MMT and the corona virus, courtesy Yash Agarwal

Yash Agarwal (here is his Twitter page) messaged yesterday, asking about MMT and whether it could be used to tackle the current crisis. He has shared a video as well, and asked a rather specific question, both of which we will get to shortly.

But first things first, what is MMT?

MMT stands for modern monetary theory. For there to be a “modern” monetary theory, there must have been a monetary theory, right?


 

OK, Lerner: His argument was that countries that (a) rely on fiat money they control and (b) don’t borrow in someone else’s currency don’t face any debt constraints, because they can always print money to service their debt. What they face, instead, is an inflation constraint: too much fiscal stimulus will cause an overheating economy. So their budget policies should be entirely focused on getting the level of aggregate demand right: the budget deficit should be big enough to produce full employment, but no so big as to produce inflationary overheating.

The excerpt is from Krugman’s blog/column in the NYT, but if you want the academic paper behind this, here you go.

Here’s the short version of the Lerner argument: so long as you don’t borrow from abroad, and so long as you print your own money without any backing (such as gold), well, there can never be no crisis. Just, literally, print your money and throw it at the problem. The one thing you gotta keep in mind is you want to do this until aggregate demand is “just” right. Too much of AD, and you’re in inflationary territory. Too little and you never solved the crisis – print more money in that case.

So today, given the low interest rates that are likely to prevail in the economy, just have the finance minister and team spend, spend and spend, until aggregate demand rises and the economy is back on track. Build more schools, lay more roads, build more bridges – spend, spend and spend. That, best as I understand it, would have been the Lerner position.

And what about the debt and the deficit once things are back to normal? Well, that’s the problem with the Lerner doctrine. It involves running, then, a primary surplus – which means cutting subsidies and raising taxes. And no, I don’t see that happening.

If you want the modern version of this monetary theory, which is MMT, a good place to begin might be this blog post I wrote a while back.


But they key thing, best as I can tell, about MMT is that you must not worry about deficits, especially during a crisis. Print more money and spend your way out of it.

Here’s a more recent take on the issue:

The world is changing that is for sure. Governments around the world are promising to spend billions to address the coronavirus crisis and no-one (other than a few so-called progressives – see below) are talking about how governments will pay for the interventions. Everybody knows how. They have always known. The shams about governments not having enough money to provide adequate housing, schooling, health care, employment, other services, and a sustainable response to climate change are now exposed for all to see. The game is well and truly up. Everybody can now see that governments just have to announce billions of intervention and it will happen. Forget all the ‘complexity’ about accounting arrangements. Forget all the stuff that we will also drown under massive tax burdens if the government dares to help some disadvantaged person get a leg up in life. Forget all the stuff about bond markets punishing profligate governments with insolvency. Everybody can now see that the bond markets are the beggars and the government rules. Even in the Eurozone, it is obvious that the ECB is able to fund fiscal deficits of any size – ‘there is no limit’. Only the Modern Monetary Theory (MMT) economists have consistently outlined the rationale for what is going on at present. And that point is increasingly being recognised although not always in ways I think does our work justice.

That’s mostly rhetoric (and I do not mean that as a criticism), the meat is found later on in the article. In particular, note the 2×2 matrices that are to be found further down, of which I present one below:

Original can be found here

Essentially, MMT says that if a country has monetary sovereignty (and India does), and if a country has an aggregate demand crisis (and India does), then proceed full steam ahead with MMT. Go full steam ahead on expansionary fiscal policy, and don’t worry about finding the money to do this, or about the debt: just create the money!


 

Here’s Stephanie Kelton on the topic, in conversation with Michael Moore:

 

For a more theoretical look, especially at the operational aspects from a global viewpoint, read this article by William Buiter:

Much of the US response will come in the form of “helicopter money,” an application of Modern Monetary Theory (MMT) in which the central bank finances fiscal stimulus by purchasing government debt issued to finance tax cuts or public spending increases. The US economy is deteriorating at a spectacular rate, partly because of the direct health impact of the COVID-19 pandemic, but mostly as a result of social-distancing mandates that are preventing people from producing and consuming.


So ok, let’s say we’re going to do MMT: what exactly might this entail for, say, the USA?

What is more important is a set of policies that tackles the health crisis head-on while also mitigating the economic uncertainties faced by households and their communities. These include:
..
(1) full coverage of medical costs associated with testing and treatment of COVID-19;
..
(2) mandated paid sick leave and full coverage of associated costs;
..
(3) debt relief for families;

..
and (4) swift deployment of testing and treatment facilities to underserved communities. We will probably still need some demand stimulus, but these four steps require immediate attention.


I learnt about their article by reading about Amol Agarwal’s take on MMT, available here:

After being ignored (and humiliated), is this the MMTers moment in the sun? Will their ideas get a hearing? One would say that we should keep all options open and not be bound by the shibboleths of economics. The speed at which the pandemic has shifted gears and become an economic crisis needs all possible policies which need to be executed at even faster speed. My gut feel is most of the economies will eventually be implementing ideas from MMT without calling it so. The Governments are being pressed to introduce fiscal support and will be calling their central banks to finance the support. MMTers might not mind their not being given due recognition. First they are used to being ignored. Second, they may well think that as long as humanity benefits, a rose by any other name would smell as sweet.


Now (phew, that was a long introduction!) here’s the video that Yash shared:

And here’s his question:

I just watched this and I was wondering if it would be correct to state that the modern monetary theory is practically possible just for the United States of America since it issues the global reserve currency?

The answer is no: so long as you have your own currency (where the “you” in question is a sovereign government), and you are only borrowing domestically, you can go ahead with MMT.

And I agree with Amol Agarwal: right now, we need all the propping up of AD that we can get, and so we should do “whatever it takes”. And that right soon!

That doesn’t mean there won’t be problems later – there may well be – but now is about now. Spend!

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