Some governments around the world are making a strategic economic gamble to solve the problem of managing unsustainable debt. In a world driven by a pandemic, the fourth industrial revolution and transitioning from fossil fuel energy as the climate crisis rises to the top of the political agenda – Graham Vanbergen asks the question – is MMT the winning formulae?
In little more than a decade, the world has had to endure the bank-led financial crisis, a deadly pandemic and the final realisation that a global environmental catastrophe is finally upon us.
In addition, the fourth industrial revolution that includes the rapid uptake of artificial intelligence, automation and so on is also upon us. Countries are adapting as best they can as they face the next decade but effectively funding and managing these game-changing events is a moot point in advanced political economies.
The most significant consideration is, how will we pay for all of this – and the honest answer is – no-one really seems to know. There is no consensus, and yet huge economic gambles are being played out.
This year, massive pandemic triggered stimulus programmes have been implemented to cushion a sudden and catastrophic decline in economic activity, which may well end up being passed on to future generations. But unlike the financial crisis where policymakers broadly unified under an austerity drive coupled with tax rises and quantitive easing (as yet still unwound), conflicting views have emerged on how to handle the current crisis. What this really demonstrates is the fragility of already weakened economies and the lack of tools available to combat the negative forces of inevitable oncoming change.
What the experts think
Anne O. Krueger is a former World Bank chief economist and former first deputy managing director of the International Monetary Fund. She thinks that countries like the USA should reduce the federal debt-to-GDP ratio through tax increases rather than engage in the tools of what she calls “financial repression.”
Stephanie Kelton is a leading expert on Modern Monetary Theory and a former Chief Economist on the US Senate Budget Committee. She takes the view that government spending is only constrained by the amount of resources in the real economy.
On the other hand, Raghuram G. Rajan, former Governor of the Reserve Bank of India, calls for targeted expenditures that protect workers and benefit the young.
Adair Turner, a former Chair of the United Kingdom’s Financial Services Authority, advocates rising national debt. He asserts that central banks in the US, the UK, and the eurozone will almost certainly end up providing monetary finance to fund higher fiscal deficits.
Todd Buchholz, a former White House director of economic policy under President George H.W. Bush, takes a different view. He thinks that to help the next generation, governments’ could sell 50 and 100-year bonds, thus locking in today’s ultra-low interest rates for a lifetime.
The Emergence of Modern Monetary Theory
The one thing that has emerged is the shift from mainstream macroeconomic theory towards modern monetary theory or MMT. Needless to say that economic shift is driven mainly by a desperate need to find the solution of unsustainable debt.
In brief – MMT allows governments to spend what they want on whatever they want until full employment is achieved. There are no worries about financing because the central bank will provide the money by merely operating the printing press at no cost to the government (taxpayers).
Supporters of MMT propose that some governments can easily cover the cost of these crises and even go one step further. They think that rolling out large social programs by discarding conventional thinking over debt and taxes in our economies is the way forward. But is it quite as simple as it seems?
In theory, MMT does have a point. So long as there is a central bank that issues its own fiat money, there are strong reasons to believe this new direction of travel could fund these events without the burden of increased taxation that inevitably strangles growth. Governments’ will be able to pay for goods, services, and financial assets without a need to collect money in the form of taxes or debt issuance and of course cannot be forced to default on debt denominated in its own currency.
The thinking also goes that MMT is only limited in its money creation and purchases by inflation, which accelerates once the real resources (labour, capital and natural resources) of the economy are utilised at full employment. If inflation does become a problem, increased interest rates or taxation can be used as a brake to remove excess money from circulation. At least, that’s the theory. So what’s not to like?
In the last few months, MMT has taken hold. The Bank of England is engaging in MMT by directly funding the government with QE. The European Central Bank is now fully committed, having announced a 750billion euro bond purchasing program (PEPP) with an option for more.
However, there is a stern warning about MMT from Otmar Issing, the former chief economist and member of the board of the European Central Bank. He warns that – “a government spending spree inevitably would lead to high inflation, at which point the window of opportunity would close, and citizens would be left to pay the bill via rising unemployment and weaker real wage growth”.
Issing goes on to provide very sound advice. MMT has one colossal flaw built into it. It takes central bank independence and puts policy into the hands of politicians. At this point, you know straight away that this design flaw is extremely dangerous.
“If governments can rely on their central banks to buy unlimited amounts of government securities to prevent interest rates from rising, they have effectively already wrested control of money creation from the central bank.”
Once an independent central bank ends up with political decisions being made over economic ones, its ability ever to regain control suddenly becomes a question of speculation. At that point, does the theory see investors (in everything from bonds to buildings) run for the hills?
About the Author
UK MMT has won the day
The Eurozone is fully committed to Modern Monetary Theory
Otmar Issing – The MMT myth