The specter of a Coronavirus Depression is reigniting the debate over Modern Monetary Theory (MMT). Essentially, MMT is the belief that we can buy our way out of a depression with deficit spending.
Modern Monetary Theorists teach that some governments; including the United States, can “print” unlimited amounts of money. A simple explanation for MMT is that government can use unlimited printing of money to pay for high levels of spending.
Dramatically, the US government has embraced MMT in the past. For instance, during World War II the US government financed the manufacture of vast amounts of weapons, munitions, vehicles, and supplies with deficit spending. To finance World War II, the government spent now and paid later.
The MMT is not a new idea. The greatest economist of all, Lord John Maynard Keynes thought countries could spend their way out of the Great Depression of the 1930s. Oddly, World War II proved Keynes right. Massive military spending pulled North America out of the Depression in 1941 and 1942.
However, Keynes taught that governments need to pay debts off during good economic times to avoid inflation. On the other hand, MMT theorists think there is no reason to pay off deficits. To expound, the MMT theorists believe deficits do not cause inflation.
How Deficits and Debt could pay for Government
Similarly, during the 1980s President Ronald Reagan (R-California) and Congress made huge increases to the defense budget to win the Cold War.
In fact the defense budget increased by 35% under Reagan. Plus, the deficit grew by $1.412 trillion during the Reagan years, The Balance estimates.
To finance the defense spending Reagan and Congress cut taxes to stimulate the economy. The hope was that the tax cuts could generate economic activity. Reagan hoped the new economic activity could increase the tax base and generate more tax revenue.
Ronald Reagan and MMT
Hence, Reagan practiced a variant of Modern Monetary Theory. Similarly, President Donald J. Trump (R-Florida) signed massive tax cuts and proposes defense budget increases. Thus some Republicans practice a kind of MMT.
Moreover, Reagan’s 1980s deficit spending was partially successful. The late 1980s and 1990s saw a massive economic boom. For example, the US economy grew by 5% during the 1980s and 1990s, ThoughtCo estimates. Additionally, the Soviet Union did collapse, partially because Russia could afford the Soviet military.
Thus, Trump practices a kind of MMT. Consequently, I think one reason Trump refuses to discuss MMT is that he agrees with it. To clarify, Trump fears a political confrontation with libertarian zealots; including some Congressional Republicans, who view all debt as evil.
Interestingly, there are those on the left who think we can finance massive welfare state expansion with deficit spending.
For example, economist; and hedge fund manager, Warren Mosler believes Medicare for All could pay for itself with savings. To explain, Mosler thinks savings from the elimination of health-insurance bureaucracy could pay for healthcare for all.
Similarly, I think the savings from eliminating means testing for welfare programs and Medicaid could make those programs affordable. To clarify, means testing requires expensive bureaucracy and bureaucrats. Hence, just handing out welfare could be more cost effective than the current system.
Can we spend our way out of a Coronavirus Depression with MMT?
Frighteningly, hedge-fund legend Ray Dalio finds similarities between the current economic crisis and the height of the Great Depression in 1931 and 1932.
“From 1929 to 1932 there was a fall in the economy, double-digit unemployment rates, and magnitude of fall in the economy of about 10%,” Dalio observes in a recent TED Talk. “Do I think we’re in that? Yes.”
Frighteningly, Dalio thinks it could take many years for the economy to recover from Coronavirus, ZME Science reports. “Same thing: zero interest rates, same thing, same dynamics,” Dalio says of the Depression and today.”
Disturbingly, Dalio estimates the stock market lost 25% to 50% of its value or $20 trillion, ZME Science claims. “And then that money causes an expansion from that point.,” Dalio speculates. “How long does it take for the stock market to exceed its high or how long does it take for the economy to exceed its former highs? A long time.”
Can we Spend our Way out of the Coronavirus Depression?
Dalio believes the government can spend its way out of the Coronavirus Depression through austerity, debt restructuring, wealth redistribution, and printing of money. Hence, Dalio believes in a modified MMT similar to Reagan’s.
Specifically, Dalio thinks the government could prevent or ease a depression by cutting spending, restructuring its debts, raising taxes on the wealthy, increasing payouts to the poor or middle class, and printing more money. Thus, I think Dalio wants something similar to President Franklin D. Roosevelt’s (D-New York) original New Deal.
To explain, in the First New Deal (1933) FDR offered a package of new taxes, defense spending cuts, debt restructuring (by eliminating the gold standard), public works, and massive amounts of direct relief to depression victims. History proves FDR was wrong because the US military was partially unprepared for World War II.
Historically, the First New Deal was partially effective. In detail, unemployment fell from 24.9% in 1933 to 14.3% in 1937, The Balance estimates. However, unemployment rose back to 17.3% in 1939.
Thus, spending, taxes, austerity, and economic growth cannot fix the problem on their own. Notably, the economy grew by 12.9% in 1936, yet unemployment was at 16.9%,The Balance estimates.
How do We fight the Coronavirus Depression?
Therefore, I think the Coronavirus Depression will necessitate radical economic policies.
Those polices could include direct cash payments to individuals, zero-interest loans, direct cash payments to business, guaranteed incomes for individuals, tax relief, debt restructuring, and debt relief. The US government is already experimenting with some of these notions with cash stimulus payments for most Americans.
