MMT and corona policy measures

20 Apr, 2020 at 23:09 | Posted in Economics | 1 Comment

heliMany commentators seem to view MMT as merely a blueprint for turning on the printing press …

These commentators have it all wrong. MMT does not support quantitative easing (QE), nor does it prescribe “helicopter drops,” for the simple reason that there is no such thing as a “helicopter-money” alternative to financing a fiscal-stimulus package. Instead, what MMT does is describe how a government that issues its own currency actually spends, taxes, and sells bonds as a matter of course. In doing so, the theory demonstrates that a government like that of the US does not, in fact, face financial constraints.

If there is any MMT feature to the US rescue package, it is the fact that it is not “paid for.” Proponents of MMT have always insisted that we must stop attaching such strings – increased taxes or spending cuts elsewhere (the “PAYGO offset”) – to spending bills. Abolishing such conditions may or may not increase the budget deficit. But, regardless of the budgetary outcome, the spending will always take the form of payments made by the Fed on behalf of the Treasury. No printing press or tax receipts are required …

MMT’s proponents have always maintained that government spending is limited only by available economic capacity. The US rarely reaches such real spending constraints in normal times, and in the case of the current crisis, the constraint we face comes in the form of a massive supply shock. But that is due largely to inadequate disaster preparedness. If there are no hospital beds to treat sick patients, more spending will not help. Insofar as the US is constrained in responding to this crisis, an inability to finance government spending will never be the reason. Once we overcome the immediate threat to our health posed by the pandemic, we need to keep government spending up in order to prepare for the next crisis, resisting all calls to tighten budgets on the ill-founded notion that fiscal austerity is needed to pay down the debt.

Yeva Nersisyan & L. Randall Wray

1 Comment

  1. “MMT’s proponents have always maintained that government spending is limited only by available economic capacity.”
    .
    Demand for money balances increases faster than demand for real goods, typically, as income grows. The rich save more than they consume, but “saving” means buying financial goods which are largely uncorrelated with economic output. Even in a recession, you can define your risk upfront, make bi-directional bets on a range of possible price movements of a fourth derivative like the VXX index, and exit the positions before they move outside of your (predefined) profit range. Some labor monitoring screens is required; if you don’t do it yourself, you pay a money manager to do the labor for you.
    .
    Modern Monetary Theory typically ignores the huge size of financial markets relative to real output dollar totals. Because people buy financial goods, government spending is not even constrained by real economy capacity.

    Comment by Robert Mitchell— 22 Apr, 2020 #


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