Saturday, May 7, 2022

No shortcuts to shared prosperity

The negative supply shock derived from the war in Ukraine has the double effect of slowing economic growth and increasing inflation. All governments and relevant actors, such as central banks, are desperate to find solutions to avoid this double curse. Suddenly, everybody has become again aware of the dangers of slow (or zero, or even negative) growth, and the costs of inflation.

An intellectual victim of this double concern is what we could call the "modern economic extreme left," or at least part of it. Two principles of this segment of the left in the recent past have been de-growth and "modern monetary theory".

"De-growers" have been correctly emphasizing that economic growth at the cost of natural resources has a negative effect on individual and social welfare. But the extreme recipe of "de-growth" as a consequence of this concern would only make it more difficult to fund the necessary investments to fight climate change, or the international cooperation needed to reduce emissions in a balanced way. Now with the crisis, there is a general awareness that we need economic growth to make debt levels sustainable, to fund public expenditure needed to fight the social consequences of crises, and to create employment without generating undesirable inflationary pressures.

Modern monetary theory argues that "normal" government spending should be funded by money creation, which is something that can easily be done by central banks. There are of course more realistic variations of this, such as using the money-printing machine to give money to vulnerable groups in cases of emergency. The bottom line though is a relativization of the costs of money creation, in particular the relativization of the risks associated to inflation. The war in Ukraine (and the supply bottlenecks after two years of a global pandemic) are a reminder that inflation has not been defeated for good and that it is a danger that free money would only exacerbate. Just giving money to people would mean more money chasing the same amount of goods, creating artificial excess demand that would trigger price increases. It may be difficult to control inflation when prices start to rise and beliefs and expectations create a feedback loop from which it may be difficult to escape.

Intellectually, the times should be better for other more realistic segments of the progressive movement, for example for a modernized social-democracy, one that adds to the traditional objective of building a strong welfare state, the objectives of individual dignity and environmental sustainability (compatible with improving living standards) in an interconnected world.

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