Thread: Does Covid-19 crisis need Modern Monetary Theory (MMT) approach?
It has now become clear that the Indian govt. will run a large fiscal deficit in 20-21.
For funding this, some amount of Deficit Monetization looks inevitable. 1/12
It has now become clear that the Indian govt. will run a large fiscal deficit in 20-21.
For funding this, some amount of Deficit Monetization looks inevitable. 1/12
Interestingly, the possibility of Deficit Monetization has given rise to discussions around MMT.
This is an unconventional approach in economics that is much more comfortable with the printing of money for govt. expenditures, than mainstream economics. 2/12
This is an unconventional approach in economics that is much more comfortable with the printing of money for govt. expenditures, than mainstream economics. 2/12
There are however, some important differences between economic conditions/objectives driving MMT, and those characterizing the economic crisis resulting from the epidemic.
These lead to important difference in policies as well. Here are some of them in the next few tweets. 3/12
These lead to important difference in policies as well. Here are some of them in the next few tweets. 3/12
1.
The primary objective of MMT is to ensure that economies reach ‘full employment’.
The policy prescription is that govt. should continue printing money and use these to carry out expenditures till this objective is met. 4/12
The primary objective of MMT is to ensure that economies reach ‘full employment’.
The policy prescription is that govt. should continue printing money and use these to carry out expenditures till this objective is met. 4/12
1. (cont.)
OTOH, the economic objectives in the midst of the pandemic are mainly about trying to save lives and livelihoods.
This should need far less printing of money, as lives and livelihoods can definitely be saved with growth much lower than ‘full employment’. 5/12
OTOH, the economic objectives in the midst of the pandemic are mainly about trying to save lives and livelihoods.
This should need far less printing of money, as lives and livelihoods can definitely be saved with growth much lower than ‘full employment’. 5/12
2.
MMT assumes chronic unemployment due to the nature of the private sector and hence proposes permanent fiscal programs (e.g., employment guarantee schemes) as public policy. 6/12
MMT assumes chronic unemployment due to the nature of the private sector and hence proposes permanent fiscal programs (e.g., employment guarantee schemes) as public policy. 6/12
2. (cont.)
In the current crisis, OTOH, the major problem is a temporary shutdown of the private sector due to the epidemic.
So the extra government intervention needed is also temporary, till the private sector is able to make a comeback. 7/12
In the current crisis, OTOH, the major problem is a temporary shutdown of the private sector due to the epidemic.
So the extra government intervention needed is also temporary, till the private sector is able to make a comeback. 7/12
3.
MMT does not envisage supply side problems.
It proposes govt. expenditure as a demand management strategy, geared towards ensuring full employment, in a world where the private sector is unable to do this. 8/12
MMT does not envisage supply side problems.
It proposes govt. expenditure as a demand management strategy, geared towards ensuring full employment, in a world where the private sector is unable to do this. 8/12
3. (cont.)
In contrast, the economies now face both demand and supply constraints at different times.
The govt. may, at times, need to print money solely for supply side expenditures (e.g., health expenditure). 9/12
In contrast, the economies now face both demand and supply constraints at different times.
The govt. may, at times, need to print money solely for supply side expenditures (e.g., health expenditure). 9/12
4.
MMT recommends inflation control using tax policies that bring down demand in the face of aggregate supply constraints. 10/12
MMT recommends inflation control using tax policies that bring down demand in the face of aggregate supply constraints. 10/12
4. (cont.)
OTOH, if there are inflationary shocks in the current crisis, they will probably be due to sectoral supply disruptions, not aggregate supply constraints.
So anti-inflationary policies will mostly be sector specific attempts to reduce these supply disruptions. 11/12
OTOH, if there are inflationary shocks in the current crisis, they will probably be due to sectoral supply disruptions, not aggregate supply constraints.
So anti-inflationary policies will mostly be sector specific attempts to reduce these supply disruptions. 11/12
The upshot of all of this is that current considerations of Deficit Monetization does not mean an adoption of MMT.
The MMT approach is geared towards a very different problem and does not seem very relevant to the current economic scenario.
End. 12/12
The MMT approach is geared towards a very different problem and does not seem very relevant to the current economic scenario.
End. 12/12
