MMT, THE PANDEMIC, AND THE FISCAL DEFICIT FRIGHT

Fiscal Studies, 2020

Contemporary Economics, 2021

The world economy entered the third decade of this century with uncertainties and challenges of COVID-19 pandemic before it had fully recovered from the lingering aftereffects of the financial crisis. The financial crisis ended a period of overall global economic growth and price stability during which globalization and its principles of trade, economic and political liberalization were widely held as the emerging international economic and political order. In domestic economy, most countries favored supply-side economics and monetary policy in a free-market setting. This paper appeals to economic logic and empirical evidence to critically study external and internal economic processes and policies particularly of major world economies to identify what caused the unanticipated onset of the banking crash and why the ensuing persistent downturn defied remedial measures. It concludes that major trading powers departed from their declared commitment to free trade and its basic rules with no effective institutional safeguards and deterrents. Internally, absence of efficient monitoring and supervision of workings of nominal and real sectors allowed anomalies to develop within the market economy unnoticed. As regards inefficacy of policies against several years of stagnation, the paper discusses asymmetric performance of monetary tools and problematic application of fiscal policy to suggest revisiting supply-side and Keynesian approaches against their past performance and forge an eclectic kit of analytical and policy tools alongside the necessary organizational reforms.

BRIQ, 2020

The pandemic crisis produced by the SARS-CoV-2 virus, which causes the disease COVID-19, has rapidly exposed the limits of growth in neoliberal globalization, where financialization, far from bolstering global productive and commercial activities, has proved to be merely an efficient means of redistributing wealth towards society’s wealthiest members. The paralysis of global productive chains and trade is exacerbated by the deterioration of financial-market assets and loss of liquidity, high levels of corporate and private debt in industrialized countries, and the prominence of the informal economy in developing countries. Taken together, these phenomena will make it impossible for the global economy to return to the way it functioned before the COVID-19 crisis. With the hyper-crisis of modern-day neoliberalism exacerbated by the pandemic, difficulties in the supply chains essential to global trade have increased the risks of default on sovereign and corporate debt markets. For both sectors – government and business – a temporary restoration of liquidity is mediated by issuing higher volumes of debt. In a context of uncertain recovery, falling investment, failing businesses, mass unemployment, and declining family income, this will shift insolvency from the real to the financial sector. The potential way out of this hyper-crisis of neoliberal capitalism should be a new development strategy based on domestic markets, which globalization has relegated to niches of industrial specialization dictated by the need for supplies in highly profitable productive chains in developed countries. The current crisis, with its attendant high unemployment and increase in poverty, will define workers’ global struggle for better living conditions, thereby defining the structure of income distribution between capital and labor for the rest of the 21st century.

The meltdown of the financial system has produced a boom in books that examine diverse aspect of the financial crisis. Most of them are written by journalists, ex-traders or policy advisors. Andrew Gamble, a professor of politics at Cambridge University, is an exception, along with some notable others, such as Robert Schiller (2008) and Donald MacKenzie (2009b). Gamble emphasizes the politics, and political economy, of the crisis which includes how the crisis is interpreted. As he puts it, 'interpretations of the crisis become part of the politics of the crisis' (p. 141; see also Klimecki and Willmott, 2010). The Spectre at the Feast is an elegantly crafted, concise, accessible and occasionally witty account of the context and trajectory of the economic boom stretching roughly from 1991-2007. Growth slowed briefly following the bursting of the dot.com bubble in 2000 only to be recharged by a sharp and then sustained cut in interest rates, especially in the US-a cut that was applied to mitigate the downturn. Gamble argues that the boom had its origins in a new growth model inspired by neo-liberal thinking, manifest primarily in extensive financialization. Chapter 1 of Feast provides a succinct account of the boom and its turn to bust. Gamble then considers the nature of crises (Chapter 2) and the rise of neo-liberalism and globalization (Chapter 3). Chapters 4 and 5 assess the implications of the crash for different economies, compare the crash to previous recessions and explore its implications for relations between states. Finally, Chapter 6 surveys a range of possible responses to the crisis. What are Gamble's wagers? First, in comparison to other crises, the present one is highly significant: only two crises of capitalism, the Great Depression of the 1930s and the period of Stagflation in the 1970s, are judged by him to have been of comparable magnitude. Second, and of most significance for this review, the boom is attributed to a 'new growth model' powered by 'financialization' (p. 78). Third, Gamble notes how capitalism survived previous major crises but that, in its recuperation, capitalism was not simply revived but was 'reorganized' (p. 7). He anticipates that the 'reorganization' following the present crisis will involve the creation of new institutions and new alignments (e.g. the dominant global position of the US vis à vis China) as well as new policies and new ideologies. Gamble is, I believe, largely successful in realizing his objective of placing the crash of 2008in its historical and intellectual context and then offering some possible future scenarios. His Organization 18(2) 239-260

