Steven Pressman, the Professor of Economics at Colorado State University. The French philosopher Voltaire excellently wisecracked: “If God did not exist, it would be necessary to invent him.” Approximately alike can be supposed of modern monetary philosophy, correspondingly recognized as MMT, since it might be the economy’s only hope to get done with COVID-19.
Devised by Australian economist Bill Mitchell & popularized freshly by Democrats comparable to Rep. Alexandria Ocasio-Cortez to fund agendas such as the Green New Deal, MMT grasps that a country with its currency can employ almost unlimited sums of money. Whereas either taxes or borrowing typically finances government spending, MMT advises that governments can also do this by just creating money.
I’m presently occupied in a book chapter that inspects various economic theories about government debt, together with MMT. I trust this theory is now being put to the test as the US and other countries spend extraordinary quantities of money to aid companies, workers & their citizens during the COVID-19 pandemic.
There is a slight doubt that the world faces massive economic problems. The situation in the US is even now worse than at any time since the Great Depression, with millions of unemployed & tens of thousands of businesses filing for bankruptcy. The US government has previously spent about USD 3tn looking to mitigate the damage. As a consequence, the federal government deficit for this fiscal year will be far higher than any since World War II. & the government is likely to add USD 1tn to USD 3.5tn more red ink, pretentious lawmakers agree to additional relief bill.
Entirely this spending benefits prop up industries such as beleaguered airlines, keeps small businesses afloat & supports Americans who have lost jobs or incomes. The US is barely the only country flinging money at the coronavirus recession. Most industrialized nations are increasing government expenditure & debt levels to prop up their economies.
Sen. Bernie Sanders, Democratic presidential candidate & Rep. Alexandria Ocasio-Cortez hold a news conference to introduce legislation to transform public housing as part of their Green New Deal proposal out.
MMT’s Rescue for others
A great apprehension, nevertheless, is whether countries can pay for all this spending. Traditionally, economists have argued that higher spending currently means taxes will have to go up to pay for it. This consequence can be put off, for a time, by borrowing money from investors.
Both choices have dangers. Higher taxes hurt consumer & business spending. & amplified borrowing can lead to increasing interest rates, which increases costs for consumers and businesses. Together with end up hurting economic progress, which is why some are quarreling, the US can’t afford to spend additional money fighting the COVID-19 recession.
MMT terminates this reasoning & argues that currency-issuing countries like the US have a third option: Make money out of thin air. In a bare-bones kind of MMT, the Treasury Department borrows from investors to finance spending, as it frequently does, but then the Federal Reserve buys a significant share of that debt’ depositing funds in the government’s checking account & creating money in the course.
This permits the government to employ then the money it wants. The Treasury & Federal Reserve may not call it MMT, but that is fundamentally what it is. & that’s what happens when the Fed buys the bonds the Treasury is issuing to finance coronavirus relief spending. The central bank deposits money that didn’t exist earlier into the government’s account, which then gets transported into the bank accounts of people and business firms when the government spends the money.
In just the previous few months, the Fed has bought almost USD 2tn in government debt or more than half of what Congress has so far agreed to spend. No necessity to raise taxes. No doubts about interest rates. “New money” aids save the day.
If that sounds a slight too decent to be accurate, it might be. One fear concerning MMT is that the money created will lead to excessive spending and generate inflation, which would reduce the value of people’s savings and generate political instability.
At the instant, the money being fashioned & spent replaces income that workers & businesses would have received had there been no COVID-19. Elementary economic theory tells us this shouldn’t cause an increase to growth as would probably happen if money creation came on top of reasonable wages and profits that people receive & then spend.
The local history of Japan delivers some support for the idea that a country can upsurge its monetary supply without inciting inflation. The government’s been trying to do so meanwhile the 1990s, yet price rises in Japan have suffered very low, averaging under half a percent a year over the past decade. Similarly, colossal money creation during the Great Recession did not lead to higher inflation in the US, though it did in Germany during the early 1920s. Acknowledging this likelihood, MMT advocates contend that if inflation does accelerate, it can be measured by tax hikes, less government spending, or some other means.
I fear that if there is a second coronavirus wave in the fall, as public health officials believe, the US government will need to employ trillions extra. MMT tells us we can keep generating money indefinitely or until inflation spikes. Nevertheless, the previous history is no guarantee of future accomplishment. If inflation does start to rise through the pandemic, at a time when it’s improbable the US would either cut spending or raise taxes, we may find that MMT is not a practical solution after all.
Future test of political will
A concluding test of MMT will come when the current pandemic ends, and the US economy begins returning to normal. At this fact, there will be a great deal of money circulating in the US economy, way more than is needed to support a standard, growing economy. If it’s not “drained” by fundamentally taking it from people and companies through taxes or higher interest rates, inflation develops an increasing danger.
Will Tomorrow’s politicians have the will to raise taxes? Will the Fed be able to diminish its sustenance for the economy & raise interest rates? These decisions will be painful, nevertheless essential, even if the economy is in excellent health. But then that’s for Tomorrow. For the present-day, I trust governments must be pragmatic. Additional expenditure financed by generating money so that families can stay at home, pay the rent, and put food on the table appears an excellent trade-off. Like God, MMT delivers us with the hope that we can make it through our present difficult times – not with prayer but with an economic policy that encourages us to spend what is necessary.