Spending Without Taxing: Now We Are All Guinea Pigs in an Endless Money Experiment | Satyajit Das
TToday, citizens unwittingly participate in a secret political experiment. It embraces the idea of ââincreasing public spending without the need to raise taxes. While modern monetary theory (MMT), doctrine, has obvious appeal to politicians, regardless of economic religion, the long-term consequences can prove problematic.
A state, MMT argues, finances its spending by creating money, not with taxes or borrowing. Since nations cannot go bankrupt when they can print their own currency, deficits and debt don’t matter. Accordingly, governments should spend to ensure full employment, ensuring employment for all who wish to work. Alternatively, although not officially part of MMT, governments can fund Universal Basic Income (RUB) schemes, providing each individual with an unconditional lump sum payment regardless of the circumstances.
Although no government or central bank openly advocates for MMT, since the 2008 global financial crisis and, more recently, the pandemic, policymakers have stealthily adopted many of its principles. People’s one-off payments and increased social rights, which could become permanent, increasingly support economic activity. As the chart below shows, central banks now buy a high percentage of new government debt, effectively financing this additional spending through money creation.
Source: Nick Baker, Marcus Miller and Ewan Rankin (September 2021) Government bond markets in advanced economies during the pandemic; Reserve Bank of Australia Bulletin
MMT is actually a mixture of old ideas: Keynesian deficit spending; the post-gold capacity of nations to create money at will; and quantitative easing (public spending financed by the central bank) launched by Japan. However, MMT raises several concerns.
First, the source of useful and well-paid work is unclear. While the MMT suggests that taxes can be used to direct production, government influence over the companies that create jobs is limited. The impact of labor-reducing technologies and competitive global supply chains is overlooked. Having one dig a hole and the other butchering it creates jobs, but its economic and social value is questionable. The dismal record of post-war planned economies, where people pretended to work and the government pretended to pay them, highlights the problems.
Second, excessive government spending and large deficits financed by money creation risk creating inflation. MMT argues that this is a risk only when the economy is at full employment or there is no excess capacity, and that it can be managed through fine-tuning intervention.
Third, MMT can weaken the currency. About half of the Australian government and significant amounts of public, bank and commercial debt are held by foreigners. Devaluation and loss of investor confidence in the stability of the exchange rate would affect the ability and cost of borrowing abroad and importing goods. The cost of servicing foreign currency debt would increase.
Fourth, while it is available to nation states capable of issuing their own fiat currencies, it is not available to state governments, private businesses, or households that are major borrowers in Australia.
Fifth, who decides on the target employment rate or UBI payment level? Unemployment, inflation and output gaps are difficult to measure accurately in practice. The effects on employment incentives, labor market participation and productivity have not been tested. How will the decision makers control the process or what if MMT fails?
Theory delegates the management of MMT’s operations to politicians, rather than unelected economic mandarins. But elected officials in financial difficulty may be ill-equipped for the task. Political considerations and cronyism can influence decisions.
Sixth, there are implications for financial stability. Lower rates, the result of central bank debt purchases, and inflationary fears could lead to a shift towards real assets, raising the price of real estate and stocks representing claims on under-cash flows. underlying. This can encourage hoarding of goods. This exacerbates inequalities and increases the cost of basic necessities such as food, fuel and shelter. Fear of the debasement of the value of paper money is partly at the root of unproductive speculation in gold and cryptocurrencies.
Seventh, MMT could undermine confidence in the currency. Instead of spending the payments, citizens can question a world where governments print money and throw it away from helicopters.
Finally, Japan’s use of persistent deficits to revive short-term economic activity and contract public debt (currently over 260% of GDP, against a world average of around 100%) does not prove the effectiveness. of MMT. The country’s situation is unique and it has been mired in three decades of stagnation with largely unchanged GDP.
The allure of MMT is the irresistible promise of freebies; full employment, unlimited higher education, health and government services, state-of-the-art infrastructure, green energy and âthe colonization of Marsâ. But monetary manipulation cannot change the supply of real goods and services or overcome resource constraints, otherwise prosperity and utopia would be guaranteed.
While the current game can and will continue for a while, the bill will eventually come in. The loans will have to be paid for by disposable income, higher taxes or inflation, which reduces purchasing power, especially of the most vulnerable, and destroys savings. Apart from nature’s free bounty, everything comes at a cost.