Some experts support the claims of Modern Monetary Theory (MMT) that finance is not a finite resource and none of the institutional workings of public finance has prevented the pandemic from being funded.
Pavlin R Tcherneva
Pavlin R. Tcherneva, an economist and Associate Professor and Director of the Economics Program at Bard College and Research Associate at the Levy Economics Institute and Expert at the Institute for New Economic Thinking, retweeted an article shared by the Economic Democracy Initiative about the world’s response to Covid- 19 supports three key Modern Monetary Theory (MMT) claims on money, unemployment and inflation.
Tcherneva mentions in her working paper series that the key lesson that could be learned from government spending and the post-pandemic recovery is that money is not tight. Governments around the world have promptly allocated their budgets to deal with the economic fallout from the Covid-19 pandemic. For example, Japan passed a stimulus package equivalent to 54.8% of GDP in 2020, compared to 26.9% in the US and 20.1% in Canada. Meanwhile, Italy, France and Germany spent 10.1%, 10.4% and 10.7% of GDP respectively.
The first lesson she noted was that funding was always available, as governments budgeted between a tenth and more than half of their economies to fight the pandemic globally. However, she added that the way the big budgets have been spent varies greatly from country to country. The second lesson was that unemployment is a political choice. Most governments allocated their budgets to protect jobs and keep the unemployed busy, but all countries came out with elevated unemployment rates. China, which gave unconditional wage guarantees to all workers. effectively became the employer of first instance.
The third lesson from the pandemic was that high government spending is not the inevitable source of inflation. She explained that all the evidence points to the current price pressures being a result of global supply chain lockdowns, including closures of factories, ports, transportation routes, slow production, a shift in demand from services to goods and price fixing in the energy sector by the Organization of Petroleum Exporting Countries (OPEC).
Roberto Perli, head of global policy research at Piper Sandler and a former founding partner of Cornerstone Macro and senior staffer at the Federal Reserve, shared his views on inflation versus recession based on an article by Neil Irwin, chief economic correspondent at Axios. He tweeted that for the US economy‘s long-term prospects, it was best to wait and see when the Fed and policymakers were confident it was caused by the temporary pandemic troubles.
Irwin explains that the country’s only real options are to be patient or cause a recession. He added that it is a difficult environment for the Biden team and the Federal Reserve, which are currently facing widespread criticism and public discontent over the economic conditions caused by the pandemic flare-up. In addition, there is a risk that dissatisfaction would increase if political decisions led to a new recession.
Inflationary prices, supply chain deadlocks and labor shortages are likely to persist in 2022 and beyond, experts say. Meanwhile, the measures needed to bring down inflation would send the US economy into a tailspin. In other words, the Fed’s decision to tighten money could lead to a recession. As a result, companies cannot raise prices and workers cannot demand higher wages when the economy is contracting and more people are out of work.
The Fed’s goal this time, however, is a soft landing compared to a steep downturn in the early 1980s with gradual hikes in interest rates, Irwin explains. However, there is no guarantee of when or by how much price pressures will ease, even if the global economy recovers from the pandemic.
Jonathan Portes, Professor of Economics and Public Policy at King’s College London’s School of Politics and Economics and Senior Fellow at the UK in a Changing Europe, shared the Institute for Fiscal Studies’ best summary of the magnitude of the pre-pandemic pressures and funding needs and the Health Foundation from his former colleagues Anita Charlesworth and Paul Johnson.
The study examines how much healthcare spending would need to increase to provide 2018 levels of benefit and how much modernization and improvement would be required going forward. The results showed that UK healthcare spending would need to increase at an average annual rate of 3.3% over the next 15 years to maintain National Health Service (NHS) benefits at current levels, and at least 4% each year if it were to performance should be improved.
In addition, social welfare funding would need to increase by 3.9% each year to meet the needs of an aging population and an increasing number of younger adults with disabilities. The results also suggested that cost pressures on the NHS would increase and therefore a long-term funding solution such as tax hikes was needed.