MMT and the Covid Recovery
BB article ( https://www.bloomberg.com/news/features/2019-03-21/modern-monetary-theory-beginner-s-guide) defines MMT as:
"MMT proposes that a country with its own currency, such as the U.S., doesn’t have to worry about accumulating too much debt because it can always print more money to pay interest. So the only constraint on spending is inflation, which can break out if the public and private sectors spend too much at the same time. As long as there are enough workers and equipment to meet growing demand without igniting inflation, the government can spend what it needs to maintain employment and achieve goals such as halting climate change"
The economy has shifted dramatically. We don't need nearly as much capital or labor to create value today, and in fact much of the value creation today is about displacing traditional inputs (capital and labor) to achieve similar outcomes. Think tech and its impact broadly (all industries and firms are maturing into technology companies).
As a result we have excess or mismatched labor and excess capital. For labor this is visible as falling labor participation and limited wage inflation outside of a narrow group of skills. For capital this is visible through near zero or negative real risk-free rates.
Because of the excesses above, there is very little private sector inflationary pressure. Fiscal deficit and loose monetary policy are required to generate even tepid inflation, and this is associated with rising debts (private and public). I.e. all demand pull inflation.
Covid is rapidly accelerating trends previously in place. Specifically technology displacing labor has taken a great leap forward and will release many workers first into the unemployment line and later into lower quality jobs or discouraged worker categories. That is not a shift in trajectory; it is an acceleration of the shift.
Covid shock is fundamentally a demand shock and pressures leveraged actors more. If growth prospects are reduced and short-term incomes reduced, then the cost of debt rises relative to incomes. That should drive deleveraging and Keynes' paradox of thrift: "Keynesians also argue that consumption, or spending, drives economic growth. Thus, even though it makes sense for individuals and households to reduce consumption during tough times, this is the wrong prescription for the larger economy." However, the paradox breaks down if prices react - i.e. drop in a recession. I interpret this as either we get downward spiral in the economy or deflation, or parts of both.
Richard Koo's balance sheet recession ideas also ring true here. No amount of monetary stimulus will drive private actors to borrow and spend if they are uncertain about their future prospects. In that scenario the government has no choice but to step in a fill the void (as seen in Japan). And they can do this without fear of inflation as there is substantial slack in the system. In fact, this is the point - govt absorbs some of the slack to help balance the economy. This sounds very Keynesian to me.
MMT seemingly extends Keynesian ideas by incorporating some of the technical realities of fiat currencies, specifically those countries control their own currency and can borrow/spend in that currency. In that scenario the argument is that deficits don't matter as the Treasury can always borrow from the Federal Reserve. Further they argue that inflation is the big limiter. Greenspan commented that the big problem with printing money is whether there are enough resources or assets in existence to support all the purchases the extra cash would demand ( https://www.businessinsider.com/modern-monetary-theory-mmt-explained-aoc-2019-3).
In terms of the real economy there seems to be plenty of assets and resources, especially post-covid. One exception could be financial assets, and specifically future earnings. As such we see negative real risk free rates and expanding multiples (particularly for those with prospects for growing future earnings, like tech). So we have deflationary pressures for inputs while seeing inflating prices of future earnings for tech and tech like businesses (the very businesses that are liberating resources and pushing deflation).
MMT would fall apart if a currency suddenly became unattractive relative to others and collapse. Think Venezuela or other countries where you have seen currency collapses. It is hard to see that happening today with the USD, RMB, pound, etc. All these economies are pursuing versions of high fiscal deficits and loose monetary policy and the underlying themes suggest that this will continue for all of them.
To cope with Covid governements have taken to sending cheques to citizens. In some cases this helicopter money has enriched large portions of the populous:
As July ends so does the US federal unemployment top-up of $600/week. A CNBC article suggests that this would market a 60% drop in income for those on unemployment (average EI is $378/wk, according to the article). These are astonishing figures on a number of fronts:
$978/wk is an annual run rate of $50,856/yr. This compares with "The Bureau of Labor Statistics reported a median personal income of $865 weekly for all full-time workers in 2017.[2] The U.S. Census Bureau lists the annual median personal income at $31,099 in 2016." (from https://en.wikipedia.org/wiki/Personal_income_in_the_United_States). In short, under these benefits individuals are earning much more than the median
US Census data indicates that 70% of workers earn less than $50,000/yr (43% were below $25k/yr), so for the majority of workers, the topped up employment benefits are an improvement, and for lower income workers, much more.
How do you possibly unwind such a program where the average individual is actually better off not working, at a time when jobs are already scarce, when money looks free, and while you're entering an election? Even without an election, how do you unwind this? Put differently, is this the beginning of universal basic income (UBI) or MMT's job guarentee?
If this is the beginning of universal basic income (UBI) or MMT's job guarentee, is that a bad thing? If a world where capital and labor are increasingly over supplied, then maybe not as it helps the many that make up society sustain their lives.
Then there is the "seignorage", which I understand means the profits of the central bank go back to the treasury. In other words, if the fed buys treasuries and treasuries are issued to finance the govt the interest ends up back .... at the governement. It is a zero interest loan, so long as inflation stays low (money is injected when the Fed to buys bonds or other assets https://www.npr.org/2016/04/29/476203984/how-managing-money-creates-huge-profits-for-the-federal-reserve
If the FED is influencing rates primary through open market operations, then rates can be help low by continuing to buy securities. Nominal rates should stay positive as long as inflation is positive, which can be achieved by large fiscal spend. The Fed also has tools to keep this rate positive. https://www.thebalance.com/how-does-the-fed-raise-or-lower-interest-rates-3306127#:~:text=The%20FOMC%20sets%20a%20target,each%20other%20for%20overnight%20loans.&text=Banks%20use%20these%20funds%20to,borrow%20the%20fed%20funds%20needed.
In a deflationary world, where structural shifts like demographics and tech drive more and more slack into the economy, MMT seems to suggest larger and larger government (i.e. govt takes a bigger and bigger role in the economy). What does this mean when taken to its limit? Does that mean the government becomes the economy, essentially communism? Is there an inflationary limit that gets reached first - who wants to invest in an economy and own a currency that is shrinking?