Post-Neoliberalism

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Did We Do MMT During COVID? A Comment on Pavlina Tcherneva’s “Whatever It Takes”

In her piece, Pavlina Tcherneva proposes a taxonomy for thinking about macroeconomic policy over the last decade and a half, examining the “big three” policies deployed in the aftermath of the Global Financial Crisis: Big Money, Big Government, and Big Industrial. All three require use of the policy space afforded by sovereign currency. She examines the policy responses to the Global Financial Crisis and the COVID pandemic. What I take up here are the questions: 1) Why did the “whatever it takes” approaches yield such dramatically different outcomes to these crises, and 2) What, if any, was MMT’s role in those episodes.

Both the Fed under Benjamin Bernanke, and the ECB under Mario Draghi pursued a “whatever it takes” strategy to save the financial system. Both lowered interest rates effectively to zero, while the Fed lent and spent $29 trillion, rescuing not only the US financial system, but, indeed, the global financial system (Felkerson, 2011). Affordability was never a question—central banks cannot run out reserves. However, the problem was two fold: the bail-out came with few strings attached and with no significant reforms of the financial system (Wray et al., 2013). And while the Fed saved “Wall Street”, the lack of a proper fiscal response meant that “Main Street” suffered for a decade. 

When the COVID crisis hit, the ECB stood ready to do “whatever it takes”—and it worked, again—up to a point (Ehnts and Wray, 2023). By contrast, in the US Big Fiscal took the stage—under both President Trump and President Biden, for a total spending boost of about $5 trillion. While the economy had literally fallen off a cliff, with the biggest and quickest job losses the US had ever seen, recovery was the swiftest ever, aided by the trillions of dollars of relief. For a variety of reasons—including mixed messaging about vaccinations—the pandemic hit the US economy harder than Europe, but the Big Fiscal response meant a quicker recovery.

What the two episodes have in common is that they did not threaten the Neoliberal regime. Both rescues continued the long-term trend of rising inequality. And while MMT was invoked in both cases, the policy responses did not follow MMT’s recommendations. 

In the case of the GFC we recommended reform of the financial system as well as resolution—not rescue—of the insolvent financial institutions. We also advocated fiscal policy targeted to job creation. We opposed the main policy used by both the Fed and the ECB, Quantitative Easing, arguing that it would not boost lending (nor would that be recommended as a solution to excessive indebtedness). Furthermore, filling banks with excess reserves would only make them less profitable. And, finally, if the goal was to lower longer-term interest rates, all the central bank had to do was to announce a target rate for bonds. 

While the US did adopt Big Fiscal to deal with the COVID pandemic, it was not the policy we recommended because the spending was not well-targeted (Nersisyan and Wray, 2020). Still, the lesson that should have been learned is that just as Big Monetary policy can always be afforded, Big Fiscal policy is affordable.

What about Big Industrial policy? President Biden came into office with big plans to put the US on course toward environmental sustainability. Unlike the COVID fiscal response, there was no “whatever it takes”. This time, the big plans were whittled down by “pay-fors”: finding tax revenues to pay for the spending. Tying good policy to tax hikes is like throwing barbells to a drowning swimmer. Unlike the previous examples, Build Back Better seemed to contain unquestionably good policy—well-targeted, and socially, economically and environmentally beneficial. But all we got were some tweaks around the edges. Most of Biden’s proposals now sit at the bottom of the ocean. 

Is neoliberal policy dead? No. Indeed, it has been boosted again, this time by the inflation that followed the COVID downturn.

The Role of MMT

MMT is getting much of the blame for rightly pointing out that affordability is not the question! How could that be the case?

The interpretation by pundits, politicians, and many economists runs something like this: 

MMT has found a new way to finance government spending: “just print money”. Deficits don’t matter. Japan had been doing MMT for the past quarter century—running up record deficits and debt ratios. The US followed MMT when it just “printed up money” to pay for COVID relief. MMT says that there is no reason to worry about inflation, because once it appears all you have to do is raise taxes. No reason to worry about government debt because the central bank can just buy it all up. 

And of course, none of this has anything to do with MMT, which is a description of the monetary system, not a proposal of new financing methods.