In the United Kingdom, Her Majesty’s Government is going farther by paying 80% of the salary for those unemployed by Coronavirus. The Guardian reports, nonworking British subjects could receive up to £2,500 ($3,111.75) a month under the plan.
Two members of the US Congress are promoting similar plans. First, Republican US Senator Josh Hawley (R-Missouri) wants Uncle Sam to cover 80% of employer payroll costs to keep the economy functioning. Second, U.S. Representative Pramila Jayapal (D-Washington state) wants Uncle Sam to cover 100% of idled employers’ salaries up to $100,000, The International Business Times claims.
Instead, of guaranteeing salaries, I think Congress will make the cash stimulus payments permanent. Thus, I predict Congress will implement a basic income or Freedom Dividend.
Notably, two influential U.S. Senators; Kamala Harris (D-California) and Sherrod Brown (D-Ohio), want a quarterly basic income as long as the pandemic lasts, The Sacramento Bee reports. In detail, Brown and Harris want a $2,000 a quarter cash basic income until the end of the crisis.
Will Coronavirus Lead to a Basic Income?
The strategy is to give ordinary people some money to spend to keep the economy functioning. To explain, the current stimulus payment is helicopter money, a one time cash hand out to stimulate the economy.
A guaranteed or basic income is a regular cash payment government sends to all citizens. For example, former Presidential candidate Andrew Yang (D-New York) wants government to pay every citizen $1,000 a month through his “Freedom Dividend.”
Therefore, I think coroanvirus could lead to a basic income in America. To explain, millions of Americans cannot work because of social distancing and stay at home orders. Yet those people still need to eat, pay bills, pay rent, and cover mortgages.
Will the Coronavirus Depression lead to Violence?
We can defer many expenses including loans, rent, utilities, and insurance. However, we cannot defer food and other basic costs. Thus, sending every American $1,000 in cash each month makes sense.
Unfortunately, I do not know if a basic income is possible in the current political environment. Disturbingly, I think it could take violence (riots) or mass disobedience to scare politicians into offering a basic income.
For instance, something similar to the Bonus March in 1932, or the violent strikes of the 1930s. Notably, the Bonus March included battles between desperate veterans and the Army in the streets of Washington DC in 1932. The Bonus March scared many Americans; including FDR and Army Chief of Staff General Douglas MacArthur, into supporting the New Deal.
I suspect will take civil unrest to scare Congress into implementing a Freedom Dividend. Mass unemployment and poverty created by a coronavirus depression could trigger that violence.
How to Finance Coronavirus Research
Under-funding of medical research could make the Coronavirus crisis far worse.
For instance, Dr. Peter Hotez told our friend Joe Rogan he thinks we could have several potential coronavirus vaccines in testing if medical research funding was high. Hotez; the Director of the Texas Children’s Center for Vaccine Development, has to beg wealthy donors for funding.
Notably funding for the U.S. National Institutes of Health (NIH); the largest source of financing for biomedical research, fell by 22% between 2003 and 2013, MIT Economics Professor Andrew W. Lo calculates. If Lo is correct, the NIH received around $30 billion a year in 2003 and around $25 billion in 2013 when we adjust the funds for inflation.
How Bonds can Fight Coronavirus
Lo proposes an interesting free market method to finance medical research. Lo wants the U.S. Treasury to issue research bonds similar to the war bonds the US government issued World War I and World War II.
In detail, Lo’s research bond will pay a guaranteed interest rate of 5%. We could make the bond more attractive by paying more interest or making the interest tax free.
The Treasury will fund the bond through profits from the research the bond finances. For example, profits from the sale of drugs, medical devices, tests, or vaccines the research finances. Lo envisions a 5% royalty on all profits companies make from research the bonds finance.
Accordingly, the U.S. Treasury could issue a Coronavirus Bond to finance vaccine research and development, treatments, and testing. In addition, we could issue bonds to develop vaccines, tests, and treatments for other infections such as Ebola.
Lo offers a full description of his proposal in his book Adaptive Markets: Financial Evolution at the Speed of Thought. One advantage to Lo’s proposal is that Wall Street could make money by selling the bonds. So investment bankers could lobby for it.
Importantly, ordinary people could join the coronavirus fight by buying “war bonds,” as their grandparents bought bonds during World War II. In addition, foreign governments with huge Sovereign Wealth Funds could finance America’s coronavirus research.
How to Get Foreign Governments to Pay for America’s Coronavirus Research
A Sovereign Wealth Fund is a pool of money, a government invests in stock and other markets to generate wealth. Some Sovereign Wealth funds contain a lot of money.
For example, the largest Sovereign Wealth Fund, the Norway Government Pension Fund Global, held $1.187 trillion in assets in April 2020, The Sovereign Wealth Fund Institute estimates. Meanwhile, the China Investment Corporation held $940.604 billion assets. Another Chinese fund, the National Council for Social Security Fund of the People’s Republic of China, held $324.996 billion in April 2020.
Thus, foreign governments could pay for America’s coronavirus research with bonds. Moreover, we could give foreign governments a strong incentive to buy America’s research bonds.
To explain, the US government could offer the research data; and products created through the research free, to any country or corporation that buys the bonds. For example, the USA could give the coronavirus vaccine to any country that buys the bonds.
Finally, Coronavirus research could boost the economy. In the final analysis, a coronavirus depression will transform our economy. Modern Monetary Theory and bonds could drive that transformation.
Originally published at https://marketmadhouse.com on April 17, 2020.