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Modern Monetary Theory and the COVID-19 induced economic slowdown.

Published by Anonymous (not verified) on Sat, 25/04/2020 - 9:00pm in

Peter Martin with his bicycle next to a street name sign for Peter Martin StreetGIMMS welcomes this week’s guest MMT Lens author Peter Martin. 

Peter has always taken an interest in politics and economics and considered himself vaguely Keynesian. He first came across MMT around seven years ago and like many others found it rather strange at first but once the penny dropped economics suddenly started to make a lot more sense than it had done previously.
Along with one of the GIMMS founders, he organised the fringe event with Bill Mitchell which took place at the Labour Conference in Brighton in 2017.



Woman wearing face mask watching stock market fallImage by Gerd Altmann from Pixabay

“We are all MMTers now” is a phrase I’ve heard more than once recently. Governments are spending big-time to address economic concerns so this must prove they are converts! Or does it? The association of MMT with the printing press is a fallacy in any case. We all know that the COVID-19 virus is causing us lots of economic problems as well as health concerns. So, how do we use MMT to understand the issues?

The partial shutdown of the economy is causing both a reduction in aggregate demand and aggregate supply. The much-predicted coming recession won’t be like the last one; that was mainly a problem of lack of demand. So, we need to be careful about saying things like ‘pounds and dollars are just like runs on a scoreboard’, ‘the Government can never run out’ etc. This is as true as ever it was, but if there are supply reductions due to factories closing down, and crops not being harvested in the fields, the amount of produce which is available for the Government and everyone else to buy is going to be reduced too. A reduction in aggregate supply will inevitably make us worse off in total but the extent of the reduction, left to the workings of the ‘market’, is likely to be very uneven and add to the already previously high degree of inequality which was prevalent in our society. Probably we shouldn’t be too ambitious and try to use the crisis to reduce previous levels of inequality. We’ll be doing well to ensure they don’t become too much worse.

We can, generally speaking, divide up stay-at-home individuals according to whether their income has been significantly reduced, or even been lost completely, or whether they have managed to carry on nearly as usual, and are still receiving close to a full income. For the latter group, which might include both wealthy retirees and well-paid footballers, life may be somewhat boring in that they don’t have much to spend their money on right now. They are therefore very likely to notice a considerable improvement in their bank accounts. They still have spending power they would otherwise have used on holidays, restaurant meals, clothing, hairdressing, drinks in nightclubs and pubs, petrol for their cars, air travel etc. Those who are less fortunate and have been ‘furloughed’ will probably include those who were previously working in hotels, restaurants, retail, nightclubs and pubs etc. There have been fewer financial transactions after the lockdown than before it. There will likely be significant exceptions but, generally speaking, the ones who are doing well at the moment were the ones doing well previously. Those who weren’t doing so well are now likely to be doing even worse.

Many neoliberals have used the crisis to renew calls for a Universal Basic Income which isn’t at all a recommended MMT solution. Those who still have their full income don’t need any extra spending power just at the moment; this would cause additional problems further down the line when the economy does finally get started again. The MMT solution of a Job Guarantee (JG) is problematic at present because individuals aren’t allowed to leave their homes without good reason. But why not just use some lateral thinking and define a job as simply staying at home? This can be a valid temporary measure, providing it isn’t treated as a second job for those who wouldn’t take up a JG job in more normal times. A JG on this basis has the advantage that scarce resources are directed towards those who need them rather than being handed out indiscriminately.

We are starting to hear the inevitable ‘how do we pay for it?’ question from the neoliberals. The correct question should be if tax rises are going to be needed to prevent a surge in inflation when the economy starts to get underway again but productive capacity hasn’t fully caught up with aggregate demand. This is not certain, but it is possible. Those lucky enough to have received their full incomes during the lockdown may well decide to catch up with their spending; their healthier bank accounts will allow them to do just that. On the other hand, those who have been struggling won’t be able to compete and so they could lose out again in a flurry of price rises. It will be important to direct any tax rises that may be necessary towards the lucky group. One way this could be achieved would be to levy a one-off income tax targeted at earnings made during the period of the lockdown with, of course, an exception made for key workers. Inevitably this will be messy and throw up anomalies but some thought should be given to making sure that those who have had it relatively easy during the lockdown do lose some of their spending power afterwards, and those who have had it more difficult should be given a little more help, should overall higher taxes be temporarily needed.

What we don’t need from this Government is a repeat of the mistakes made by the Tory/Lib Dem coalition, spooked by a high deficit following the 2008 Global Financial Crisis, which erroneously cut government spending, and raised taxes, in the middle of the worst recession since the Great Depression. Yes, we should raise taxes, but only if we need to dampen down inflation. Otherwise, we concentrate on steering a sensible course between having too much unemployment on the one hand and too much inflation on the other. It’s probably not realistic to expect a JG just at the moment. We can rely on both the exchange rate and the Government’s deficit to take care of themselves.









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