Still, critics insist that MMT was wrong all along because it caused massive inflation. We cannot raise taxes to fight inflation because that is too difficult. Instead, the Fed had to fight the inflation with high interest rates. Now the deficit is exploding because of interest on the debt. Banks are failing because they are holding assets whose prices are cratering because of those high rates and because commercial real estate is underwater. And we are back to the orthodox refrain “We must get our fiscal house in order”. 

Though MMT has typically confined its analysis to describing how governments already spend, its policy proposals have yet to be tried. So, what policy approach does MMT actually take? 

1. Affordability. Yes, MMT does say that affordability is not in question, but what matters is resources, institutions, and political will. If we want to transition to green energy, the problem is not the dollar cost but rather whether we have the resources, technology, integrated grid for delivery, and political will to work toward the desired result. Further, all projects should be evaluated for inflationary impact—closely related to resource availability—rather than for budgetary impact. 

2. Inflation. Targeted spending along with careful analysis of resource availability can help to prevent inflation. In addition, the overall budget (including spending and taxing) should be formulated to ensure strong countercyclical movement. What this means is that government spending should go up when private spending is falling, and taxes should go up when private spending is rising. This ensures the budget is an automatic stabilizer. In the US, spending used to be countercyclical but it is much less so since we’ve largely dismantled the social safety net. Taxes remain highly procyclical, doing their job to take demand out of the economy when it is booming (Wray, 2019). 

3. Job Guarantee. How can we make Big Fiscal policy more anti-inflationary? The Job Guarantee: it automatically hires workers when the private sector downsizes, and sheds workers when the private sector hiring increases. It is a tremendously powerful stabilizer.

4. COVID Response. Sending checks to everyone was opposed by MMT proponents as the wrong policy. The COVID recession began as a collapse on the supply side (people couldn’t go to work), created a demand side problem (wages and profits were lost), morphed into a longer-term supply chain disruptions, and provided the opportunity for firms to exercise market power to raise mark-ups and monopoly profits. The right policies would have included: target spending to those who lost jobs so that they could pay bills; create public jobs to deal with the crisis (expanded meals-on-wheels, etc, to serve those in quarantine), eventually leading to creation of a universal JG program; spending to relieve supply chain problems (as was done in the case of some of the nation’s docks); and confronting price gougers (as President Biden has finally started to do).

5. Big Monetary Policy. MMT does not support use of monetary policy to manage aggregate demand; Big Fiscal policy is far better suited to that purpose. The Fed has one tool it can use—the overnight interest rate target (Fed funds rate). While the Fed pursued the correct policy for many months (arguing the inflation was “transitory”), it eventually began a series of what became a huge increase of the interest rate target. Its stated goal was to lower expectations of inflation by slowing economic growth and significantly increasing unemployment. This made no sense for inflation driven mostly from the supply side—raising rates was not going to relieve supply chain issues or produce more construction to relieve a housing shortage. In any event, the high interest rates did not perceptibly slow growth or raise unemployment. But inflation fell anyway—as it certainly would have done without the rate hikes because it mostly came from supply side problems. But those high rates are creating cascading problems throughout the financial sector (as rate hikes always do!) and for indebted consumers. Another financial crisis is not out of the question. Moreover, the rate hikes have fueled government spending on interest, thus increase the budget deficit and debt ratios. That fuels more worry about government debt—with an ever rising chorus of pundits predicting government insolvency and default on debt. The solution: take interest rate setting away from the Fed. Congress should mandate a low and fixed interest rate target. 

While COVID opened a window of opportunity for bold public action, none of the above policies were embraced. So, where do we stand with respect to the question about whether neoliberalism is dead? The deficit hawks remain in control. Wall Street is still shoveling wealth to the one-percenters. While one lesson may have been learned—government can “find” the money—the consensus is that we should not make full use of our Big Fiscal, Big Monetary, and Big Industrial powers to obtain an economically, socially, and environmentally sustainable future. 

