By Yiannis Kitromilides
Once upon a time, a magic money tree was discovered that instead of leaves had money on its branches.
People could just pick up the money from the tree and spend it without worrying that the money would ever run out because the tree created new ‘money-leaves’ all the time.
Sadly, the story of the magic money tree did not have a happy ending.
This was because the people soon realised that the money that grew on the tree was worthless.
They could not buy anything using the money they picked from the tree.
Nobody would sell anything for money they could pick up so easily themselves from the money tree.
In the end, the people realised that when everybody can have money from the money tree, nobody has money.
They call this situation when there is so much money about that money becomes worthless, hyperinflation!
The sad story of the magic money tree was soon forgotten but not entirely.
From time to time, responsible politicians, distinguished financial journalists and eminent academic economists had to remind those naïve and gullible members of the public that there is no magic money tree.
After all, sooner or later, children learn that ‘there isn’t a Santa Claus’!
There was, however, a strange twist to the tale of the magic money tree.
According to this other story, the government decided to nationalise the magic money tree. That was a very smart move.
Instead of a ‘free-for-all’, only the government can now pick up the money from the money tree.
The government could then spend it on things that the voters wanted: schools, hospitals, social welfare, civil servants, police, aircraft carriers, nuclear submarines etc.
Although there was no limit to how much money the magic tree could produce this did not mean that the government should spend without limit.
A golden rule of sound and responsible public finance was easily worked out: public revenue and expenditure must balance.
This came to be known as sound public finance.
Having discovered the ‘golden rule’ of public finance did the citizens of this land live happily ever after?
Unfortunately, again, there was still yet another twist to the long magic money tree saga.
Some distinguished financial commentators, esteemed members of various ‘think tanks’ and eminent academic economists were unhappy, not so much with the ‘golden rule’ itself but with the likelihood of its responsible application by politicians.
As long the magic money tree was in the garden, politicians would be tempted to abandon ‘sound’ public finance.
If, however, elected politicians are not to be trusted to act responsibly whom should society trust?
The almost unanimous answer by the experts was that the group in society that should be entrusted with the responsibility of maintaining financial stability was the bankers.
Without much ado, the keys to the garden where the magic money tree was kept were taken away from the hands of elected politicians and handed over to the unelected and unaccountable central bankers with a simple and clear mandate to keep the keys to the magic tree garden firmly locked up.
In 2008, when a financial crisis nearly caused the collapse of the global financial system, many people started thinking that the trust in bankers to maintain financial stability was perhaps misplaced.
Despite these doubts, nothing changed after 2008.
In March 2020, another global economic crisis arrived caused by the Covid-19 pandemic.
In response to this crisis, governments across the world started spending gigantic amounts of money without raising taxes or reducing spending elsewhere and the central banks have been signing the cheques!
A bewildered public started wondering where all this ‘jaw-dropping’ quantity of money is coming from.
If it is coming from the magic money tree is that not, as the public had been repeatedly warned for decades, a recipe for economic disaster?
Before the pandemic, a ‘heterodox’ economic theory known as Modern Money Theory or MMT, claimed that governments that issue their own currencies do not face financial but only real resource constraints in making spending decisions.
This theory was uniformly dismissed and derided as a naïve and dangerous fantasy.
Critics of MMT were quick to link the story about a magic money tree with the seductive promises of MMT that governments can spend big without raising taxes or cutting spending elsewhere.
Just as the magic money tree promises happiness (‘people do not have to worry about money anymore’) but delivers misery (‘worthless money and hyperinflation’) so does MMT.
Before mid-March 2020 suggestions that massive government spending on ‘progressive’ policies like preventing climate change, universal healthcare, decent retirement pensions, free higher education, could be undertaken without necessarily raising taxes or reducing spending in other areas, were dismissed as dangerous ‘nonsense’.
After Match 2020 ‘magic money tree’ economics became the only game in town.
Psychologists, sociologists, and other behavioural scientists speculate that the Covid-19 pandemic may have many wider and long-lasting effects on social and economic behaviour.
Concerning the future of economics and economic policymaking, the pandemic experience may bring about a profound change in the well-established and powerful popular narrative about ‘sound’ public finance.
A very plausible and credible conclusion that the public could draw from this experience is that if government spending that has not been ‘paid for’ can be used to deal with a crisis without the predicted financial Armageddon why can it not be used to prevent a crisis?
If governments, in an emergency, can do ‘whatever it takes’, without a financial constraint, why not continue with the same approach after the crisis?
Counter-narratives might develop.
For example, instead of considering public debt as a ‘burden’ on future generations, it may be viewed as a ‘benefit’ to future generations.
According to this new narrative, future generations may in fact be grateful that we did not stop making the necessary public spending to prevent, say climate change, for fear of unbalancing the budget.
The public perception of public deficits after the pandemic could change.
Public deficits of the scale experienced during the pandemic could be seen as solving rather than creating problems.
If that were to happen in a post-pandemic world, politicians and experts who demand ‘belt-tightening’ and austerity as a solution to the ‘deficit problem’ may be met with the same response as ‘the boy who cried wolf three times’.
Is Magic Money Tree economics here to stay? Time will tell.
The writer is an economist, academic