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Monday, April 6, 2020

Modern Monetary Theory After The Crisis (Part II)

The uncertainty about the medical containment of the pandemic remains high, and forecasting at this point is largely an exercise in wild guesses. However, it seems likely that we will be in a environment of high unemployment even after a vaccine tames the virus. Modern Monetary Theory (MMT) will be highly relevant in that environment.

Current Situation: Not Many Options

The main policy decisions we currently face are largely medical: how hard does economic activity have to be locked down? Where to deploy medical resources? What activities will be safe to resume? How long do these policies need to be put into place?

The economic policies that are pursued are reactions to those medical decisions. Take the situation of the household sector as a key example. Many developed countries were unprepared for this pandemic, and so a lockdown was pursued. This entailed keeping households at home. Meanwhile, very few households had large financial buffers, and so a mass default event would be inevitable if no economic actions were taken. There were only three broad options:
  1. Do nothing, and liquidate households en masse
  2. Somehow put in place a standstill on fixed obligations.
  3. Hand out bridging cash flows.
Policy makers felt the first two options were not acceptable or workable, so the third (cash transfers) was the only option. Different countries followed different methods, reflecting differing institutional frameworks.

When we turn to the business sector, we faced the similar prospect of liquidation or suspended animation. 

The key point is that these economic decisions were forced by the facts on the ground, and economic theory had little to offer. Even if one could demonstrate that an alternative intervention was optimal, there is no hope of implementing it amidst the chaotic nature of the lockdown.

Once Activity Normalises, Policy Space is Wider

Once the medical interventions needed to control the virus are better understood. policy options will open up. It is safe to say that the positions of different countries will vary widely, but at the same time, widespread unemployment is extremely likely. The reasoning is straightforward: in addition to failed domestic businesses, global trade and activities like tourism will be crippled. This will create a demand-deficient environment that will in turn force retrenchment in things like the energy industry.

The implication is that we will be in an environment that has broad similarities to the post-2008 world.

Many people are calling for and/or expect deep structural changes to the capitalist system. This seems possible, particularly with respect to how the American health care system operates. However, I do not see any potential changes as being inevitable, so I will put them aside.

My argument is that Modern Monetary Theory will be in a good position to analyse the main economic issues of the post-Crisis environment. (I discussed some of the reforms associated with pandemic handling in a previous article. Those reforms are largely theory-agnostic.) 

Government Debt

Governments are being forced to throw around large amounts of cash in order to avoid a liquidation event, while at the same time, tax revenue is falling. Although the usual suspects are wailing about imminent hyper-inflation, no credible economists are worried about government debt levels now.

Based on past experience, this will not last. Once the stock market has resumed a bull market, fiscal conservatives will come out of the woodwork, worrying about the risks of a financial crisis created by bond vigilantes. (The solution will be to cut welfare state spending, and not to raise tax rates.)

My gut reaction is that these debates will be largely contained to the media and online. Hard money proponents will be emboldened by the validation of their prediction that the fiat currency system is susceptible to crises, and will push currency collapse stories. These partisans are mainly found in finance and online, and so there will be a flood of articles about upcoming government debt market collapses. Of course, this narrative will be opposed by MMT proponents, like myself.

Neoclassical economists in academia and central banks will largely be tut-tutting from the sidelines. Very few of them will want to align themselves with hard money investors who have been wrong about sovereign debt crises for decades. At the same time, they will want to avoid saying that MMT proponents were correct. So they will write hand-wringing articles about debt sustainability -- why it matters, but why not now.

Euro Area

Once again, the survival of the euro area is up in the air. The conclusion from Modern Monetary Theory (and was noted early on by others, such as Wynne Godley) is that the euro is a construct doomed to fail, as it lacks a central fiscal agency.

This pessimism is perhaps unwarranted; although the European project is supposed to be rule-based, the rules tend to only apply to small countries. The question is what legal dodges can be used to keep the common currency functioning. This is a topic that will be of intense interest to Europeans, but bewildering to outsiders like myself. Details of institutional structure will matter more than theory.

U.S.-Specific Governmental Finance Reforms

MMT proponents have been behind a good deal of research on the operational details of U.S. governmental finance. For example, on how to prop up state and local finances to avoid a pro-cyclical contraction in spending.

This is of general interest because of the importance of the U.S. economy, but the details of the proposals are U.S.-specific.

Job Guarantee vs. UBI vs. Helicopter Money

We have discovered the hard way that society needs a way to keep a minimal income flowing to households. I see three broad strategies. The existing strategy -- reliance on unemployment insurance -- broke down in this crisis.
  1. A Job Guarantee (the MMT preference).
  2. Emergency direct cash handouts on a time-limited basis. This was the strategy chosen. The policy is to put in place a permanent infrastructure to allow ready use. I call this strategy "helicopter money."
  3. A permanent Universal Basic Income.
There is very little doubt that emergency cash handouts ("helicopter money") was the correct policy in this crisis -- there was no time to build anything else. However, I would argue that a Job Guarantee would have accomplished the same thing: workers would have been told to "work from home" if there was nothing safe for them to do. Policymakers would just need to make the programme flexible to allow it to deal with similar emergencies in the future.

Since the Job Guarantee is a core part of MMT research, it will be of use in upcoming debates.


