Modern monetary theory is suddenly everywhere. The idea that a government that can freely print and spend its own currency shouldn’t deny anyone a job is gaining currency in our pandemic-ravaged world.
Coming amid a sharp increase in public expenditure, Democratic presidential candidate Joe Biden’s $2 trillion clean energy plan shows a disregard for debt and deficits that was unimaginable after the 2008 subprime crisis.
The theory that sovereign currency issuers can’t go broke is also at work in the U.K., in Chancellor of the Exchequer Rishi Sunak’s attempt at keeping the economy ticking — even if it means paying the private sector not to fire staff. Japan’s government, already the most indebted among major nations, is more than doubling its bond issuance to fund Covid-related expenditure.
Orthodox scholars still occasionally murmur that all of this will somehow have to be paid for by future generations. But there’s nothing like the fear that gripped policy makers around 2010 when economists Carmen Reinhart and Kenneth Rogoff proposed that beyond a public debt to-GDP ratio of 90%, long-run growth tends to swoon.
However, this newfound confidence is seen only in relatively affluent societies. Move over to developing economies, and the conversation is much the same as before. When it comes to paying for a costly lockdown, helping people tide over the loss of livelihoods, or marshaling resources for publicly funded Covid-19 vaccination, the dominant question is, “Can we afford it?”
Emerging markets have reasons to be wary of MMT. They don’t strictly meet its preconditions. While every country does print a legal tender and collects taxes in its own currency, not all can borrow in them. Nor can they allow their exchange rates to float freely, especially if they import vital commodities like food or energy. The degree of economic freedom enjoyed by the governments of the U.S., Japan, or the U.K. is simply not available in most places.
Yet, individuals and businesses everywhere are expecting their governments will stop elevating the “needs of abstract ledger entries over the needs of flesh-and-blood human beings,” as Stephanie Kelton writes in her book, “The Deficit Myth.” For instance, New Delhi is finding it tough to explain to people why, with India’s economy expected to shrink by 10% in real terms this year, it’s hesitant to boldly expand the budget deficit. The states are unhappy that the federal government is pushing them to borrow, rather than using its own unlimited power to print money.
If MMT catches the fancy of the global working classes, emerging markets won’t have a choice. They’ll set out to assert whatever little financial freedom they have, ignoring debt and deficits. The question is, will the experiments succeed, or sink them in an Argentinian-style quagmire of hyperinflation, sovereign defaults and erosion in living standards?
India, South Africa, Mexico and Brazil will all be plagued by large overcapacity well until 2023, according to the International Monetary Fund’s forecasts. This persistent slack appears to be partly due to a lack of what MMT refers to as “monetary sovereignty.” After all, among rich nations, Spain, Italy and France will also be operating far below potential as being part of the euro zone similarly crimps their financial freedom.
So how to tackle the spare capacity? MMT scholars and activists like Denison University economist Fadhel Kaboub stress a “decentralized community-based job creation policy” with funding provided by a central fiscal authority acting in coordination with a central bank.
In other words, deficit financing and money-printing.
It’s hard to quarrel with MMT pioneer Warren Mosler’s argument that in any society, developed or developing, state-funded transitional jobs would be better than long-term unemployment, which destroys skills, connections and attitudes. But some proposals coming out of the MMT tent are audacious. One prescription for India pegs the first-year cost of putting 400 million people to work at $270 billion, or 10% of pre-Covid gross domestic product.
For now, the Indian rupee is stable because import demand has cratered more than exports. But trying to spend 10% of GDP in one year on things like renewable energy, rainwater harvesting and wages could easily switch the currency market’s view. The rupee might collapse in anticipation of higher import demand for everything from Chinese solar panels to shirts made in Bangladesh.
A sharp, one-time increase in government deficit, monetized by the central bank, is easy to sell to markets as a temporary measure to deal with Covid-related supply dislocation and demand funk. Indonesia has shown the way. Running such deficits permanently would butt heads with investors.
For countries that pass the threshold conditions, MMT says the only real constraint on government spending is inflation. If it makes a sudden return, the theory recommends raising taxes and reducing deficit spending. The standard practice of raising interest rates is deemed to be inflationary.
If that flies in the face of conventional wisdom, the more adventurous MMT advice of creating slack by putting curbs on polluting industries may work only for a handful of nations. I can’t see India or Indonesia shutting down coal-fired power plants to fight price escalations.
Is modern monetary theory really for emerging markets? For now, they’re right to have reservations. But if the shock of the pandemic lingers and left-wing politics turn ascendant, there’s no telling where the MMT juggernaut will stop.- Bloomberg