Covid-19 is laying bare the fundamental stupidity of our economic system. There is a better way.

All around the world governments are trying to weigh the economic and real world harm of effective suppression/mitigation strategies vs the potential danger of not effectively containing the pandemic. Given current circumstances, and the assumptions they operate under, it’s a legitimately difficult decision. Poverty is a killer too.

But it doesn’t have to be this way. We don’t have to be stuck in this awful “Sophie’s Choice” dichotomy between epidemiology and economics.

Governments could and should be able to focus on dealing with Covid-19, (or Climate Change, or whatever else comes along) without worrying so much about how it will affect the rate at which people attend sporting events, visit fancy restaurants, or go on holidays. Those things should be nice bonuses, things we worry about only after we have made sure we aren’t going to cook the planet or kill millions of old people in a 6 month period, and that people aren’t stuck in deadly, grinding poverty, unable to access the basic necessities of life.

The reason this isn’t so is because of the ideological monoculture in which politics operates, and in particular two (interconnecting) core assumptions of that monoculture:

  1. Governments must balance budgets
  2. You can’t just give people money, they have to earn it through labour (except bankers, the very wealthy and business owners/shareholders — but you aren’t supposed to say that bit out loud.)

Right now in Australia, where I live, and elsewhere, I am sure, the government is taking less drastic action than many of us would like, because, in large part, they are concerned that the economic effects (of, for example, shutting schools and large workplaces) will be outrageously bad.

Let’s leave aside the possibility that there’s either an irrational attachment to economic indicators, or a corrupting interest in the fortunes of the shareholding class, and assume they are acting in good faith their main concern is the economic impact on ordinary people.

Leaving aside the specific shortages of medical equipment and staff we might face (more on that later — but no one is suggesting doctors and nurses stay home), there’s no concern that we will lose the capacity to produce the food, housing clothes and other basic necessities people need. The fear is people will lose income, as non-vital economic activity (tourism, gallery visits, dinners in restaurants, concerts, strip clubs, conferences, guerilla marketing, call centres, paintball and laser-tag) and that will cause widespread suffering, as the people who provide these services are pushed onto inadequate welfare payments, which aren’t really enough to cover rent, bills and food- let alone a netflix subscription, a smartphone, a new car, or a musical instrument. Then people who make and sell shows, smartphones cars and synthesisers have less money, and a wave of contraction rips through the economy.

One answer would be to increase welfare payments, and/or make them easier to get (easiest of all just give everyone a UBI then claw some of it back from higher earners with income tax increases, but more on that later). But governments are afraid to do this, because they are committed to “balancing the budget” — matching spending and taxes (as are many UBI advocates). The idea being that if the government spends more than it taxes, it will, like a household, “go broke”.

This is both superficially convincing, and widely accepted, but fundamentally untrue. Governments don’t need to tax to spend in the same way that planes don’t need to flap their wings to fly.

If you couldn’t see planes, but you were familiar with birds, the idea that planes had to flap their wings too would seem pretty logical. The reality is that for most of us (including, disastrously, most economists and politicians) the complex interactions of the central bank, the financial sector, the real economy and the treasury, are equally obscure, so the lie lives on.

But. It. Just. Doesn’t. Work. Like. That.

Explaining how something *doesn’t* work, it turns out can be incredibly difficult. But there have long been people who tried. I just recently wrote a blog about how their macroeconomic thinking could be helpful at the current juncture. But since that’s only part of what I want to say today, here’s a TLDR version:

These thinkers can be grouped together as “soft currency” thinkers, as they all focus on the elasticity of the money supply, and usually object to the fact that in our current system banks have an effective monopoly on money creation, through loans, which are the ultimate source of all deposits. Every dollar available for spending in the real economy has an evil twin, made of antimatter, owed to the banks. But it gets worse. As Steve Keen points out, banks charge more interest on loans than they pay on savings, so the only way for the overall money supply (and therefore the economy) to grow is for the rate of money/debt creation to constantly accelerate — with enough new money entering to cover the ever growing aggregate interest payments, and fund actual economic activity. This leads inevitably to disaster, when new loans cannot be created fast enough and it all blows up, like now.

