assessment . But its important to understand that the quantity theory of money argument has had a long run partly because most economists were always convinced that monetizing debt was bound to be inflationary sooner or later.

I and a number of other theorists of monetary and fiscal policy loosely grouped under the Keynesian and post Keynesian school disagreed and said so in a number of articles and books going back to the work of Keynes, Lerner and Takahashi. We shall see in the coming months whether any excessive inflation develops and what inflation rate is permitted by the central banks. The key factor is whether the markets seek to increase interest rates and the Fed stops buying debt and the Government continues to spend money on stimulus and infrastructure.

For now the emphasis must be on infrastructure investment, overcoming the shock of the pandemic and reducing unemployment to acceptable low levels. 3-4 % is an excellent target.