In this nightmare vision of cats in revolt, fifteen-year-old Alex and his friends set out on a diabolical orgy of robbery, rape, torture and murder. Alex is jailed for his teenage delinquency and the State tries to reform him - but at what cost?
Modern Monetary Theory: What should the EMU make of it? Progressive Post
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In 2020, governments all over Europe and beyond have enacted unprecedented fiscal stimulus to keep their economies afloat amidst the pandemic. By the end of the year, a country like France will have engaged or guaranteed at least 300 billion Euro in 2020, the equivalent of four years of income tax receipts. Institutions of the European Union also rightly stepped up to the challenge. Most notably, the European Central Bank launched several bond-purchasing programmes to absorb the rising public debt on its balance sheet. Should the public debt sitting on central banks' balance sheet be considered a burden or an unfortunate tab that a country can get away with? This is in essence the question that Stephanie Kelton, one of the leading progressive voices in American academia, raises in her book The Deficit Myth (2020). Kelton's book, meant to serve as a manifesto for the 'Modern Monetary Theory' (MMT), primarily considers the nexus between fiscal and monetary policy in the specific context of the United States. In the wake of the Covid-19 pandemic however, Kelton's 'deficit myth' has, gained traction in the EU too. Notably with some policymakers who see MMT as a way to 'cancel' public debt. A misnomer rightly debunking misconceived views on fiscal policy As Kelton herself acknowledges (2010), Modern Monetary Theory is a 'misnomer'. MMT is indeed not a theoretical but rather a descriptive approach, which largely builds on the work of economists such as Georg Friedrich Knapp, John Maynard Keynes, and Abba Patchya Lerner. MMT primarily focuses on the role of fiscal policy in achieving macroeconomic objectives – such as full employment, low inflation, and lower inequalities – with monetary policy supporting these objectives in the background. In The Deficit myth, Kelton's argument relies on the following main claims:
- There are neither financial nor monetary constraints for sovereign countries. Kelton primarily focuses on the United States as a country issuing fiat money (government-issued currency that is not backed by a physical commodity such as gold), in a floating exchange rate regime where its currency is internationally accepted. In this context, governments can never default since central banks can always credit the accounts of banks holding public bonds. Accordingly, governments don't need taxes or borrowing to fund their expenditures.
- Fiscal policy should help balance the economy, not the budget. Kelton rejects the widespread view of the state's finances as equivalent to those of private households: borrowing, like taxes, is not there to fund public expenditures, but to attain targeted objectives in the economy, including achieving full employment, controlling inflation, or altering the distribution of income. Efficiency should be measured against the objective of bringing about policymakers' goals rather than against the ability of correcting market failures. In that spirit, Kelton proposes introducing a federal job guarantee scheme, which would create a market for jobs linked to building a care economy.
- The real constraint is not deficit, but inflation. Kelton clearly acknowledges that while deficit may not be a constraint on government expenditure, inflation is one that needs be taken seriously. Rather, productive resources are the real constraint as inflation will kick in when aggregate demand is higher than productive capacity. This kind of 'demand-pull' inflation, she argues, should be dealt with by raising taxes or cutting spending to reduce the available money in the hands of the taxpayer. A federal job scheme would also help reduce inflationary pressures by stopping companies from bidding up wages to attract workers.