Shrey Srivastava is a student at the London School of Economics and a private investor. He writes at shreysnotepad.com.
The old proverb goes: “A society grows great when old men plant trees in whose shade they know they shall never sit”. But what becomes of societies whose young – by dint of myopia – leave old trees unwatered for future generations?
I fear the newest brand of economic heterodoxy ‘modern monetary theory’, or MMT, puts us at risk of exploring that question practically. Put simply, it argues that as the monopoly issuer of currency, a country such as the UK can simply generate the money to finance its deficits. National debt thus should not be prohibitive for government spending in a sovereign currency. The constraint on spending therefore becomes not deficits or debt but inflation, which taxes can then tame.
Essentially: print as much as you want! – just don’t cause inflation. What could go wrong?
In the olden days, I gather this type of idea would have been fringe at best, along with sentiments like republicanism or Welsh secessionism. One does not need a ‘Generation Z’ lecture to see the paradigm shift. Low latency communication and global diffusion of ideas – through social media, of course – can turn heterodoxy to orthodoxy before governments can blink, much less act.
The US, a mecca of fringe ideas, is as usual leading the pack on MMT. Joe Biden’s $6 trillion spending plans embolden MMTers, already buttressed by the bulging budgets of Trudeau and others across the globe. Curiously, both use the phrase ‘build back better’ in their marketing.
They are certainly building back. Whether it is ‘better’ is anyone’s guess.
To be clear, countercyclical fiscal policy should be encouraged to an extent. With low interest rates, investing in previously neglected sectors and areas is prudent. The risk arises from feeble efforts to ensure the debt taken on can be serviced in the future, without hyperinflation.
For example, Biden proposes financing his fiscal largesse by raising the capital gains tax rate. However, a Wharton study suggests the wealthy would inevitably avoid 90 per cent of the change. Logically, either he needs bolder taxation (inadvisable, given the US is coming out of a pandemic) or to corral his spending. We all know the chance of him reining in Uncle Sam without external intervention. Because apparently, deficits don’t matter.
But what if the Federal Reserve financed Biden’s deficit spending?
Unfortunately, the Achilles heel of money printing is that the Goldilocks amount, or indeed how much will generate excessive inflation, is unclear. It is a question predicated on that most whimsical of things: human sentiment. Societies from the Weimar Republic to modern Venezuela have and will continue to struggle with this conundrum.
And once inflation arises, reversing course is difficult. Businesses shut down or relocate, unemployment soars and we enter an economic contraction. Those of us who were alive in the 1970s – when Britain was the ‘sick man’ of Europe – know something about these ramifications. History may not repeat, but it could certainly rhyme.
This pernicious flavour of economic thought may have captured the US palate, but that is no reason for us to follow suit. Young people like myself historically have found these sorts of ideologies attractive at first glance; equally, the change starts with us. We benefit from an impressive credit rating, and thus low risk premia on UK government bonds. That, in addition to zero interest rate policy, is responsible for our cheap borrowing costs. Budget control has indeed gone out of fashion since the departure of the erstwhile Prime Minister, David Cameron. Nevertheless, remember that decades of sound economic management are why this country is trusted to service its debt.
At a national debt hovering around 100 per cent of GDP, the UK is not yet Japan (with a national debt over 200 per cent of GDP) but we are getting there. Sunak strikes the right chords emphasising fiscal prudence, but he knows that he is ultimately bound by the electorate. This is where voters come in.
The profligacy of incumbent governments before an election is well documented. It is also tempting given all we have been through (soaring house prices, a global pandemic scuppering employment prospects, et cetera) to accept unsustainable cash injections into the real economy as a voter ploy. It then becomes a self-fulfilling prophecy. Political parties feel the need to out-spend each other – or at the very least, overspend – to gain a majority (see: 2019 UK general election, 2020 US election). They may rationalise their economic policy as worthy price for their other pledges to be implemented. Spending plans go up.
Over time, some combination of rising inflation, a lowered credit rating, and a stymied economy are likely outcomes. Such is the tale of every economy throughout history that printed excess money to fund government expenditure. An undervalued monetary tenet – central bank independence – falls by the wayside as the Bank of England essentially becomes a vehicle for monetising government deficits. The youth are most affected as the generation left to pick up the pieces.
Although that Pandora’s box is not yet open, the alarmism serves a purpose. The tide is shifting in favour of MMT: the economic version of an internet-driven, instant gratification culture. However, indubitably, being able to call on the electorate to fix the issue is both historically anomalous and a very good thing. As a certain Winston Churchill proclaimed, ‘democracy is the worst form of government, except for all the others.’ Within our feted democracy, we can chart our own destinies.
Going beyond realpolitik and blame games, politicians reflect the views of their electorate. Our job as custodians of democracy is squaring the circle: demonstrating the compatibility of voter franchise in the internet era and long-term policymaking. Any thriving democracy holds representatives accountable not only for current progress, but also for what they leave for future generations.
Clearly, MMT sacrifices long-term stability for illusory short-term wealth. It is not necessary to be an Osborne-style deficit hawk to acknowledge this. So spend, yes. ‘Level up.’ But always remember to water the trees previous generations planted. Leave MMT in the past: our children will thank us for it – that is, if we do not thank ourselves first.