COVID-19 has thrown the world’s economies and government coffers into turmoil. In many countries, unemployment has spiked and is expected to remain high as certain sectors, like retail and travel, are forced to reconfigure their business operations. Many expect a wave of business bankruptcies. School systems, from kindergarten to university, are in crisis.
The way economies have weathered the pandemic, so far, has been through very muscular interventions by the world’s central banks. To address the economic damage done by COVID-19, governments have borrowed, in the aggregate, trillions of dollars from central banks, using the money to do everything from prop up falling asset values across the board (from equities to commodities to real estate), to providing safety nets for unemployed workers and assisting businesses in their efforts to stay solvent until the crisis passes.
Borrowing such enormous sums of money means that other urgent needs will have to go unmet, at least from many traditional economic and budget-planning perspectives. Take the U.S.: It still has major problems with the runaway costs of health care. Medical insurance in the U.S. is still not available to all citizens, a problem that both major political parties know needs to be resolved (though only one seems to be interested in resolving it). There is a gargantuan $1.6 trillion student-loan debt crisis that hobbles young adults at the starting lines of their adult lives, preventing them from taking steps toward home ownership, starting families, and investing for the future. Americans are now split over the value of a four-year degree — bad news in a democracy, which depends upon educated citizens to stay strong and avoid the siren songs of populism and demagoguery. There is a pressing need to add to, repair, or replace a good deal of infrastructure. Massive debt makes it harder to address all of this.
The same is true on a global scale. According to estimates from the UN, OECD, and others, climate change is expected to cost trillions in the coming decades, as the nations of the world address sea-level rise, coastal erosion, and other damage from more frequent and more powerful storms, droughts, and mass migrations. And I’ve not even mentioned the costs of future epidemics and pandemics. Again, the debt taken on during this period of extreme crisis makes it more difficult to address future emergencies.
But it doesn’t need to be this way.
The mechanisms that the world has created to financially support our way of life — to have airports, universities, highway systems, centers for the arts, and so on — can provide the resources to meet all of the stated needs. But we must recognize that they do not have the capacity to address the costs of what I call “Force Majeure Global Catastrophes” (or FMGCs), catastrophes that make it nearly impossible for states to meet the needs of their peoples and care-take the natural ecosystems over which they have stewardship. Indeed, what would the world do if the WHO announced a new pandemic? Where would the money come from to address its costs, as we are still trying to address the costs of the current pandemic and the other pressing needs of various populations?
It is only sensible that the world create a “scheme” or “mechanism” for global sovereign debt forgiveness, worked out in a protocol which will establish triggers for forgiveness of sovereign debt assumed solely in relation to FMGCs. In such a case, the scheme would require that the world’s central banks (though no other person or entity) forgive the principal amount of the debt due to them by the world’s governments (ultimately, the taxpaying citizens) — essentially the creation of what I will call a “jubilee mechanism,” to borrow the term used in the Hebrew scriptures. The creation and implementation of that jubilee mechanism would, of course, require legislative cooperation and action, and it would be best done — and this is a crucial point — in coordination with other nations.
A strange or eccentric idea? Such a mechanism sounds morally problematic and economically destabilizing, but it should sound no more so than the ability of central banks to create fiat money by typing a few characters on a keyboard, as is presently the case — money that inflates or re-inflates asset values/prices, usually to the benefit of those wealthy enough to own such assets in the first place.
The apparent moral qualm has to do with the common notion that this is not how either businesses or individuals normally resolve debt assumed in good faith, pursuant to a contractual and moral obligation to repay. But the jubilee mechanism does not concern normal periods or normal economic activity or normal business-cycle downturns. Nor am I calling for the more-sweeping debt forgiveness proposed by economist Michael Hudson in a recent Washington Post article.
Again, my proposal is concerned with the potentially horrendous economic and social impact of an FMGC. The forgiveness would be extended only by one class of holder of debt: the central banks. Debt forgiveness would be tantamount to or analogous to the forgiving of debt to oneself. Central banks are chartered by and are creations of states (countries), and the people of those states have the ultimate right to determine when a debt burden they have placed upon themselves, in order to respond to an FMGC, is too much to bear.
