On Why Governments Are In Effect, Printing Cash To Defeat Covid-19
Part of the psychology of moving to Level Three is the sense of people heading back to work – at least 400,000 more of them – thereby fostering some semblance of normal life returning to the economy. Indeed, National Party Simon Bridges has been trying to argue that by prolonging the lockdown (for a week !) the government has wilfully preventing life from Going Back to Normal. The polls (and the social media reaction) suggest that very few people agree with Bridges.
Economists usually don’t have much an appetite for consensus. This time, they in agreement that the global economy (and domestic economies around the world) are taking a huge hit from the virus, although judgements on the extent of the damage vary. In New Zealand, unemployment is being estimated to at least 8.6 % but could conceivably reach around three times that figure. If anything though, economists are even more divided on the timeframe for recovery. Aas Nate Silver’s 538 site just pointed out, there is no consensus at all on how long the economic journey back from Covid-19 is going to take, and that’s largely because economists are so famously bad at predicting (a) when recessions will arrive and ( b) when and how they will end.
So…pick your favourite economist. Will the bounce-back occur in the latter half of this year, or by first quarter 2021 – or are we looking down the barrel of years of pain and insecurity, inequitably distributed? As others have noted, one of the difficulties in predicting how and when economies will bounce back from major recessions is that each one is different : last time around in 2008, it was a financial crisis. This time, it’s a public health crisis. History is not on the side of the optimists. If the scale of unemployment likely is Great Depression proportions, keep in mind that it began with the crash of 1929, was relieved by the New Deal of the mid-1930s, returned in force in 1937-38, and was finally relieved only by the arrival of WW2. Not exactly a happy trajectory.
While at least Finance Minister Grant Robertson still has a job, few people will be envying him the task of putting together a credible Budget in May, given the current conditions of uncertainty. How can Robertson reliably predict how much money will be coming into the state coffers in the coming 12 months, and from where? In the short term…yes, there will be a retail bounce when the lockdown finally ends (all going well) in mid-May, but this bounce is likely to be of the dead cat variety. Job losses, income insecurity and fear of the virus will inhibit the public’s readiness to spend on anything other than bare necessities, for a very long time. In the process, that decline in spending will mean that GST – hitherto a key source of government revenue - is going to dry up for possibly…quite a while.
Similarly, the litany of job losses and firms in survival mode will mean that the receipts from reliable revenue streams (income tax, business tax) are going to reduce to a trickle. No one knows how many small firms are going to open again after the lockdown, let alone how many will be capable of trading successfully under conditions of severely constrained demand. Needless to say, raising taxes on the survivors to generate more revenue is not a realistic option – not economically, and not politically.
Which means that the only other ways to Covid-19 rescue missions are to borrow a lot more and/or to print more money. Hopefully, come Budget day, we’ll be given a clearer picture of what the exit strategy from Covid-19 is going to look like. Right now….if it was a movie, it would look a lot like Dunkirk. Lets try to escape on a flotilla of small firms.
Money Does Seem To Grow on Trees
The ordinary rules of running a modern economy have changed, or been suspended indefinitely. Governments on both sides of the Tasman have been throwing huge, unprecedented-in-peacetime sums of money at helping firms and workers to survive the Covid-19 crisis when - only months ago – this money (a) supposedly didn’t exist, and (b) allegedly couldn’t possibly be used to fight poverty, social inequality or climate change. Surely, if we can suddenly find all this money to prop up capitalism as we’ve known it in the past, why not use some of it to promote a Green New Deal for the future?
A fortnight ago, a journalist for the Australian Broadcasting Corporation described the paradigm shift in these terms :
If you're in your twenties, paying off the national debt incurred through Covid-19 welfare could define a large part of your life. It could mean less government spending, which would mean worse public transport, fewer government jobs, less welfare or government assistance for buying a first home, and more expensive course fees. Or it may not. The pandemic is overturning long-standing economic theories, including the idea that responsible government means reducing the national debt. If central banks can print money like they're doing now, why don't they just print more of the stuff to pay off national debts that are denominated in the national currency? If we have a magic money tree, why haven't we been using it all along?
Right now, there are many different species of Magic Money Tree out there, from Quantitative Easing (QE) to Modern Monetary Theory (MMT) on the other, and both come in many shades and varieties. In some versions of MMT for example, governments can underwrite any amount of expenditure they see fit – in other versions, strict rules are supposed to govern how MMT interacts with the inflation rate. I’ve always preferred Australian economist John Quiggin’s description of how MMT works :
The central idea of Modern Monetary Theory (MMT), is that rather than worrying about budget balances, governments and monetary authority should set taxation levels, for a given level of public expenditure, so that the amount of money issued is consistent with low and stable inflation.
