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February 10, 2022

Macro view: Covid-19 response did not lack funding

Some experts support Modern Monetary Theory (MMT) claims that finance is not a limited resource, and none of the institutional workings of public finance prevented the funding of the pandemic.

Pavlin R Tcherneva

Pavlin R Tcherneva, economist and associate professor and director of the economics programme at Bard College, and a research associate at the Levy Economics Institute and expert at the Institute for New Economic Thinking, retweeted an article shared by the Economic Democracy Initiative, on the global Covid-19 response supporting three key Modern Monetary Theory (MMT) claims about, money, unemployment, and inflation.

Tcherneva mentions in her working paper series that the central lesson that could be learnt from the government spending and post-pandemic recovery is that money is not scarce. Governments around the world appropriated their budgets without delay to meet the economic fallout from the Covid-19 pandemic. For example, in 2020, Japan passed a stimulus package equal to 54.8% of GDP, while in the US, it was equal to 26.9% and in Canada to 20.1%. Meanwhile, Italy, France, and Germany spent 10.1, 10.4, and 10.7% of GDP, respectively.

The first lesson she noted was that funding was always available, as governments budgeted anywhere from one-tenth to more than one half of their economies to fight the pandemic worldwide. However, she added that the way the large budgets were spent varied greatly across countries. The second lesson was that unemployment is a policy choice. Most governments appropriated their budgets to protect jobs and employ the jobless, but all of the countries came out with elevated unemployment levels. China, which provided unconditional wage guarantees to all workers. effectively became the employer of first resort.

The third lesson from the pandemic was that the large government spending is not the inevitable source of inflation. She stated that all evidence points at the current price pressures being a consequence of the global supply chain blockages, including the shutting down of factories, ports, transportation routes, slow production, a shift in demand from services to goods, and price setting in the energy sector by the Organization of the Petroleum Exporting Countries (OPEC).

Roberto Perli

Roberto Perli, head of global policy research at  Piper Sandler and former founding partner of Cornerstone Macro and a Federal Reserve senior staff member, shared his views on inflation versus recession based on a piece by Neil Irwin, chief economic correspondent at Axios. He tweeted that the best thing to do for the long-run prospects of the US economy was to wait it out if the Fed and policymakers were sure that it was caused by the transitory pandemic issues.

Irwin explains that the only real options the country has is to be patient or cause a recession. He further added that it was a pick-your-poison environment for the Biden team and the Federal Reserve, who are currently facing huge criticism and public discontent over the economic conditions caused by the pandemic flare-ups. In addition, the risk is that the discontent would magnify if policy choices led to a new recession.

Inflationary prices, supply chain blockages and labour shortages are likely to persist in 2022, and beyond, say experts. Meanwhile, the measures needed to bring down inflation would risk sending the US economy into a tailspin. In other words, the Fed’s choice to tighten the money supply could lead to a recession. As a result, companies cannot hike prices and workers cannot demand higher pay if the economy is shrinking and more people are out of jobs.

The Fed’s goal this time, however, is a soft landing, compared to a steep downturn in the early 1980s, with the gradual increase in interest rates, Irwin explains. However, there is no guarantee of when or how much price pressures will come down, even as the world economy recovers from the pandemic.

Jonathan Portes

Jonathan Portes, professor of economics and public policy at the School of Politics and Economics of King’s College, London and a senior fellow at the UK in a Changing Europe, shared the best summary of the scale of pre-pandemic pressures and funding requirements according to the Institute for Fiscal Studies and the Health Foundation by his former colleagues Anita Charlesworth and Paul Johnson.

The research looks at how much increase in health spending was required to provide the level of service it did in 2018, and how much it would need to modernise and improve for the future. The findings revealed that UK spending on healthcare would have to increase by an average 3.3% every year over the next 15 years in order to maintain the National Health Service (NHS) provision at current levels, and by at least 4% every year if services were to be improved.

Social care funding would also have to increase by 3.9% every year to meet the needs of an ageing population and an increasing number of younger adults living with disabilities. The findings are also suggested that cost pressures on the NHS were set to grow, and therefore, a long-term funding solution such as tax increases was required.

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