 

References

Ehnts, D. H., & Wray, L. Randall (2024). “Revisiting MMT, Sovereign Currencies and the Eurozone: A Reply to Marc Lavoie”. Review of Political Economy, 1–15. https://doi.org/10.1080/09538259.2023.2298448 

Felkerson, James Andrew. (2011). “$29,000,000,000,000: A Detailed Look at the Fed’s Bailout by Funding Facility and Recipient”. The Levy Economics Institute, Working Paper No. 698. https://www.levyinstitute.org/publications/29000000000000-a-detailed-look-at-the-feds-bailout-by-funding-facility-and-recipient

Nersisyan, Yeva & Wray, L. Randall. (March 2020). “The Economic Response to the Coronavirus Pandemic”. The Levy Economics Institute, One Pager No. 62. https://www.levyinstitute.org/publications/the-economic-response-to-the-coronavirus-pandemic

Wray, L. Randall et al. (April 2013). “The Lender of Last Resort: A Critical Analysis of the Federal Reserve’s Unprecedented Intervention after 2007”. The Levy Economics Institute, Research Project Report. https://www.levyinstitute.org/publications/the-lender-of-last-resort-a-critical-analysis-of-the-federal-reserves-unprecedented-intervention-after-2007

Wray, L. Randall. (2019). “MMT and Two Paths to Big Deficits”. Challenge. https://doi.org/10.1080/05775132.2019.1668646

 


L. Randall Wray is a Professor of Economics and a Senior Scholar at the Levy Economics Institute of Bard College and the 2022-2023 Teppola Distinguished Visiting Professor at Willamette University, Oregon. He is one of the developers of Modern Money Theory and his newest book on the topic is Making Money Work for Us (Polity, November 2022).

Whatever It Takes: How Neoliberalism Hijacked the Public Purse

It was widely believed that the Great Financial Crisis damaged the core ideology of neoliberalism, and some hold that the response to Covid-19 finished the job. This view is mistaken. Instead, the extraordinary measures that pulled the global economy from the brink in both episodes not only revived neoliberalism, but also consolidated it. To see why, one needs to look at the nature of modern money and the use and abuse of public finance. 

The 2008 crisis did shake the economics profession. Mainstream equilibrium models do not account for the role of money and finance and had failed to predict it. Hamlet without the Prince is how Jan Kregel described this state of affairs a few decades earlier. Studying a market economy without its principal actor – money – was a farce. Meanwhile heterodox traditions, drawing on Keynes’s seminal work on money, were able to explain the crisis and the chronic failures of capitalism: mass unemployment, investment instability, financial crises and – as a result – pervasive and perennial economic insecurity. Worse, increasing financialization and global money manager capitalism only made insecurity more ubiquitous. As heterodox economists well understood, few if any modern households were insulated from the vagaries of high finance. 

But even in heterodox economic circles there was little understanding of public money and public debt as qualitatively distinct from private money and private debts. Insights into this distinction existed, but a coherent and accessible analysis emerged only with the development of the modern money approach, or MMT, which built upon Keynes’s Treatise on Money and the earlier doctrine called Chartalism, which understood money as a political entity (that is, as a creature of the state, and not only of the banking system).1 MMT debunked the dangerous notion that the public purse is just a larger version of a household budget and should therefore be governed with the dictum of good husbandry: “thou shalt not spend beyond your income”. 

MMT debunked the dangerous notion that the public purse is just a larger version of a household budget and should therefore be governed with the dictum of good husbandry: “thou shalt not spend beyond your income”. 

Public money – the currency itself (in physical and electronic form) is the final means of settlement of all debts. It is fundamentally different from other forms of money such as bank deposits and private promissory notes. It is issued by public financing institutions (central banks, treasuries, and ministries of finance). It represents perhaps the purest form of monopoly and is necessarily a public good available to all members of society. Until recently, most economists had not explored the implications of the unique nature of government money.

Money as a Public Institution

MMT played a role in some seismic shifts in thinking about the economy and in policymaking post-2008. Understanding money as a public institution – as a political artefact – changes everything. Governments that are sovereign in the control of public money are self-financing. One of MMT’s signature contributions has been to clarify monetary operations: the technical and institutional processes by which sovereign governments are already self-financing (i.e. using their own resources independently from private creditors). This, in turn, brings to light the funding limitations that non-sovereign monetary regimes face. MMT laid out a framework for thinking about the spectrum of monetary sovereignty – why some governments enjoy full monetary sovereignty and others do not. Monetary sovereignty is predicated on an explicit or implicit coordination between monetary and fiscal authorities while non-sovereign states on institutional firewalls designed specifically to constrain public spending.

