Modern Monetary Theory Reboot: It is Time to Throw Money at this Problem
Last year, I quickly dove into the discussion about Modern Monetary Theory (MMT). It was well before COVID-19 and a bit before Andrew Yang’s dark horse presidential campaign started making waves with his progressive universal basic income (UBI) model. Once on the periphery of the nation’s political and economic discourse, MMT and UBI continue to move into the mainstream. And I expect recent fiscal and monetary policy responses to the coronavirus pandemic to keep MMT and UBI headed in that direction. But in my view, the government’s responses actually continue a trend. I think we’ve been living in an MMT-type simulation since the 2008 financial crisis.
Inadvertent MMT in Action
As Modern Monetary Theory goes, government spending for a monetarily sovereign country like the U.S. should be limitless. Large deficits are irrelevant because the government can just print more money. MMT’s efficacy is highly debatable. As I mentioned last year, nothing is free. A debt always comes due, one way or another. To say otherwise is naïve. Federal Reserve (Fed) Chair Jerome Powell agreed: “The idea that deficits don’t matter for countries that can borrow in their own currency I think is just wrong.”1
But a global pandemic has a way of bending traditional thought processes. To steward public health, governments around the world had to implement the social distancing and shelter-in-place policies that we’re all adjusting to. Of course, shuttering the global economy comes with a hefty price tag, the likes of which we’ve never seen. Workers and businesses of all sizes, big, medium and, perhaps most significantly, small, need monetary relief.
Powell and the Fed “committed to using its full range of tools to support households, businesses, and the U.S. economy overall in this challenging time.”2 Many global central banks followed suit. The Fed quickly cut the fed funds rate to zero, implemented an aggressive quantitative easing (QE) program, and launched liquidity facilities to keep credit flowing. The Fed’s measures comprise an open-ended monetary policy response that continues to grow in scope. Today, the Fed’s balance sheet is approximately $7 trillion and rising fast.
Fiscal responses vary. Several European countries essentially froze their economies by paying their workers to stay home. In something of a pseudo basic income strategy, Denmark, the Netherlands and the United Kingdom planned to backstop companies by paying a percentage of worker salaries, as long as companies agreed to no layoffs.
In the U.S., the White House and lawmakers on Capitol Hill went in a different direction. After the typical haranguing, Congress passed the bipartisan, $2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES). Among the highlights, the bill includes $1,200 one-time payments for many individuals (income caps apply), a $500 billion corporate liquidity fund (some accountability was a sticking point), $377 billion for small businesses, and enhanced unemployment provisions.
Though expansive, the bill seems to guarantee more for corporations than the (Read more…)