Economists’ Brave New World and The Theories About To Be Tested

Out with the new, in with the old is the political rule as two septuagenarians, old white guys in blue suits as voters unhappy with the choice put it, face off for the presidency of the United States. Out with the old, in with the new, is the economic policy rule.

Start with fiscal policy. When Joseph reigned supreme in Egypt and John Maynard Keynes reigned supreme in academic and policy circles, the desired policy was to run surpluses in good years and deficits in lean years. What seemed sensible then, at least to many economists who believed a lack of demand was the cause of recessions and depressions, is now considered excessively growth-restricting, at least to adherents of Modern Monetary Theory, or MMT. After all, what are a central bank’s printing presses for?

Down with fusty old Milton Friedman, up with Stephanie Kelton, the Stony Brook University economist and adviser to Bernie Sanders who, if not the sole creator of MMT, is certainly its most evangelical enthusiast. Budget balancers are not only obsolete, but dangerous. Limiting fiscal policy to black ink in fear of inflation stifles growth. Recent experience with buckets of red ink proves deficits do not produce inflation. Better to run large deficits, reaping the benefits of rapid growth, until inflation rears its unlovely head, and then raise taxes to nip inflation in the proverbial bud.

Worry not that this year’s budget deficit is set to clock in at around $4 trillion, perhaps 20% of GDP, and the accumulated federal debt to top 100% of GDP. MTT, called “ludicrous … fallacious at multiple levels … [and from] fringe economists” by Larry Summers, former treasury secretary to a liberal President and the intellectual darling of the center-left, now drives economic policy, and not only in America.

With the supply side of the economy likely to remain in the ICU for quite a while, the ability of the central bank to produce paper money will exceed the economy’s ability to produce stuff people want to buy with those dollars. With too much money chasing too few goods – Milton Friedman’s formulation – prices will start to rise and the politicians will be challenged to gird their loins and do as the MTTers assume they will: raise taxes. We will then know whether MMT theory will survive that clash with reality. Or whether, instead, politicians prefer inflation to tax increases. In which case interest rates will soar as lenders demand to be compensated for the risk of being repaid in depreciated dollars. At which point those interest payments will consume so large a portion of the government’s budget as to be unsustainable.

Along with MMT the new policy alphabet soup includes UBI, or Universal Basic Income. Traditionalist (old-fashioned, obtuse, if you prefer) economists and policymakers believe the incentive to earn and spend drives people from the couch into the workplace, or into the lab in search of life-changing innovations. Supplemented by what Adam Smith taught and, lately, modified to incorporate what behavioral economists teach: man is more than homo economicus. The regard of others, empathy with the poor, religious belief, all affect behavior.

But replacing the need to toil with a government that is somewhere between Lady Bountiful and the Tooth Fairy, will reduce the incentives that make workers toil and capitalists’ animal spirits soar. Capitalism and its bourgeoisie “… have accomplished wonders …created enormous cities [and] … more massive and more colossal productive forces than have all previous generations taken together.” So Karl Marx tells us. With UBI in place, it would seem that capitalism would have to develop new incentives.

Not so, say UBI advocates, dismissing worries that their plan would be a disincentive to productive effort. COVID-19 has revealed that many Americans live on the edge of penury, among them workers we now realize are “essential” to the provision and delivery of the stuff on which we depend. Rather than fiddling with the programs that in combination we call “the welfare state,” give Americans money, conjured from thin air by the central bank rather than paid for with taxes (see MMT, above).

Prisoners of old theories, among them a few Republican legislators, worry that when such payments exceed the wages being offered by such as Amazon and Walmart, seeking 175,000 and 150,000 new staff, respectively, the unemployed have an incentive to remain work-free. The newly enlightened UBI proponents balance that risk against UBI’s benefits. They believe that a guaranteed basic income would relieve poverty and uncertainty without increasing the number of citizens preferring a government check to working, assuming the sum is set as a reasonable level, which in the U.S. policy discussion is taken to be about $1,000 per month for every man, woman and child, regardless of income. Besides relieving poverty, UBI would, it is claimed, free people to pursue more satisfying life choices, to “prefer the good to the useful … and cultivate … the art of life itself and … not sell themselves for the means of life,” as Keynes put it some ninety years ago.

Another policy that has moved from both the left and right fringes of American economics to center stage is managed trade. China has never worried about such minor matters as the efficient use of global resources, preferring instead a trade policy aimed at creating a nation rich enough to challenge the United States’ global leadership position. And, in the process, eviscerate America’s industrial base and decimate many of its communities.

Exit that old standby, free trade and its cousin, globalization. We are all Chinese now, although with less malevolent intent. As Nick Eberstadt, a political economist at the American Enterprise Institute put it in a paper for The National Bureau of Asian Research, to which he is an advisor, “…national interests and economic nationalism [have] come roaring back.”

Enter tariffs, stepped-up subsidies to pharmaceutical companies searching for means of coping with the coronavirus, government intervention to build redundancy into the health-care system and restrict exports of vital goods, broadly defined. And, by paying all medical costs of virus victims, whether or not insured, take a step closer to still another novel proposal, Bernie Sanders’ Medicare For All.

In sum, policies to balance budgets, maximize incentives to work and take risk, preserve free trade, and rely on the existing health-care system, are so yesterday. MMT, UBI, managed trade, and de facto health care for all are, well, so today.