The pandemic stimulus proves that radical economic change is possible

As money pours from government coffers all around the world, it’s time to fundamentally rethink our understanding of economic principles.

We’ve long been told society can’t support massive government spending without tempting financial ruin. And yet stimulus has clearly been necessary to stave off economic annihilation and the financial ruin of millions.

Modern monetary theory (MMT), an emerging branch of macroeconomics dealing with debt and government spending, may be the key to understanding that and the what-comes-next.

It has grown from fringe theory to favoured new dangerous idea of the left, with American firebrand politicians Alexandria Ocasio-Cortez and Bernie Sanders among its fans.

And now, with governments around the world spending up big, it’s about to undergo its biggest test. 

The main thesis of MMT is that governments that issue their own currency, such as Australia, should always be able to pay for things, pay down debt and fund jobs by printing new money.

It argues that massive government spending should be used to create record levels of workforce participation by guaranteeing a job for everyone, building infrastructure and essential services, and freeing many from poverty. 

This can seem too good to be true — something akin to a magic money tree funding public spending — and many dismiss the idea before investigating further. A mistake.

Chief among complaints are the supposed effects on inflation. But where critics argue that too much spending will lead to wartime levels of inflation, MMT considers that a red herring.

Although extra money in the economy should increase demand and thus cause inflation, if it is introduced through an expanded workforce, aggregate market supply will also increase and temper inflation. With the right tax policies, inflation should be able to be brought under control.

The deficit, too, is considered an insurmountable issue. But the economic consensus on deficits is evolving. No longer are they considered an ultimate evil.

It’s now normal to accept that some degree of government deficit is healthy: money the government has spent is, by definition, now public money sitting in our hands. This is doubly so when the deficit can be paid down by printing more money. 

Current stimulus measures will give us an insight into how MMT’s principles will play out in real markets. We may conclude that there should always be money and jobs available to those in need — with inflation, tax, debt and deficit all reckoned with from that perspective, not the other way around.

That kind of insight would radically recontextualise the debate about balancing reopening the economy and putting lives at risk. 

I saw recently on Twitter a meme subverting Margaret Thatcher’s famous paraphrased quip — “The problem with socialism is you run out of other people’s money” — into the more zeitgeist-appropriate: “The problem with capitalism is you run out of other people’s labour.”

You may or may not laugh, but the point is very real.

Everything has changed exactly because most value is created by those at the bottom, not those at the top. And yet the favours made available by our economic system work as if the opposite were true. 

If it is the case that workers are the most essential, perhaps our economic theories should treat them so. It is difficult in that context to accept the reality we have been told, which is that unemployment is necessary and government spending should be restricted. Try broadcasting that at the Centrelink queue. 

Job losses, uncertain futures and literal hunger pains are not pandemic-specific. These situations (and worse) merely describe the lives of many, even in times of relative prosperity. Their suffering is written off as a necessary component of an otherwise healthy system.

But what if it did not need to be this way?

Stimulus packages prove that money can be made available when needed. Is it really too radical to think that money in quantities sufficient to support high standards of living should always be made available to those in need?

MMT has answers that demand consideration, and at the very least an entirely new vantage point from which to help better understand the interaction of economics and well-being. 

Remember that the next time you’re told we can’t support all those in need.

Scott Colvin is a writer and lawyer based in Melbourne.