'COVIDnomics' exceptional but conventional

Stephanie Kelton, a Stony Brook University professor and senior economic advisor to Democratic presidential candidate Sen. Bernie Sanders, has advocated for it as a way to pay for Green New Deal programs championed by many of the more progressive Democrats in Congress. But MMT remains unpopular with most economists.

Even under these unusual economic circumstances, and after Federal Reserve Chairman Jerome Powell said March 26 there will be no limit to its credit flow support, “MMT is not widely accepted at this point,” John Kessler, director of Purdue University Fort Wayne’s Center for Economic Education, said in an email.

“Modern Monetary Theory is not a new theory, but rather an old idea that printing paper money solves economic problems. I do not believe it is accepted at all among economists,” Marek Kolar, an associate professor with Trine University’s Ketner School of Business, said in an email.

MMT is based on the idea that a central bank can increase money supply without significant negative effects on the economy, he said. And increasing the money supply is a standard strategy for stimulating economic growth during a slowdown.

“According to accepted economic theories, increases in the money supply will result in a higher inflation rate, and in the long term may be counterproductive, because the central bank would be forced to fight inflation, which could lead to a significant recession,” Kolar said.

He and Kessler believe the United States may be in a recession, and Powell has acknowledged that may be the case.

“We may well be in a recession but again I would point to the difference between this and a normal recession. There’s nothing fundamentally wrong with our economy, quite the contrary, the economy performed very well right through February,” Powell told NBC’s “Today” show viewers late last month.

“You may well see significant rises in unemployment, significant declines in economic activity. But, there can also be a good rebound on the other side of that and that’s actually one of the main things that we’re trying to do by assuring the flow of credit in the economy and keeping rates low, to assure that that rebound when it does come is as vigorous as possible.”

Because a recession is defined as two consecutive quarters of negative GDP growth, Kessler said we will have to wait for an official recession declaration.

“Of course, we will have been living through it up to that point. We are in a serious situation because we have basically shut down a large portion of the economy; 70% of GDP is based on consumer spending. With people not spending money we are likely to see negative GDP growth for the next quarter,” he said.

“Whether that extends for a second quarter in a row depends on how long the COVID-19 shutdowns last and how quickly people get hired when we are able to move around again,” he said.

This decline is abnormal because it did not follow a weakening of the economy, but rather a public health crisis, which eliminated demand side activity, he said.

“Normally negative GDP growth shows that something is wrong with the economy. Right now though, I would suggest the normal economic indicators are thrown upside down,” Kessler said.

“If we see negative GDP growth, I would argue that is a good thing – it means that people are actually abiding by the CDC (Centers for Disease Control) guidelines and staying home. The question becomes how long will it last and how fast can we recover.”

The tanking of the IHS Markit purchasing manager index indicated a major slowdown in U.S. economic activity for March, Kolar said.

The Flash U.S Composite PMI recorded a huge decline to 40.5 in March from 49.6 in February, he said..

“The hardest hit sector seems to be services, which already hit a 4-year low of 49.4 in February, and now in March is at 39.1,” he said.

“This data seems to suggest that the slowdown in the U.S. economic activity started in February, most likely due to the supply chain problems caused by the production shutting down in China, and is now exacerbated by the shutdowns in the U.S.”

The intentions behind a $2 trillion stimulus package the president signed into law March 27 and the Fed’s credit flow support position them closer to a “helicopter money” economic stimulus strategy than MMT, Kolar said.

Among other things, the “COVIDnomics” package increased unemployment benefits by $600 per week and provided for economic stimulus checks to go out to individuals and households based on income.

Individual taxpayers making up to $75,000 annually in adjusted gross income will receive $1,200 and married couples who file returns under $150,000 will receive $2,400. The checks will include an extra $500 for each dependent child under 17.

Helicopter money can be described as a central bank directly injecting large amounts of money into the economy, “in contrast with its traditional approach of limiting its bond purchases with newly created money to only manipulating the interest rate in order to achieve its interest rate target,” Kolar said.

“I think the actions are consistent with what would be suggested by modern monetary theory, but the objectives may be different,” he said.

“I believe the current stimulus strategy aims toward avoiding, or getting the economy out of recession, while the proponents of the modern monetary theory aim, in my opinion, at creating money as a standard way of paying for a large share of government expenditures.”

In addition to Congress passing the Coronavirus Aid, Relief, and Economic Security Act, Kolar said the Fed has started buying Treasury bonds of various maturities — between $50 billion to $100 billion daily late last month – as well as mortgage-backed securities around $25 billion a day.

And the Fed was planning a special facility that will accept corporate bonds as a collateral in exchange for loans, he said.

Total Fed assets have grown to $5.25 trillion as of March 25 from $4.31 trillion as of March 11, showing it injected $940 billion of newly created money in the economy over two weeks.

The Fed Funds rate was brought down to a target range of 0% to .25% and the $700 billion quantitative easing program to buy Treasuries and mortgage-backed securities were put in place after so much spending stopped because COVID-19 safety measures put so many people out of jobs, Kessler said.

“You also have $500+ billion for small and large businesses to help them stay afloat during the shutdown. It is going to be easier to recover if we can keep the businesses alive in the short term, rather than having to raise them from the dead later,” he said.

“MMT would take these emergency measures and essentially make them everyday practice. MMT says that the Fed can just keep printing money until we have full employment, with no negative effects. This is questionable,” Kessler said.

“The Congress then would use fiscal policy to fight inflation by increasing taxes if there is too much money in the economy. Fiscal policy becomes an anti-inflation tool, rather being used to increase aggregate demand, under MMT.”

MMT proponents may point to the experience after 2008, arguing that the unprecedented increases in the monetary base designed to pull the nation out of the Great Recession produced no negative consequences during the following decade, Kolar said.

Without making comparisons to that period, he said many area employers could struggle during this downturn beyond the coronavirus lockdown because so many consumers will be in worse financial positions.

“We will most likely experience significant decline in consumer spending, which I believe will last for years, not months. I believe we will see similar impact in Indiana, as across other parts of the U.S.,” Kolar said.

“I expect retail stores and the automobile sector to be hit particularly hard and expect the service sector to be hurt much more than the manufacturing sector going forward. I expect more saving and a slow recovery in manufacturing, but a long-term decline in the service sector, especially relative to manufacturing.”

Kessler also believes we are in for a rough stretch and said how bad it gets will depend partly on how long we must remain isolated and how quickly we can get back to normal.

“We will have high unemployment rates and some businesses will go out of business in the short term. Hopefully the policies we have seen the Fed and Congress take will work to keep things going until we can get to the other side of the health crisis,” he said.

“Once that passes, I expect we will see some systemic shifts in people’s preferences and how companies do business. That will have an impact on what the economy looks like in the long run.”