Fiscal Policy

This is the third essay in my series of deep dives into economic ideas and theories—see the first two here and here—and it is only now becoming clear what I am actually doing. These expositions were always meant as book chapters in some loose form, and that still applies, though my spin is slightly different. Put me in a book store and I’ll walk out with a collection of short stories rather than a novel. These essays are aimed at those interested in economics with a similar mindset. I have no idea when the whole project will be done—sometime in 2089 probably—but this contribution on fiscal policy is a cornerstone. The conclusion is pasted below for those not interested in the gory details. I hope you enjoy it.

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The idea of government intervention and demand-side fiscal stimulus was born by Keynes, eradicated by neoclassical economics, lazily reintroduced by the new Keynesians, and is now enjoying a renaissance. It’s fiendishly difficult to judge history in real time, but I would bet that the current shift has momentum, a position that has been strengthened by the response to the Covid-19 crisis. It is perhaps unfair to insist on a marriage between this story and MMT, but it serves as an introduction to the issues at hand. 

The idea that governments with sovereign Chartalist currencies can’t run out of money, and that this power should be used to achieve full employment, is enticing. It is also, however, naive. MMT easily dodges the main theoretical critique, at least in the current environment. The Phillips Curve probably still exists, but it has also flattened significantly, making it difficult to attack MMT armed with the traditional trade-off between unemployment and inflation. 

If MMT passes this first test, however, it fails the subsequent trials. The implementation of MMT in today’s economy requires significant shifts in the relationship between fiscal and monetary policymakers and an end to the free flow of capital. My sense is that about half the proponents of the theory don’t have a clue about any of this. The other half understands that MMT requires an end to central bank independence, and a significant reduction in capital mobility. The problem is that this latter group aren’t being honest, and for that reason, I am skeptical about their true motivation. If you want to dial back globalization, the least you can do is to be honest about what this means for households and firms. If you think that an independent central bank is a suboptimal institution, how will the alternative look, and how will it be held accountable? 

Finally, the idea that money is a limitless resource, is naive in the extreme. Even a government with a sovereign currency can’t ignore fundamental issues of distribution and the division of scarce resources. No matter how benevolent, a government with a printing press still has to decide who gets what and how much. The most well-informed proponents of MMT seem to dodge this issue via the support of wealth and income distribution via the tax system, though it is often difficult to tell exactly what they believe. The question of (re)distributiobn is a, as of yet ,hidden layer of the debate. Until that changes, it will be impossible to have a proper debate about MMT, which is a shame, because we probably need one.

Do you want to read the rest? Click here for the PDF.

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