Modern Monetary

Theory and the COVID-19

Crisis

L. Randall Wray

Professor and Senior Scholar, Bard College and the Levy Economics Institute

January 22, 2021. 17:30 - 21:00

Online via NIKKEI CHANNEL

Hosted by the Department of Economics, Tokyo Keizai University and NIKKEI

Policy in the Age of Multiple Pandemics

• Multiple Pandemics

• Covid19, Covid21, Covid23…..

• Pandemics of Climate Catastrophe, Racism, Forever Wars, Forever Fires, Inequality (of healthcare, education, housing, wealth, jobs)….

• Poverty, Unemployment, Homelessness, Financialization, Secular Stagnation, Refugees, Rising Sea Levels…

How can we pay for it?In the foxhole, all find religion

• Claim: MMT found a new way to finance COVID response: central bank helicopter money! • Japan does MMT!

• But:

• MMT is only for crisis!

• Dangerous, inflationary, Zimbabwe!

• But!

• We are in the age of multiple, permanent pandemics! The crises will not end!

• MMT says there is only one way modern governments spend: central bank credits to bank reserves, with banks crediting deposits of recipients.

• This is description, not policy recommendation.

PAUL SAMUELSON:I think there is an element of truth in the view that the superstition that the budget must be balanced at all times. Once it is debunked [that] takes away one of the bulwarks that every society must have against expenditure out of control. There must be discipline in the allocation of resources or you will have anarchistic chaos and inefficiency. And one of the functions of old fashioned religion was to scare people by sometimes what might be regarded as myths into behaving in a way that the long-run civilized life requires. We have taken away a belief in the intrinsic necessity of balancing the budget if not in every year, [then] in every short period of time

ORTHODOX VIEWS:

• Normal times: Tax then Spend

• Limited borrowing may be OK in recession

• Sustainability condition: g>r

• Increasing gov’t spending slows g and raises r

• Burdens grandkids, who must pay it back

• Result: secular stagnation

• Money printing causes inflation

• Samuelson: Shhhh, can you keep a secret? The necessity of balancing the budget is that “old time religion” we use to scare politicians and the population to behave themselves.

• Bernanke: “It’s not tax money… We simply use the computer to mark up the size of the account.”

• Greenspan: “The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.”

MMT: Spend then Tax

• You cannot take out what you have not put in!

• Taxes are paid by debiting bank reserves

• Only sources of reserves: Treasury spending, Central Bank purchases or lending

• Put those reserve rabbits in the hat!• Injections → Leakages• I → S • G → T

The Danger is Excess Spending, NOT Excess Money

• Government spending takes one form only.• Congress/Parliament authorizes spending.• Treasury cuts checks; Central Bank clears them by

crediting reserves.• Budgetary outcome is known only ex post.

• Cash Registers do not discriminate.• Too much spending, government or private, can

cause inflation.• “True inflation” only occurs beyond full

employment.• “Semi-inflation” can occur before full employment:

bottlenecks, pricing power• Doubtful austerity is useful.• Japan and OPEC’s “oil crisis”.

Is Japan Following MMT Policy?

NO!

• MMT is NOT a proposal to ramp up “deficit spending”.

• It follows Abba Lerner’s “functional finance”:

• Budgeting should be FUNCTIONAL: to pursue full employment, moderate inflation, sustainable growth, greater equality, environmental sustainability.

• The budgetary outcome is ex post, not discretionary.

• Japan has run high deficits and debt not due to following MMT policy prescriptions, but by doing the opposite.

• Still, the Japanese experience validates core MMT arguments concerning sovereign deficits and debt: • Deficits need not lead to inflation.

• Bond markets cannot force default.

• Bond yields largely depend on CB policy.

Japan’s Stop-Go-Stop Policy

• Since the collapse of the real estate bubble, Japan has been in and out of recession, with sluggish average growth.

• In recession, limited fiscal stimulus is applied.