MMT also overturned the traditional understanding of government debts and deficits. Public debts denominated in sovereign currencies are sustainable and free of any risk of involuntary default. Government deficits are the accounting record of non-government sector surpluses, while government debt is the net private sector financial wealth. Any attempt to wipe out one is an attempt to wipe out the other – there are no winners from erasing public deficits or debts; to do so is to erase private savings and net financial wealth, dollar for dollar and bond for bond. 

As the world watched the Big Monetary and Big Fiscal policies of 2008 and 2020 with bank bailouts and stimulus payments to households that appeared to defy then-prevailing economic wisdom, MMT easily made sense of government action: governments simply made free use of their monetary sovereignty. We are now witnessing the revival of Big Industrial policies in some corners of the world – a development engaging the same logic of financial sovereignty. And while these bold policies hold the key to a different economic paradigm, a post-neoliberal economic order if you will, far from undermining neoliberalism, the particular policies that were financed have instead thrown neoliberalism a lifeline. To understand why this is the case, we need to discern the constructive potential of big government spending and scrutinize the manner in which that spending is directed.

And while these bold policies hold the key to a different economic paradigm, a post-neoliberal economic order if you will, far from undermining neoliberalism, the particular policies that were financed have instead thrown neoliberalism a lifeline.

The big three (Big Monetary, Big Fiscal and Big Industrial) policies have demonstrated unambiguously that public finance is not scarce. The governments who responded most aggressively to the crises were self-financing and the extraordinary policy measures post-2008 did not diminish their capacity to respond to COVID. Far from it, the US, Canada, and Japan passed unprecedented postwar fiscal packages (26%, 20%, and 53% of GDP respectively) in just 2020.

To anyone who was looking, the crises were a lesson in the technical aspects of public finance: government spending does not depend on tax collections or private creditors, but on the legislative process and the coordination between public financing institutions to clear all payments. No wealthy households were asked to foot the bill, and no creditors were called upon to lend governments money. Governments created it, as they always do, by fiat, a process that is true in crises, as it is on any given day – no matter how small or large the expenditure. But COVID spending was large, large enough to concentrate the mind, bust economic dogma and reveal that money is fundamentally a public institution.

Areas like the Eurozone rediscovered, indeed reverse-engineered, temporary monetary sovereignty and a quasi-fiscal union to tackle COVID. The Maastricht criteria were suspended, public deficit and debt limits were lifted, and the ECB launched bond purchase programs that financed member states. Germany, Italy, France spent about 10% of GDP, which would have been impossible under the old rules.

Japan didn’t blink an eye. It had been using the big three policies for decades, all the while enjoying near zero interest rates and no possibility of government default, despite record debt-to-GDP ratios.

Let’s be very clear: 2008 and 2020 did not produce some fundamentally new paradigm in government financing. Whatever the political economy of money, and whatever laws, institutions, and power circumscribe government policies, there is a fundamental technical aspect of public finance that cannot be ignored: governments possess unparalleled spending firepower and those who have abdicated their monetary sovereignty scramble to rediscover it when faced with major crises. 

Governments possess unparalleled spending firepower and those who have abdicated their monetary sovereignty scramble to rediscover it when faced with major crises.

Meanwhile, the big three policies rarely reach the shores of the global south, where monetary sovereignty is often denied to countries already crippled by foreign denominated debt, fixed exchange rates, and all the legacy institutional trappings of colonialism. 

If 2008 and 2020 pointed to an existing monetary design that is most conducive to bold public action (a vital lesson for tackling the climate crisis), the next question then is, did the big three upend the neoliberal logic of the past decades and open the door to a more just and democratic social order. Here the answer is also ‘no’, even if the new “whatever-it-takes” financing paradigm provided a glimmer of what was possible.

“Whatever it Takes” Financing

“Whatever it takes” is how Mario Draghi described the new course he took in 2012 as President of the European Central Bank after four painful years of post-2008 austerity continued to rattle financial markets. It was a promise that the ECB would now act as a fiscal backstop to (most) member states, largely removing the fear of government default. But the goal of ECB lending and asset purchase programs was to lower bond yields and stabilize bank balance sheets, not to enable greater fiscal action geared to restarting growth, achieving full employment, and alleviating poverty.