Commentary, 2020

This is a similar tale to the one experienced by British engineer Major C.H. Douglas just before the outbreak of World War I. Douglas was working on the London tube when his superiors announced that there was no more public money for any further construction. The budget had been reached and construction would have to halt. Douglas thought this strange since the materials, the know-how and the manpower were all present. The only thing lacking was money-but why? Then on the 28 th of July, 1914, the Great War began and suddenly there was money available for everything the war effort required. This set the engineer on a quest to discover more about the nature of money and capitalist accounting. WWI was Douglas' 'teaching moment' just as COVID-19 is our teaching moment. It will teach us many things: about our friends, family, colleagues, neighbours and communities. It will have lessons to impart regarding the way we think about work, about our health, education and child care systems, and the very standards to which we hold our own governments to account. But it will also teach us about our money, who controls it and what we can do to promote healthy and prosperous communities in a time when our faith in our political leaders and financial systems is being urgently and critically tested.

PArtecipazione e COnflitto, 2021

This article seeks to contribute to the analyses of the impact of the Covid-19 on the global political economy. It does so through a qualitative content analysis of the key policy documents published by the International Monetary Fund (IMF) since the outbreak of the pandemic crisis. The IMF has been, historically, one of the main designers of international macroeconomic governance. The paper focuses on fiscal policy, which retains a central place in the strategy of the IMF to deal with the pandemic and especially for the post-pandemic recovery phase. The analysis of the documents of the IMF contributes (i) to appreciate the interpretation of the nature of the pandemic crisis through the lenses of a prominent international financial institution, (ii) to explore the policy strategy outlined to deal with the pandemic emergency, (iii) to assess possible changes at the level of policy, and accordingly, future directions in global political economy. Evidence suggests that fiscal stimulus, public investment and planning will likely have a prominent position in the future directions of the IMF policy advice.

The Great Recession and the Contradictions of Contemporary Capitalism, 2014

Advances in Austrian Economics, 2016

During times of economic crises, the public policy response is to abandon basic economic thinking and engage in 'emergency economic' policies. We explore how the current financial crisis was in part caused by previous emergency economic measures. We then investigate the theoretical limitations of emergency economic responses. We argue that these responses fail to take into consideration the practical conditions of politics, and thereby making them unsuitable to remedy the problems of a crisis. Lastly, we provide a preliminary analysis of the consequences resulting from emergency economic policies initiated in response to the 2008 financial crisis.

Journal of International Money and Finance

We build a minimalist framework to analyze the macroeconomics of a pandemic, with two essential components. The first is productivity-related: if the virus forces firms to shed labor beyond a certain threshold, productivity suffers. The second component is a credit market imperfection: because lenders cannot be sure a borrower will repay, they only lend against collateral. Expected productivity determines collateral value; in turn, collateral value can limit borrowing and productivity. As a result, adverse shocks have large magnification effects, in an unemployment and asset price deflation doom loop. There may be multiple equilibria, so that pessimistic expectations can push the economy to a bad equilibrium with limited borrowing and low employment and productivity. The model helps identify policies to fight the effects of the pandemic. Traditional expansionary fiscal policy has no beneficial effects, while cutting interest rates has a limited effect if the initial real interest rate is low. By contrast, several unconventional policies, including wage subsidies, helicopter drops of liquid assets, equity injections, and loan guarantees, can keep the economy in a full-employment, high-productivity equilibrium. Such policies can be fiscally expensive, so their implementation is feasible only with ample fiscal space or emergency financing from abroad. We provide macroeconomic evidence consistent with the mechanisms in our model. * While working in this paper, Roberto Chang served as BP Centennial Professor at the London School of Economics and Political Science, whose hospitality he acknowledges with thanks. We also thank several LSE colleagues for very useful conversations on the subject of this paper, and participants of e-seminars at the Central Bank of Peru, GRADE, Universidad Adolfo Ibáñez and Bank of Canada for comments and suggestions. As always, all errors are our own.