• As recovery begins, stimulus is removed and (consumption) taxes are typically raised to “deal with” the deficit.

• This pushes the economy back into recession—and the deficit climbs.

Wray Curve: Two Paths to Deficits

--The “Ugly” and the “Pretty”

Consumption tax increased in 1997

Sectoral Balances

• At aggregate level, sum of surpluses = sum of deficits since income = expenditure.

• For one sector to run a surplus, at least one other must run a deficit.

• Household Balance + Government Balance + Corporate Balance + Rest of World Balance = 0

• For a nation with a Current Account surplus, typically:• Rest of World runs deficit.

• Households run surplus, but Corporate can run deficit or surplus.

• Usually: Household + Corporate is in surplus.

• Government is in deficit.

• So: Household + Corporate surplus = Government + ROW deficit.

Summing Up:

• In 1980s government contributed to rapid growth along with private investment and exports. (Private sector activity was, however, overly dependent on real estate speculation.)

• After the bubble burst, the corporate sector deleveraged, running a surplus. Growth faltered, producing big government deficits.

• Fiscal stimulus packages were too small (often overstated) and abandoned too quickly in weak recoveries. “Ugly” deficits and slow growth followed.

• Like most rich countries, Japan relied excessively on monetary policy (low interest rates)—which is impotent in conditions of uncertainty.

• Government deficits placed a floor to aggregate demand, but could not generate robust growth in the absence of persistent and well-formed policy.

Policy and Existential Crisis

• The world faces unprecedented and immediate challenges; human survival is threatened.

• Coordinated and concerted effort by the richest nations is required

• They are the source of most production

• They have been and will remain the source of most of the environmental destruction.

• The age of austerity must end.

• We can learn from the experience of War—when government absorbs 50% (or more) of national production.

Keynes: How to pay for the “war” (on pandemics)

• “Government, which has control of the banking and currency system, can always find the cash to pay for its purchases of home-produced goods.”

• The problem comes afterwards: “the Government’s expenditure necessarily remains in the hands of the public … the Government having taken the goods, out of which a proportion of the income of the public has been earned, there is nothing on which this proportion of income can be spent.”

• (The danger is inflation.)

• Keynes recommended 3 principles to guide war planning: (1) use deferred compensation to reward workers; (2) tax higher incomes; and (3) maintain adequate minimum standards for those with lower incomes.

J. Fagg Foster:Resources, not Finance, is the True Constraint

• Whatever is technically feasible is financially possible.

• To the perpetual question ‘Where is the money coming from?’ the answer is now clear.

• It comes from the only two institutions we permit to create money funds: the treasury of the sovereign government and commercial banks.

• And the rate at which we permit either to create funds is pretty much a matter of public policy.”

• Tackling multiple pandemics comes down to mobilizing unemployed resources, shifting those already employed, and creating new ones.

• How to shift? Taxes, Postponed Consumption, Patriotic Saving, Rationing, Regulations.

• Spending allocates resources as desired to achieve public purpose.

How Much Does it Cost? (partial acctg; USA)

• Summary of net GND resource use (percent of GDP). Note: Source of resources is negative; use is positive.

• Job Guarantee 1.0

• Greening Projects 5.0

• Medicare For All -3.7

• Miscellaneous GND Projects 0.0

• End Forever Wars -1.0

• Payroll Tax Surcharge -2.0

• Net Increase in Resource Use 1.3 (without payroll tax surcharge)

• Net Increase in Resource Use -0.7 (with payroll tax surcharge)

MMT Conclusion:

How to Pay for Response to

Multiple Pandemics

• No change of procedures is required: authorize spending and the Central Bank and Treasury know how to “finance” it.

• Ultimate constraint is resources, not finance.

• Budgetary outcome is neither discretionary nor worrying.

• Interest rates are determined by Central Bank policy, not markets.

• Inflation can be avoided by policy focused on mobilizing resources and releasing themas necessary.