In 2020, governments around the world are spending phenomenal amounts of money.
Globally, they are injecting trillions of dollars into their economies to help resolve the devastating effects of a global recession brought on by the COVID-19 pandemic.
In Australia alone, federal treasury expects the total Commonwealth debt under the Morrison Government to soon surpass a trillion dollars.
Indeed, the $130-billion Job-Keeper scheme alone, is the largest single economic bailout in Australian history.
In the recent 2020-21 October budget, the government declared its total COVID-19 response and recovery support so far, was $507 billion – including $257 billion in direct economic support.
And net debt is forecast to peak at a record $966bn or 44% of Gross Domestic Product (GDP) by June 2021.
That’s some big fat debt.
But, as the Australian government throws billions into welfare and infrastructure projects to kickstart the economy, the question being asked is: will Treasury ever run out of money?
Well, the proponents of MMT (or Modern Monetary Theory) say: Nope! A modern government running out of money is not even a thing.
If it wants to, it can spend itself into existence.
No way! Wait, what even is MMT?
Well, it’s kinda complicated. But in a nutshell…
The contemporary ideology of MMT has been around for decades and proposes that a government with its own sovereign currency – Australia, Japan, the USA for example – needn’t fret about balancing its federal budget or accruing too much debt.
This is mostly because governments can effectively print as much money as they need (or create digital money) ad infinitum.
And what’s more, they can pay it back whenever they like.
Excuse me, but you can’t run a household like that!
That’s because a federal government is not actually a household.
We hear this comparison all the time: “the government budget is just like your household budget.”
Well, not really.
MMT theorists state that the spending goal of a federal government is not the same as a suburban household.
Federal governments aim to support an entire national economy, whereas a household budget is concerned with only its simple, domestic economic situation.
In other words, a handful of people who live in a house, in a street – as opposed to 25 million citizens is not the same!
Household budgets are about balancing the income and expenses of a family – not juggling a nation.
Indeed, the federal government can effectively print money… and a household cannot. At least, not legally!
Spend first, tax later
The concept of MMT argues, rather than taxing or borrowing before they spend into the economy, governments should spend money into the economy before they tax or borrow from it.
Make sense? In essence, MMT asserts that government spending effectively precedes taxation.
And if there are enough workers and infrastructure in place to meet growing demand – without inciting inflation (i.e. a rise in the overall level of prices for goods and services consumed by households), the government can and should spend what it needs to maintain employment and achieve goals.
Indeed, the argument is that governments should use all its available fiscal levers, like taxation and incentives etc to fine-tune economic policy and make things happen in society, such as addressing the climate crisis, tackling obesity or overcoming tobacco addiction and the old chestnut: building roads and hospitals.
But, dude we will run out of money!
Not according to the MMT experts.
“As long as parliament can pass a government budget – running out of money is literally impossible in our modern-day monetary system,” says Steven Hail, Professor of Economics at the University of Adelaide.
“Our government is a full monetary sovereign – it spends the currency into existence and then taxes some of it back out of existence again. It can never run out of its own currency,” he says. “The only constraint on government spending is inflation risk.”
Professor Hail says the important thing to understand is that the federal government is the monopoly issuer of our currency, and as such has nothing in common with households.
All good, but…
Economics commentator and former Deutsche Bank director, Claire Rushe accepts the basic MMT principles but doesn’t necessarily agree with all of its elements.
MMT is not some “pie in the sky,” she claims. “It is happening, and we are doing it right now. And I do think significant components of it are highly relevant in the current environment.”
She believes countries with their own currency will recover easier from the effects of COVID-19 – rather than those (in the European Union for example) who cannot print their own money.
“People get confused, its not like a household or a company budget where they have to balance their books,” she says.
“They try to put their own personal economics into government policy and it just doesn’t work – they are very different beasts.”
Ms Rushe says that with interest rates so low at the moment, and the cost of debt so cheap, there is very little risk of inflation.
With Australia facing around a trillion dollars in debt, she doesn’t think a deficit is necessarily a bad thing – but it comes with a big caveat: “The money needs to be spent effectively, and not frittered away,” she warns.
Like unemployment?
“The government should spend whatever is required to achieve full employment… where anyone that is able and wants one – can have a job,” says Ms Rushe.
If everyone has a job – in other words Full Employment – the supply and demand cycle of an economy might work in harmony.
Get a Job!
And this is where MMT suggests the concept of a “Job Guarantee.”
Under a Job Guarantee system, the federal government would ensure ongoing employment by providing a moderately-waged employment to pay for housing, transport, food etc to anyone who wants a job.
Using the numerous fiscal tools at its disposal, the government might create various entry-level jobs for people such as bus-driving, aged-care, child-care – and invest in matching citizen’s skills to the most appropriate jobs. Or offer training to suit.
This seemingly radical approach to tackling youth unemployment and insecure work was suggested in a recent report by Australian public policy think tank Per Capita.
The bottom line is that everyone would be guaranteed a job, including during economic recessions and forced unemployment may be a thing of the past.
Maybe NMT?
Does Professor Hail think MMT will eventually become Normal monetary theory?
“Yes, and I think there is such momentum now, that it is unstoppable. It might not be called MMT. It will be standard economics,” he says.
And as Claire Rushe asserts: “We are already doing it! We just don’t know it…”
Make sense?
If not, watch Lukenomic’s fun take on the whole thing…