The Sunday Magazine

No need to worry about a deficit when the government can print money, say some economists

The economic shutdown in March quickly made people of all political stripes big believers in big government. Even deficit hawks were clamouring for more government spending to support the millions of people and thousands of businesses that suddenly found themselves in financial distress. That’s left Ira Basen pondering some questions: Where, exactly, is the government getting those boatloads of billions? How and when is it — or are we — going to pay it back? And has the pandemic put an end to the idea that deficit spending is a fiscal no-no? Here is Basen's documentary, On The Money.

‘Modern Monetary Theory gives us the power to imagine a new politics and a new economy’

Since the pandemic started, much of the world has been adopting measures from the Modern Monetary Theory playbook. (Getty Images/Gallo Images)

Balancing budgets, reducing deficits and eliminating debt: these priorities have preoccupied the minds of many Canadian politicians, economists and voters, but a different theory of macroeconomics is having a moment, as the world weathers a pandemic.

Modern Monetary Theory (MMT) proposes a shift in focus from a balanced budget to a balanced economy: one that offers full employment, a more equitable distribution of wealth and a social safety net for all who need one.

At the moment, there appears to be a rare consensus among economists, business leaders, and politicians of all stripes that governments have to spend whatever it takes to ease the pain for millions of Canadians suffering the aftershocks of the pandemic. That may be one of the reasons why MMT, which has been around for decades, is in the spotlight and challenging economic orthodoxy.

Modern Monetary Theory

Stephanie Kelton is an economist at Stony Brook University in New York and the author of an upcoming book — The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy. (Alex Trebus Photography/Hachette Book Group Canada)

Since the pandemic hit, much of the world seems to be adopting measures that come right out of the modern monetarist's playbook; central banks have put their printing presses on high speed, and governments have been piling up trillions of dollars in debt.

"MMT gives us the power to imagine a new politics and a new economy. It challenges the status quo across the political spectrum with sound economics," wrote Stephanie Kelton, an economist at Stony Brook University in New York, and the author of an upcoming book The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy.

At the core of the "deficit myth," Kelton argued, is the idea that deficits are bad for the economy, and that governments need to limit spending in order to achieve a balanced budget.

"Spending should never be constrained by arbitrary budget targets or a blind allegiance to so-called sound finance."

Balance economies not budgets

Modern monetary theorists are essentially looking to shift the focus of economic policy-making away from a preoccupation with balanced budgets. Their central argument is that any country that controls its own currency, as Canada does, can do whatever it wants with it, including printing as much money and ringing up as much debt as it needs to, in order to achieve a more balanced economy.

This ability to print money means that Canada will always be able to pay its bills, it can never go broke, or default on its debt, no matter how deep into the red it goes.

And for Canadians who are fretting about the size of our debt, Stephanie Kelton has a simple solution: we should just stop selling billions of dollars of interest-bearing bonds and Treasury bills to investors.

"The Canadian government never needs to borrow its own currency, ever," she explained in a recent interview. Instead, the Bank of Canada could purchase our debt, interest-free, "move it onto their balance sheet, hold it to maturity, stop issuing bonds and you'll be done with the whole thing." 

It might sound far-fetched, but Japan has been doing this for years. The bulk of its roughly $11 trillion US debt is owned by the Bank of Japan. Many economists disapprove, but Japan remains the world's third largest economy.

Inflation is the limit

Modern monetarists believe there is a limit to how much governments can spend. That limit is not the threat of insolvency or bankruptcy, but inflation.

"MMT distinguishes the real limits from delusional and unnecessary self-imposed constraints," Kelton wrote in her book.

Traditional monetary theory, developed in the 1960s by economist Milton Friedman, holds that injecting too much money into the economy inevitably will lead to hyper-inflation. They point to Germany in the 1920s and Zimbabwe and Venezuela today, as examples.

Steve Ambler is an economics professor at the University of Quebec at Montreal and the David Dodge Chair in monetary policy at the C.D. Howe Institute. (Émilie Tournevache)

But modern monetarists again look to Japan, which has been boosting its money supply for 20 years, and has seen no inflation. Similarly, central banks in the U.S., Canada and elsewhere have been printing money at an accelerated pace since the financial crisis of 2008, and inflation has consistently remained below two per cent.

"If inflation doesn't show up in the next three years or four years then maybe the modern monetary theorists are going to be able to come out and say, 'Hey! Look we were right,'" conceded Steve Ambler, an economics professor at the University of Quebec at Montreal, and the David Dodge Chair in monetary policy at the C.D. Howe Institute. "I'm just extremely doubtful that that's going to be the case because in the longer run, if we get back towards full employment, these huge money stocks eventually do become inflationary."

In the meantime, so long as global economies remain on life support due to COVID-19, there is little danger of inflation, and governments will continue providing what Stephanie Kelton describes as a "vivid, real-world demonstration of the power of the MMT way of thinking."

Print money, spend it, repeat.

Click 'listen' above to hear Ira Basen's documentary, "On the Money."

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