The jubilee mechanism would permit a substantial level of debt to be removed from the balance sheets of states, as well as from the central banks’ balance sheets. It would rescue taxpayers from the burden to resolve debt that arose through no fault of their own. Who wins? Everyone.
The central banks would still be empowered to create money, as they were chartered to do, and their operations would continue unhindered. No other holders of the referenced government debt would be affected since the forgiveness would be limited to the sovereign debt on the central banks’ balance sheets. Governments win because they could then address the important needs mentioned above. Politicians win because they would not need to propose legislation that would raise taxes enormously and thereby risk the public’s ire and their offices. The macroeconomies and the markets win since more money would be available for capital expenditure and private innovation and entrepreneurship.
Yes, there is some macroeconomic risk in the short run, as bond and other market participants scramble to assess the overall impact of debt write-off: What would be the effect on the credit ratings of the states that write off, and might they be disparate between states? In the case of the U.S., would its currency remain the world’s reserve currency? Would market participants worry that legislators might find ways to redefine FMGCs as including less-exigent economic and human crises? Might market participants game the system, in anticipation of such write-offs, in ways not foreseen? Might some countries game a jubilee mechanism to benefit themselves at the expense of other countries? These are good questions, but I think deft policy planning can address them satisfactorily, if imperfectly.
But in the long run, the main macroeconomic impact would be that a government would be able to redirect the money required to pay a portion of its public debt toward important programmatic initiatives (including foreign aid) that would yield long-term economic benefits.
Who loses? It’s not who, but what: It’s the fiction that the architecture of the financial system controls us, rather than us it. The jubilee mechanism would reclaim agency from impersonal and blind market forces that would otherwise, like a garrote wire around the necks of nations, strangle them. These market forces are usually beneficial, as the inflammatory response in the presence of an infection in the body can be beneficial. But there are times when both can be harmful unless controlled and managed.
What about Modern Monetary Theory? you might ask. It holds that my worry concerning the level of debt is largely pointless; as long as all that extra money injected into the system isn’t leading to inflation, there is little to worry about. (Economist Stephanie Kelton argues this point at some length in her recent book, The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy.) For MMT proponents there really is virtually no limit on the level of debt or deficits that the government can bear, or that the central bank (in the U.S.’s case, the Fed) can maintain on its balance sheets.
I am not convinced that this is the case. For one thing, the notion that the Quantitative Easing (QE) effected in response to the Great Recession has had no inflationary impact may be true by common measures of inflation, but here we have, perhaps, a distinction without a difference. It did lead asset prices like stocks and real estate prices to spike in a way that showed a disconnect from the real economy. While this is not “inflation” as commonly measured, it has had effects that have eroded, by comparison, the wealth and purchasing power of the vast majority of people under the top tier of income earners and wealth holders. On the other hand, the holders of assets such as equities and real estate were made whole or even placed in a better position than before the economic shock hit. For the rest, these assets have been priced out of reach.
Of course, there is an argument to be made that re-inflating asset values after major economic downturns using money created at keyboards in central banks places many employers and the more wealthy individuals in society in a position to continue to provide jobs and spend to support the economy. But, again, the greatest benefits of QE seem to accrue to the benefit of the wealthy, contributing to the further widening of already large wealth and income gaps.
What MMT gets right is that policymakers may be overly concerned with balanced budgets and overall debt levels. As Keynes taught us, there are times when adding substantially more debt, if not a virtually unlimited amount of debt, may be beneficial to meet public needs. But MMT theorists are wrong when they say that debt can be converted into something that bears little indicia of a moral obligation, a real promise that requires repayment through the market activities of the real economy. Instead, we need a mechanism to address enormous public debt loads added in response to rare FMGCs. The creation of a jubilee mechanism to address heavy government debt burdens caused by the coronavirus pandemic and future FMGCs should be created without delay.
David E. McClean is a Principal with the DMA Consulting Group in Hauppauge, New York, a lecturer in philosophy at Rutgers University–Newark, and a member of the Board of Trustees at The New School.
This post was originally published in a slightly different form on LinkedIn.