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Cascade Institute researchers on COVID economics
Cascade Institute executive director Dr. Thomas Homer-Dixon and postdoctoral research fellow Michael Lawrence shared their thoughts in the Globe and Mail on governments adopting the precepts of Modern Monetary Theory in response to the effects of COVID-19 on national and global economies.
Here is an excerpt:
The MMT framework could provide the fiscal basis for a vastly improved relationship between government, economy and society – if it turns out to be right. But if it turns out to be wrong, Canada and other societies could find themselves far worse off than they were before the pandemic, as the financial foundations of the welfare state implode and opportunities for progressive policies close, perhaps for decades. Either way, the pandemic’s real economic fallout almost certainly lies ahead.
MMT has provided governments with an intellectual framework to justify and legitimize more deliberate action to steer Canada toward a better future. At its core is the idea that countries that control their own currency (such as Canada, the United States and Britain) don’t need to balance income and expenditures like households do. Instead, they should issue currency at whatever rate stimulates the full use of the country’s productive capacity, even if it creates large and sustained deficits.
And during the pandemic, that’s what the central banks of wealthy countries have done. The Bank of Canada buys $4-billion in government bonds each week, essentially creating new money that the government spends to shore up the economy. The federal government estimates that the fiscal 2020-21 deficit will exceed $380-billion – almost 10 times greater than the 2019-20 deficit of $40-billion. But with interest rates near zero, such “monetized” fiscal deficits seem to generate free money to keep us going.
But maybe not. MMT doesn’t in fact propose that governments can keep spending without consequence. The limit on government spending, though, is not government deficits but rising inflation. And for years inflation hasn’t been a problem; indeed, central banks haven’t been able to raise inflation to an optimal 2-per-cent rate, despite concerted efforts.
Read the full opinion article in the Globe and Mail.