That is, unless governments tilt the scales. Often they do this by simply running deficits, which they can actually get away with pretty much indefinitely, since the money they borrow and spend grows the economy as a whole, shrinking the debt relative to GDP and tax receipts. In the postwar years of American plenty, this is exactly what happened. The US ran deficits nearly every year between 1950 and 1981, with government spending stable or increasing as a proportion of GDP, yet through this same period had a decline in the government’s debt to GDP ratio.

But the most prominent modern variant of soft currency thinking, Modern Monetary Theory suggests going even further. Pointing out that the government, as an issuer of currency, cannot go broke, and advocating that it kick the wall between fiscal and monetary policy down, “print” (or electronically create) money and spend that directly. Stephanie Kelton, is probably the most prominent thinker from this school (Steve Keen is pretty much a school unto himself).

The critics of this theory usually focus on the dangers of inflation. But MMT’ers are not blind to this danger. In fact arguably they see the issue more clearly than most. Inflation, in the MMT picture, occurs when the amount of money entering the system outstrips the productive capacity of the real economy — when there is too much money chasing too few goods.

So far, so good. Except that right now, a lack available of money isn’t the only thing preventing economic activity. The virus is, too. Productive capacity is shrinking along with demand.

Here MMT, and much of the rest of soft currency thinking, is tripped up by it’s acceptance of the *second* assumption that You can’t just give people money, they have to earn it through labour.

Right now, from the point of view of fighting the virus, MMT’s flagship policy, a federal jobs guarantee, designed at achieving full employment, is a terrible idea.

There might be specific jobs (producing ventilators and face masks, for example) which have a net positive effect on fighting the virus, but overall, what we want is for people to stay home, stay away from each other, stay away from office buildings (and the filthy buttons in the elevators) stadiums and bars and restaurants and malls and amusement parks and so on. We want, ideally, all deliveries that aren’t immediate necessities like food or medicine to stop. We want, essentially, the economy to contract.

But we don’t want people to suffer. Some suffering — the denial of these non-vital goods and services, kids missing out on trips to Disneyland and adults missing out on nights at bars — is fundamentally unavoidable. But another kind of suffering — the staff at amusement parks and bars losing the spending power that gave them access to food, clothes and shelter — is both qualitatively different — and fundamentally avoidable.

Technology means that, as a society, we can easily create and distribute the essentials of a decent life, food, clothes, shelter, clean water, electricity, bandwidth and so on using only a fraction of the total available labour force. But if you can’t sell your labour, you are denied these necessities. So people have to find all kinds of non-essential, but still “valuable” things to do (in the sense that someone will pay for them).

And so we have derivatives traders, and a huge excess of cafes, and bands, all connected in a kind of pseudo interdependence. So if (leaving aside the complications of a pandemic) the derivatives trader has a bad day on the markets, and doesn’t go watch the band play at the cafe, the cafe owner and the musician have their access to basic necessities (a place to sleep, food) threatened.

Just. Give. People. Money. Then even if the economy does contract, it matters less, since a small portion of the economy’s output can guarantee us all a decent life — so long as we all have access to it.

Now MMT’ers, and others who object to a UBI will advocate a more traditional, means tested, selective welfare system — one which you have to make an effort to access, a glitchy process which will always exclude some (as anyone who has dealt with the welfare system knows), and which are almost always designed to incentivise the most rapid return to work possible. None of those things are useful unless having people in paid work is treated as a good unto itself, as the only legitimate way for ordinary people to get money.

But wage-labour is, as current circumstances demonstrate, simultaneously the most vital and the weakest link in the whole economic chain.

One argument against the UBI is that it will involve giving money to those already earning plenty of it. The simplest way to solve this is just to increase income (and/or wealth) taxes on those people. That way you only have to measure their income once, at tax time, not twice, at tax time and at the point of provision of welfare — as pointed out by Alex Howlett, and an obscure, heterodox and even to a certain extent DIY economist, who advocates Consumer Monetary Theory, which, as far as I know presents the only systemic and sustained attack on both, these toxic assumptions (MMT only challenges the first, and UBI advocates only challenge the second).

It is thus uniquely positioned to offer us a way forward from our current impasse.

Originally published at on March 21, 2020.

Recovering journo. Still at war with bullshit. Cofounder of the Stone research transparency system.

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