Page 11 - ISQ UK_October 2021

OCTOBER 2021

“ Fiscal stimulus is intended to halt this

snowballing and can be thought of as a bridge that

must be long enough to get to the other side. ”

the theory, while opponents say it has been set against a naïve tually try to get our fiscal house in order. That means having a
‘straw man’ interpretation of conventional macroeconomics. deficit that grows no more than GDP, which would stabilise
and begin to reduce the debt-to-GDP ratio. Achieving this could
Critics of MMT point out that it isn’t particularly ‘modern’ (such involve increased tax enforcement and debate about spending
ideas have been around for a while), it isn’t ‘monetary’ (we’re reductions, including entitlement reform. Increasing taxes will be
talking government taxation and spending, which is fiscal policy), difficult, but lawmakers could work to reduce ‘tax expenditures’,
and it isn’t much of a theory. It starts with its conclusion, unlike the $1 trillion-plus in tax breaks that are embedded in the tax
conventional economics which is built up from basic principles. code. The important point is that there’s no need to rush.

Conventional wisdom on deficits has evolved, but not due to MMT.
In the late 1980s, a decade of government borrowing had begun
to put upward pressure on long-term interest rates. Fed Chair KEY TAKEAWAYS:
Alan Greenspan had an agreement with Congressional leaders to • Both fiscal and monetary policy are used to support
lower interest rates if they moved to reduce the budget deficit. the economy. Fiscal policy refers to the use of tax
The first President Bush and President Clinton each signed legis- and spending policy to influence economic behav-
lation to reduce the deficit. iour. Monetary policy is the setting of short-term
interest rates (and also, in recent years, large-scale
In recent years, the conventional view has come to see more buying of Treasury and mortgage-backed securi-
leeway in government debt. The key is that real interest rates ties) to influence economic activity.
(the rate at which the government borrows adjusted for inflation)
should not exceed the growth rate of GDP on an ongoing basis. • In a recession, the loss of jobs and income leads to
reduced spending, which leads to further job losses,
WHERE DO WE GO FROM HERE? and further reductions in spending, and so on.
In July, the Congressional Budget Office (CBO) projected that the Fiscal stimulus is intended to halt this snowballing
federal budget deficit would fall from 14.9% of GDP in fiscal year and can be thought of as a bridge supporting aggre-
2020 to 13.4% in fiscal year 2021 (ending in September), and then gate demand while the private sector recovers.
drop to 4.7% of GDP in fiscal year 2022 and 3.1% of GDP in fiscal • Should we be worried about the debt? The key issue
year 2023. The CBO’s projections are based on current law and do is whether we can meet interest payments on the
not include the infrastructure bill, which would add a few tenths debt and whether we can roll over existing debt as it
of a percent of GDP to the deficit in each of the next few years. The matures.
important point is the deficit will be coming down significantly,
much as it did after the response to the 2008 financial crisis.
The federal budget deficit was on an unsustainable trajectory
before the pandemic, around $1 trillion and rising as a percentage
of GDP. We don’t have to balance the budget, but we should even-

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