Chris Johns
This short piece is a response to a thoughtful comment on our recent podcasts from Sean. I thought it might merit a wider audience.
Sean:
given all the debates that are cranking up now about how (or if!) we should “pay” for the cost of the pandemic, and what we see the US/EU/IMF doing and saying about using stimulus to “build back better”, could you maybe do an episode critiquing MMT and whether our DoF in Ireland is captive to a wrongheaded “tax and spend” orthodoxy that treats the economy like a big household?
My understanding of MMT is that it is tries to remind us that the government budget constraint is different from that facing a household. Govt can tax, borrow or print the money it spends. Households do not have the money printing option. MMT is, to my knowledge, never written down as a formal model in the way that most other economic theories are specified. So it's hard to approve or critique a theory that is mathematically imprecise and verbally vague (as I see it).
Perhaps this is simplistic, but MMT advocates say 'spend until inflation arrives'. Where spending is sometimes financed by borrowing, sometimes by the printing press, sometimes by both. As I said, it's vague.
Whether or not they formally believe in MMT, the Fed seems to be following MMT's policy prescriptions - inflation has arrived and they are bringing forward their expectations of monetary tightening (via interest rate rises).
Inflation has arrived, in the US if not elsewhere. Nobody knows where the peak is, or how long it will last. The debate is over whether that peak and/or duration will be a 'problem' that leads to a rise in interest rates that threatens growth or even causes a recession. Like the early 1980s.
The economic policy experiment being conducted in the US has a strong political element running through its core - something that has not attracted enough attention. Namely, those making these policy choices think that this is the last chance to head off Trumpism, to stem the populist wave.
There is no policy experiment being conducted in Ireland: policy is mostly dictated by Europe. The EU’s fiscal rules have been suspended but they are merely waiting in the wings. The ECB determines monetary policy and they will be reluctant to give up their role as the guardians of monetary orthodoxy, notwithstanding what they have had to do recently. The current policy stance looks like ‘tax and spend’ - indeed it is. Domestic politics and, in particular, the rise of Sinn Fein, will determine tax and spend going forward, subject to when the EU’s rules return. That’s it, no MMT here.
If economic growth doesn't lift enough American boats, doesn't do something about inequality, doesn't solve the income and wealth distribution problems facing the US, the political consequences are obvious: the return of Trump, or somebody even worse. It's a big call.
Biden is contributing to this experiment with his clear determination to spend as much as he can, to boost the economy as much as he can. He is acting as if he believes in MMT but I think he is more motivated by a desire to put populists back in their box.
Europe is not participating in this experiment. There will, in my view be a return to monetary and fiscal orthodoxy at the earliest opportunity. The UK is in the vanguard of this, led by long-standing Treasury orthodoxy. Keynes railed against this but it has lived on a lot longer than he did.
So, great policy contrasts. The results will be visible soon but it will take a few years before we can fully assess. Whatever the outcome, great change will result. Not least, either the end of populism or its onward march.