Big Monetary

“Whatever it takes” was at the heart of the Big Monetary policy in the US. Since the Fed acts as market maker for government debt, risk of government default was never the problem. To stem widespread bank illiquidity and insolvency, the Fed lent against and purchased an unprecedented level of distressed financial assets. As I explain here and here, the success of these measures was largely due to the ‘fiscal components’ of monetary policy, meaning that the Fed has no unilateral ability to purchase assets (even if it has unlimited financing capacity) without the authorization of Congress and support of the Treasury. Meanwhile, Congress worked hard to constrain conventional fiscal policy. The logic of austerity ruled over government spending in a sovereign currency regime (US), just as it did in a non-sovereign one (Eurozone), even as public finance was abundant and flowing for the purposes of stabilizing financial markets. 

The difficulties with relying on Big Monetary policy were clearly understood by central bankers themselves. 

“Is this the best way to allocate liquidity”, Draghi asked “if you have in mind objectives like climate change or reduced inequality? Probably not. In fact, some of the new ideas like MMT… would suggest different ways of channeling money in the economy… so we should look at them.”

In his academic work, Ben Bernanke had also argued that monetary policy of the kind he himself pursued in 2008 would have muted effects on aggregate demand. Coordination between monetary and fiscal policy, a “Rooseveltian Resolve”, and a willingness to abandon failed paradigms are needed to “do whatever it [takes] to get the country moving again” (p. 165, 1999).

But the possibility of coordination between the Federal Reserve and the Treasury was clearly rejected by the mainstream as a radical new proposition – allegedly for fear of politicizing the purported neutrality of monetary policy. Only MMT zeroed in on how monetary and fiscal policies already coordinate, allowing for more aggressive fiscal action. What was required was for Congress to act.

The end result of Big Monetary policy was a far more consolidated and more difficult to regulate financial sector. Shadow banking continued to grow and now holds almost half of the world’s assets. The “whatever it takes” approach did not transform monetary policy in any fundamental way. If anything, it stands ready to roll out new forms of unprecedented support (e.g. SVB and Signature bank full deposit insurance and subsequent takeovers). A monetary policy approach based on “whatever-it-takes-to-rescue”, without “whatever-it-takes-to-regulate” has made the financial sector more unwieldy and more systemically dangerous.

Big Fiscal

As Bernanke and Draghi intimated, financing Big Monetary policies with fiscal components is not fundamentally different from financing conventional fiscal policy. The currency is a public monopoly, and the ECB and the Fed cannot run out to money. See Draghi and Bernanke’s unambiguous statements on this point. What MMT clarified is that public financing institutions create public money in the act of spending and lending, and extinguish it in the act of taxation and loan repayment. Spending and lending must come first, as the currency must be injected into the system before tax payments or bond purchases could take place. The large-scale asset purchases post-2008 and the large-scale fiscal policies during COVID were financed the same way. 

The return to fiscal policy was a welcome development and it delivered the fastest postwar recovery in the global north. In some ways, the experiment with Big Monetary policy unwittingly made the case for Big Fiscal policy during COVID. “Whatever it takes” is what the US government did to provide broad-based support to businesses (via tax credits, capital injections, firm loans), households (via generous income support and expanded healthcare) and industry (e.g., airline and other transportation services relief). Some European governments guaranteed the payroll of threatened workers and avoided mass layoffs. The US expanded unemployment insurance and healthcare coverage and passed universal child allowance in 2021.

For a brief moment in a highly uncertain time, for many families, economic security seemed possible. But all of that was temporary. In the US, as the policies expired, child poverty spiked, millions lost their healthcare eligibility, and work requirements for public assistance returned. In Europe, the most generous and equitable health system in the world faced an onslaught of problems and is further being threatened by the post-COVID budget crunch. Around the world, health systems are either nonexistent, weak, or have suffered legacy disinvestments.

