COVID and the Myth of the Deficit – It is being destroyed (well, for the moment)

The Covid-19 crisis has clearly demonstrated what should have been obvious already: provisioning society – whether with food, disinfecting wipes, toilet paper or medical supplies – is not a financial issue. If we can’t produce enough masks, ventilators or food, finance will not help. Society’s capacity to produce real output is what limits its ability to provision itself. And this is precisely what the virus threatens, as workers stay home, supply chains break down and businesses shut their doors.

On the financial side, a sovereign government can always afford to buy what is for sale in its currency, as Modern Money Theorists have long explained. It cannot run out of money because it simply credits bank accounts when it spends. This is not a prescription, but merely a description of what actually happens. In the United States, Congress passes the budget, while the Treasury, in cooperation with its fiscal agent, the Federal Reserve, makes the necessary payments. This happens through the thick and thin of the business cycle, crisis or not. If the US government wants to buy more ventilators or masks, finance cannot be an impediment.

Buying into the deficit myth, for generations we have been living below our means – paralyzed by the belief that finance is the constraint. Prolonged periods of slack and jobless recoveries have disincentivized investment and hurt our productive capacity and labor productivity. Even in good times our economy leaves millions unemployed or underemployed and a significant amount of our capacity idle (before the epidemic, our factories were only operating at three-quarters of capacity). We have underinvested in public healthcare, education and infrastructure and imposed extreme limitations on social assistance programs. As of this writing, the administration still plans to go through with its plan to kick 700,000 Americans off the food stamps program to save a measly $4.2bn over five years. We have been living in “poverty in the midst of plenty”, as John Maynard Keynes aptly noted in the Great Depression.

Once this crisis passes, the deficit scolds will be back at it again, trying to put roadblocks in front of progressive policies. We will be told we can’t afford Medicare for All, Jobs for All, College for All or halting climate change. The centrists will try to get us back to “normal” – ie an economy that leaves so many behind.

Chosen excerpts by Job Market Monitor. Read the whole story @ Coronavirus has destroyed the myth of the deficit | Yeva Nersisyan and L Randall Wray | Opinion | The Guardian

JMM Editor notes : Well, wait a moment. Government are testing this theory (ideology) on a grand scale for the first time as it fits their political agenda … It is not the same to spend that money for 14 weeks as it is to make it a permanent program. We will have to see the results in real live … Are you so sure that there will be no austerity ?