When modern monetary theory began to emerge into popular consciousness almost two years ago it carried with it an odour of coming from the distant economic fringe.
Opposed by many traditional economists from both the left and the right, MMT as it became popularly known, was the idea that governments didn’t have to raise new taxes to increase spending.
Instead, like the funding for the Second World War, governments that controlled their own currencies, claimed the theory, could borrow from their own central banks and keep on spending, creating economic growth and jobs until inflation finally kicked in.
Only a year and a half after I first wrote about MMT as a radical idea that effectively offered a bottomless piggy bank for new government spending, it appears that the fringe is going mainstream. And as COVID-19 pulls the rug out from under economic growth, some economists are beginning to face up to the fact that a version of MMT has moved from economic conjecture to economic fact.
Fear of being complicit
“The problem we have is that MMT is considered so fringe that many economists are even afraid to talk about it for fear of being viewed as complicit,” said Frances Donald, global chief economist at Manulife Investment Management in a phone interview.
But she said refusing to address the reality of what governments and central banks around the world are already doing is a mistake.
“Like it or not, elements of MMT are already so embedded in our economy and financial system since COVID-19 developed that burying our heads in the sand isn’t going to help us,” said Donald.
Certainly a search for economists to discuss MMT shows Donald is something of a rarity in her forthrightness. Many are reluctant to give the theory credibility, saying things like “but you can’t keep on borrowing forever.”
Even the current U.S. guru of the theory, Stephanie Kelton, an economist at Stony Brook University in New York and author of the new best seller The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy, doesn’t claim running up the balance sheet is without consequences.
“Generally I feel that MMT has been misunderstood as the idea that budget deficits don’t matter and that you can spend as much as you want,” said Donald. Instead, she said, the message is that there are more important things to consider — such as jobs — when contemplating when to run a deficit.
Less a concrete list of policies than a lens through which to view the world, Donald said that it is clear spending too much, even under MMT, will eventually lead to inflation. She said that’s something Canada must consider as it borrows from the central bank and spends on growing the economy following shutdowns for COVID-19.
Still ‘just wrong’?
If central banks really can stimulate inflation with low interest rates and the creation of money by buying up government bonds, it would seem that U.S. Federal Reserve Chair Jerome Powell is now on side.
A year and a half ago, Powell called MMT “just wrong,” saying, “We are going to have to spend less or raise more revenue.”
But that was then. This is now. Last week, the Fed chair made headlines by announcing that the central bank would keep interest rates near zero, even as inflation began to rise, with the idea that job creation was the priority.
Interestingly one of those who seemed reluctant to endorse MMT by name was Scott Aquanno, author of The Bank of Canada and Crisis Management: COVID-19 and Beyond and a strong supporter of the central bank’s bond buying program.
Among his recommendations is the formation of a public bank to lend to groups and projects that would be unlikely to get money through normal banking channels in spite of rock bottom interest rates. And as for inflation, he said it remains far, far away.
“I think what you might see, paradoxically, is a situation where the Bank of Canada is essentially printing billions of dollars to fund government debt and deficits but that inflation declines,” Aquanno said in a telephone interview.
If Canada were the only one doing this, the loonie would likely lose value, he said. But as countries around the world all do the same thing, so long as the Canadian central bank doesn’t get ahead of the pack, there is little to worry about.
Aquanno, an assistant professor at Ontario Tech University in Oshawa, a city that has watched GM jobs melt away, believes the lack of wage inflation is simply a matter of 40 years where labour lost bargaining power to businesses that have been able to move jobs abroad.
Mark Kamstra, a finance professor at the Schulich School of Business at York University in Toronto, generally takes a more traditional view of economics, but even he sees some of the remedies prescribed by MMT as appropriate for a very unusual malaise.
Certainly the term MMT has been politicized in the United States as its star advocate, Kelton, appeared on stage with left-leaning Democratic presidential candidate Bernie Sanders.
While many traditional private sector advocates may dislike the heavy hand of government on the economy, cheap money and government-led investment may be the best option at this point, said Kamstra.
Low interest rates create zombie companies that might otherwise be displaced by more deserving players, said the York University economist. But pushing them out of business now would result in economic collapse and deflation. Like Frances Donald, he is certain this is no time for austerity.
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Like Aquanno, though for different reasons, he thinks inflation will be hard to generate despite low rates and cash injections in Canada’s service-led economy.
“If people had a lot of money they might get their hair cut twice a week instead of once a month,” said Kamstra doubtfully.
Injecting money into the economy may increase demand, he said. But this demand would be for goods such as iPhones and cars often made by cheap foreign labour. These products don’t face shortages, so there is so little inflationary pressure.
As to governments creating jobs on green projects or infrastructure, in normal times, that could well steal away resources needed in the private sector. But in an economy shattered by COVID-19, that’s not a problem right now right, said Kamstra.
“It’s a good time for the government to start thinking about how it can safely employ resources to fix problems.”
And as we desperately look for ways of digging the economy out of the hole created by the global coronavirus lockdown, that applies whether we decide to call it MMT or something else.
Follow Don on Twitter @don_pittis