Big Fiscal threw the global north a lifeline but never reached the global south. Neither did it address economic insecurity in any fundamental way. As it retreated from providing stronger safety-nets, it morphed into Big Industrial policy. While this turn is largely motivated by national security interests, many hope the strategy would deliver enough good jobs and the green transition. This too will be a dashed hope.

Big Industrial

Industrial policy is not new. China, Japan, and South Korea have long pursued successful industrialization strategies. What is new is the scale and scope of its revival in the US and Europe after decades of neglect and underinvestment. “Whatever it takes” is what produced COVID-19 vaccines on short order. Yet, companies which received public funds for their development and production refused to waive their patents. Vaccine apartheid blanketed the globe. The neoliberal market logic prevailed. A public health problem was being tackled by engineering a market mechanism and profit opportunities for a technology that was publicly funded and widely hailed as a global public good.

This is the fundamental logic of all industrial policies that followed, from the CHIPS and Science Act and Inflation Reduction Act in the US to the Green Deal Industrial Plan in Europe. It’s the Washington Consensus with a twist: rooted in free market principles but with fiscal guarantees.

This logic is nowhere more evident than in the de-risking approach to Big Industrial policy, which reifies the price signal as a solution to social and economic problems. Governments have enlisted large private capital, including institutional investors and private equity by way of devising risk/return profiles of investments in areas that were previously considered uninvestable (e.g., the green transition, healthcare, public utilities). The approach has ‘worked’ only insofar as public financing institutions (central banks, treasuries and ministries of finance) have stepped in to provide the necessary backstops to private finance thus shifting private risks onto public balance sheets.

This financing regime has created the appearance that the state needs private finance to pursue key policy objectives, whereas it is private finance that needs the assurances and guarantees that only the state and its public financing institutions can provide.

When the de-risking regime meets the “whatever-it-takes” public money regime, the New Industrial state is reproduced by the forces of financialization, consultification of government procurement, and mega contracts to price-setting firms. The planning system, as Galbraith put it, remains firmly in the hands of the big tech, big finance, and big multinational corporations. And all of it is underwritten by the public purse with devastating consequences for democratic governance.

This financing regime has created the appearance that the state needs private finance to pursue key policy objectives, whereas it is private finance that needs the assurances and guarantees that only the state and its public financing institutions can provide.

As MMT helped explain the financing operations behind the big three policies, it suffered a peculiar fate: it was held responsible for these policy experimentations and the subsequent inflation. MMT-informed policies of course were never tried. There was no consideration of an open-ended job guarantee policy, transition to Medicare for all, the downsizing of the financial sector, or permanently low and stable interest rates. What MMT did reveal is that the inflationary paradigm is the current one: the “whatever-it-takes” public-money-for-private-benefit paradigm; the very same paradigm that revives whole industries that depend on predatory pricing and labor practices.

What MMT did reveal is that the inflationary paradigm is the current one: the “whatever-it-takes” public-money-for-private-benefit paradigm; the very same paradigm that revives whole industries that depend on predatory pricing and labor practices.

Meanwhile, “whatever it takes” has never been the approach to economic development in the global south or to fighting economic insecurity in any corner of the world. There isn’t a single place in the world where investments for social or climate needs are fit for purpose. There is already a retreat from climate commitments, and the deficit and debt myths are again weaponized against essential public programs. 

And yet the “whatever-it-takes” paradigm has illustrated unequivocally that public finance is abundant for funding democratic priorities too. It has shown that we can stabilize labor markets, eradicate poverty, provide public goods and relative economic security. At bottom, we don’t need to find the money. We have it. What we need is a way of emancipating the public purse from the neoliberal logic and using it to finance a comprehensive framework for structural transformation. Because the question of “How will you pay for it?” has already been answered. With public money. 

 

Read L. Randall Wray’s response to this piece “Did We Do MMT During Covid?” at this link.

 

Footnotes

1. For the history of the articulation and development of this approach see Pavlina Tcherneva, “Chartalism and the Tax-Driven Approach to Money”, in A Handbook of Alternative Monetary Economics (Edward Elgar Publishing, 2007), Ch.5.

 


Pavlina R. Tcherneva is Founding Director of OSUN-EDI, Professor of Economics at Bard College, and a Research Scholar at the Levy Economics Institute, NY. Learn more about her and this EDI symposium on our About page.