In other words, it isn’t open slather, much as MMT often gets described as such. That bit about being ”consistent with low and stable inflation” is important. The value of the net increase in money issue is called ‘seigniorage’ and to the extent that it is consistent with stable inflation, can it really be sufficient to allow for ambitious programmes like a Green New Deal, without the necessity of ( for example) raising taxes to compensate, and dampen down inflation? For any government making that call, it seems essential not to be dazzled by the headline sums involved : given that over the space of a few years, growth in GDP can fairly readily manage the amounts involved. Here’s the example that Quiggin gives :
According to the St Louis Fed, the [US] monetary base grew from around $800 billion to just over $4 trillion between 2008 and 2016. That’s an increase of $3.2 trillion, which is a lot of money. Expressed in terms of GDP, though, it doesn’t seem quite as large. Over eight years, $3.2 trillion is $400 billion a year or around 2 per cent of US GDP ($20 trillion).
Point being, we could arguably afford a considerable amount of monetary expansion, in a context where inflationary pressures are kept in check. Which is where we are right now. In one of its few benefits, the Covid -19 crisis is going to ensure low inflation for quite some time. Oil prices are down, mass unemployment is being predicted to reduce upwards pressure on wages in areas say, like farming,
and consumer demand is about to flatline, at best. (Staving off deflation will be the more tangible challenge for the rest of 2020.) So folks….switch on the money printer !
In a brilliant article on Interest.co.nz, the business journalist Brain Fallow not only succinctly described the form of quantitative easing being deployed here by the Reserve Bank and government working in tandem. Fallow also explained how much – in practice – the approach taken shares in common with Modern Monetary Theory. He includes this illuminating quote from Reserve Bank governor Adrian Orr, to the Epidemic Response Committee :
“Over time, Government debt will either be paid back or rolled over. Since the days of Julius Vogel we have owed somebody something. Fortunately this time we start from a very low debt to GDP position and, judging from what we are seeing, we are going to get back to an average historical position. What we [the Reserve Bank] are doing is transferring those long-term IOUs into short-term cash. We are doing it through the secondary market, not buying it directly off the Government…It is a way of effectively monetising, or creating the cash for people to spend.”
The bank could do that without fear of inflation if it was during times, like now, when there was a significant negative output gap when demand was way below sustainable potential growth, Orr said. His point is that what would be inflationary if the economy’s resources were fully employed, is necessary when instead it is caught in a deflationary rip.
In other words and finally…it seems you need to have almost destroyed the village before you can start to allocate the resources required to save it. In that sense, Covid-19 offers some good precedents and some bad precedents for how and when we start throwing large sums of money around to combat climate change. It may have to get a whole lot worse, before crisis funding (and structural change) is wheeled into play.
Footnote One: As in the 1930s, we’re going to need a lot of government work schemes to create jobs, and to get money circulating again through the retail economy. The extent to which the 21st century New Deal is a Green New Deal may - unfortunately – come down to a numbers game, to do with the jobs readily created.
Among the desired ‘shovel ready’ schemes, what the country cannot afford is to build stuff mainly/only to create jobs, regardless of whether the end product would be of any possible use to the communities paying for them. Unfortunately, the convention centres under way in Christchurch and Wellington still appear to be destined to proceed – despite the evaporation of any business case based on mass gatherings of people being willing & able to travel large distances to attend them. Convention centres? Hey, we might as well be putting the money into trying to build a stairway to Heaven.
Footnote Two : Going back to what I said about MMT.. using the country’s own ability to progressively generate the wealth to underwrite its spending on desired goals will remind a lot of older people of…Social Credit. Young’ uns may not remember this, but Social Credit was a political party and belief system widely mocked in the past (largely on class grounds, by the smart money types ) for the way that its adherents would drive Skodas, wear polo shirts and bang on endlessly (and for most people, unintelligibly) about how money is created.
Well, we seem to have gone full circle, and the neo-liberal orthodoxy has once again failed us. Deeply ironic that in the 21st century, something that looks a lot like Social Credit reasoning should now gaining a fresh legitimacy. A roe by any other name etc…
Agents of misfortune
Labour MP Deborah Russell has copped a lot of flak this week from left wingers and right wingers alike for suggesting – in a question she posed to Grant Robertson at the Epidemic Response Committee – that maybe some of the small businesses struggling to survive Covid-19 came into the crisis in a weakened state. Could our low wage economy, she asked Robertson, have induced some people to set up shop when they lacked the expertise, business advice and resources necessary to survive a major external shock ?
Robertson and PM Jacinda Ardern both quickly distanced themselves from Russell, and from any inference that Labour thought that firms being hit by a once-in-a-century pandemic might have been in any way the agents of their own misfortune. But hang on. How is what Russell said any different to Robertson himself saying only a week or so ago, that mainstream media companies came into the Covid-19 crisis with pre-existing conditions?
Russell wasn’t saying these firms had only themselves to blame and/or didn’t deserve government support. She was asking whether Robertson thought our low wage economy had left them vulnerable, and less resilient. If politicians on the centre-left are being forbidden to debate such matters in public, then we’re really in bad shape. After all, the centre-right is usually more than happy to let low-income workers and beneficiaries go to the wall, and blame them for their plight.