One popular way of phrasing MMT's view of fiscal policy runs something like this:
The central government can always pay for any goods or services offered for sale in the domestic currency.
When we look at the current situation, we see the obvious problem faced by policymakers: they face a shortage of critical protective equipment available for sale in the domestic currency.

Many post-Keynesians are obsessed about external financial constraints. However, if your trading "partner" commandeers equipment you are trying to purchase, we see that financial resources are not really the issue.

Countries need to concern themselves with securing supply chains of critical resources and materials. This does not mean that globalisation is necessarily dead; there are only few risks if you are dependent upon foreign countries for cheap plastic toys. Instead, countries need to focus on real resources, and think hard about where their real vulnerabilities are.


Inflation is going to be a major theoretical obsession over the coming years. In the short term, there will be massive divergences in different components of the CPI. The highly vocal hard money partisans will highlight the prices that are rising (which will be highly visible), and argue that inflation data are being doctored by government bureaucrats. Given the bureaucratic failures (and outright lying) in the management of the coronavirus, these complaints will be landing in a fertile field.

Longer-term, it seems extremely likely that conventional models will suggest that NAIRU is over 10%. The only way to stop this will be bald-faced fudging with the models in order to get a plausible number. This environment will create demand for alternative theories of inflation, such as the one provided by MMT/post-Keynesian thought.

Interest Rate Policy

There will be a massive flood of papers that will attempt to find a mechanism by which to make interest rate policy relevant again. On the other hand, MMT proponents will stick to their stance that interest rate policy offers almost no way to stimulate the economy under current conditions.


I mainly look at top-down macro, but MMT is multi-disciplinary, including legal analysis. There should be an examination of the legal structures within our societies. The key area I see are around the environment for large corporations, as they have benefited at the expense of small firms during the crisis. 

Green New Deal

Most Western countries ignored the warnings of scientists for decades regarding pandemic risks. (Asian countries took the warnings more seriously, and performed better as a result.) There is a slight chance that the population might take other scientists' warnings more seriously, and Green New Deal policies will be of greater interest. Given the disarray of current economic arrangements, it is much harder to argue that these plans are disruptive -- there is a lot less activity to disrupt.

Although one can favour a "Green New Deal" without agreeing with MMT, many of the proposals have come from MMT proponents.

Concluding Remarks

In popular discourse, the same arguments we had the last decade are likely to repeat. The same ideological divide exists, and the underlying problem of deficient demand is the same. Modern Monetary Theory is likely to come up in those debates, since the core of the theory addresses the underlying issues.

As for academic economic theory, it is less clear what will happen. Adding epicycles to highly aggregated models is the path of least resistance, but of little relevance to questions around the deployment of particular real resources.

(c) Brian Romanchuk 2020


  1. This is just perfectly excellent Brian. I don't know how else to phrase it. Excellent and thank you. If I come up with better superlatives I will add them in as I think of them. Great stuff.

  2. MMT (as you are describing it) is a rather strange vehicle. JG seems to be the solution to a problem yet-to-be-described.

    For me, I see the coronavirus problem to be narrowly focused. Let's describe a more focused problem:

    First, let's subtract those whose INCOME is mostly unaffected. I think here of government workers at most levels (including teachers), those retired on social security payments, welfare recipients, and fixed income beneficiaries in general.

    With those groupings subtracted, who remains to be severely affected? Transportation (airlines), lodging away from home, personal services of all kinds (including discretionary medical), and construction/repair services are good examples. You will notice that these are groupings that include services vital for the sustained well-being of our economy.

    There is a third group that I call too-vital for shutdown. This group includes the food supply and transportation infrastructure supporting food. There can be no doubt that the ongoing need for food resupply is a common intersection between people, with vulnerability to coronavirus spread. Income earned by this group remains substantially unchanged under present CV rule changes while RISK has been greatly increased (risk of exposure increased). If anything, this group deserves a CV risk-based income premium.

    With the problem described in more focused way, I just don't see a sweeping JG program helping those needing financial help under present CV distorted circumstances. Instead, I see the need for specific programs (basically unemployment programs) targeted for each of the separate affected niches. The goal should be to allow niche individuals to continue eating and paying previously contracted obligations. The justification for support is that these niche individuals were productive contributors until government ordered them to cease and desist.

    You might ask which economic theory we are using as we make this analysis and recommendations? I guess I would say that this is a mechanical economic theory (maybe MeMT). Basically MMT but much more focused, without any hint of JG unless we wanted to use JG as a life-support lurking hidden in the background (to be used in emergencies).

    The U.S. Government seems to be delivering a massive dose of green money, maybe MMT style. I expect (in a few months) to be looking back and allocating economic effects to specific actions. Not quite sure what theory that look-back will be using.

    1. I am explicitly discussing a post-vaccine world. Unless some miracle of good governance appears out of nowhere, there will be persistent high levels of unemployment at that time. There will be a question of how to get people employed, and there will no longer be a question of shutting people in.

      In the current environment, it would be harder to implement a JG. No state has the administrative capacity to undertake a project of that magnitude under current conditions, nor do I see any government that is interested in such a project. So there is no point in worrying about how to implement a JG in April 2020, since we know it will not happen. We just need to ask what the programme should look like in April 2022, given what we have seen in this crisis.

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