Economic measures taken in response to COVID-19 lockdowns were designed to ensure life could remain as normal as possible. But have we gone too far?
Modern monetary theory (MMT) now plays a role in your life, whether you know it or not. The theory argues that a nation can never truly run out of money, and it advocates quantitative easing to solve a nation’s debt and unemployment problems.
Historically, quantitative easing and currency devaluation have been used as last-resort options to pay for growing national debt during war, recession or other crises.
As a result of the COVID-19 pandemic, lockdowns and enormous government spending to keep businesses alive, MMT and quantitative easing are very much on the table.
They’re not just mainstream ideas now – they could redefine Western economies within a matter of months.
MMT and universal basic income go hand-in-hand today, with the biggest advocates of the former also advocating the latter. New York Rep. Alexandria Ocasio-Cortez has advocated both. And in January, she joined with dozens of other House Democrats in calling on new U.S. President Joe Biden to deliver recurring cash payments to U.S. citizens instead of a single COVID relief cheque.
“We kindly request that your incoming administration consider including support for recurring cash payments in your future economic relief plans,” the letter reads. “Recurring payments would provide a long-term lifeline to struggling Americans for the duration of this deadly pandemic.”
Universal basic income is trending again in Canada, too. Liberal MP Julie Dzerowicz apparently gained the support of some cabinet ministers for her universal basic income plan. In February, she introduced Bill C-273, a private member’s bill calling for the finance minister to study various universal basic income models and formulate a national plan.
Dzerowicz said that a “broad swath” of MPs from her party support the idea.
Canada’s eye-watering $100-billion stimulus debt is already a cause for concern for the country’s leadership, with the International Monetary Fund (IMF) suggesting that continued spending in Canada might “weaken the credibility of the fiscal framework.” And with more than 850,000 jobs lost since the beginning of the pandemic, the economy needs dramatic action to get moving again.
To the left, it all points to modern monetary theory and universal basic income. It’s an easy answer to a lot of the problems facing Western economies. But it ultimately leads to the devaluation of the currency. And it could turn the nations that embrace quantitative easing into quasi-North Koreas, with citizens trapped at home paying extortionary prices for foreign goods, and foreign business reluctant to invest in a nation that keeps devaluing its currency.
Should Western economies continue to offer direct financial relief to citizens through the pandemic and beyond?
MMT will have to be implemented to absorb the costs. But an increase in the supply of cash doesn’t necessarily stimulate the economy.
The marginal propensity to consume for one of the millions of people either unemployed or only recently re-entering the workforce is determined not just by their current income but by consumer confidence, interest rates and general market conditions. A worker recently re-entering the workforce after a year of low income and accumulating debt has no incentive to spend on much other than repaying that debt.
Even with a universal basic income, it could take a year or more for workers to feel comfortable spending their savings as the economy revives. At best, a combination of MMT and universal basic income in response to the pandemic would create short-term comfort for workers in debt but long-term troubles when international travel and trade stabilize once again.
Economic measures taken in response to COVID-19 lockdowns were designed to ensure life could remain as normal as possible. Workers who lost their jobs were offered direct income support to minimize the buildup of debt and a poverty crisis. Businesses forced to close were given loans and grants to help reopen once the pandemic ends.
But MMT and universal basic income are long-term economic changes that do the opposite of maintaining the status quo.
As global economies heal and businesses reopen, politicians must win the confidence of voters who may have lost everything. During economic strife, it’s easy for those politicians to promise the world.
Universal basic income is an easy way to win over voters, and MMT could be the way to pay for it, however wrongheaded that may be.
By Jack Buckby
Jack Buckby is a research associate with the Frontier Centre for Public Policy.