How to pay for Covid-19?

samfloy~11 April 2020 /Random

At university I studied economics, and this week have been dusting off some of those neurons by reading up on something called Modern Monetary Theory.

With all of government stimulus packages to fund small businesses and individuals through this huge external shock it offers some framework into the consequences of all the money just appearing out of nowhere to pay for it.

If “monetary theory” isn’t something you would usually read about, I hope you give this a try as it could have pretty big repercussions for how the relationship between state and individual may develop going forward.

Background

I started reading “in depth” about this idea through one of my favourite newsletters (Matt’s Thoughts in Between).

The fundamental recommendation of MMT is that the state (government/ central banks) can print money much more freely than has historically been the case.

The basis is that, assuming a country has the ability to issue new currency (e.g. not the Euro-zone), there is less need to “balance the books” by imposing austerity measures for society to pay it back because governments can just print more money to pay back the loans. 

This frees up the ability for governments to spend money on big projects + supporting people within their society rather than limiting themselves to only do things where they can recoup the payments.

More explanation

The notion that you can print money and there’ll be no repercussions runs aggressively counter to everything most economists say. Many prominent figures/ economists have come out against MMT for just this reason.

Interestingly, MMTers agree. Within the current framework of how the finance world works it may not be the best policy.

But they believe the framework is wrong and that by changing, for example, regulation on how banks give credit you can get to a place where governments can finance without the risk of runaway inflation (which everyone agrees is very bad).

These two articles (+ a podcast from a couple of years ago) I found to be the best explainers. 

  1. “How the US will pay for the $2 trn package is tossed in the trash”: explains what the USA did a few weeks ago and how it is basically what MMTers would advocate
  2. Modern Monetary Theory explained: a deep dive on MMT (a bit more technical)
  3. Planet Money podcast: for those who prefer audio (from 18 months ago)

So what?

What we’ve seen globally is a huge financing effort to tackle a massive, unexpected negative shock.

Faced with millions of people’s livelihoods being threatened, governments have printed money in unprecedented amounts to make sure populations don’t suffer.

What some people are asking is: why did we need coronavirus to start helping people?

In all countries, and around the world there are people struggling to get by. If it was “this easy” to create money to pay for services to support them, why couldn’t it have been done earlier?

The classic rebuttal is “it’ll lead to dangerous inflation” but, if this episode shows that, in fact, it needn’t, then we have potentially demonstrated a way for governments around the world to be more outreaching in the supportive projects that they do meaning fewer (none?) are left at risk.

I don’t profess to be an expert, but the majority of counter-claims to “this is just being irresponsible” are addressed in articles like this.

If enough people start believing Modern Monetary Theory as a result of the global experiment being run right now, it could have far-reaching implications for how the global economy functions in the coming years.

In other news…

Thank you very much for all of your recommendations for wholesome activities to do during lock down. Here’s a selection, in case you are interested:

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