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The Re-emergence of Economic Sycophants
A good friend sent me the article below. It is worth a read, in light of the troubling times in the global economy. Written by Andrew Kordik, a Harvard scholar, it comments on the Biden Administration’s economic strategies in the context of policies from FDR to the present. I have highlighted key points in the article in blue. Kindly read the full article here:-
Welcome to the age of Modern Monetary Theory: It's turning conventional economics upside down
Who cares about the deficit? Biden's advisers embrace a hot new economic theory — whether they meant to or not
MARCH 20, 2021
Like Keynesians of yesteryear, Modern Monetary Theorists urge government to achieve full employment through fiscal policy, even when it requires deficit spending. Their comfort with large deficits emerges......
Their point is that inflation, rather than rising national debt, is the best indicator of whether deficits are too large.......
Deficits appear as virtuous public investments, while surpluses become scourges.......
When overspending does cause inflation, the MMT remedy is to remove money from circulation through progressive taxation, rather than by reducing spending and sacrificing the poor to unemployment. ....
Deficit spending is here to stay. Passing transformative legislation requires that Democrats finally become unafraid of debt.....
Modern Monetary Theory gives Biden an opportunity to break free from the Reagan-era debt trap....
When I first read the article above, I had the thought that within the economics profession, there has never been agreement on how the economy really works, and how it should complement political ideology. There will always be sycophants who will come up with ideas that can justify the economic actions of the current powers that be. As Kordik pointed out, during the Great Depression, John Maynard Keynes came up with a theory of economics that justified public deficit spending in times of economic downturns, and that guided economic thinking for a good half century. It was the central macroeconomic theory that even high school students learned as god-ordained wisdom 50 years ago. I was one of those kids.
And then Keynesian economics didn’t work anymore. Government participation in the economy led to government dominance and red tape. When this started to constrain the private sector, Reagan (and Thatcher) led a revolution to bring the economy back to a purer form of capitalism. Taxes and hence the ability to underwrite government spending were rolled back. A number of economists wrote up nice sycophantic theories why less regulation would lead to a resurgence of economic dynamism headlined as Reaganomics. For a good twenty years from 1980, that was the doctrine of the day.
Then in the last twenty years, 2000-2020, the unfettered economy led to the rise of, or shall we more accurately say, the descent into, a bifurcated economy where income and wealth inequality became widespread. A few hundred people held most of the wealth of an entire country of hundreds of millions. With the pandemic recession, the abject failure of an incompetent Trump Administration to do anything right, and the continuance of Reaganomics to an unsustainable extreme, have ended up with scenes of Great Depression breadlines in 21st Century terms – the destitute queuing up for food in fancy cars. How absurd is that?
It is evident that “Bidenomics” will have change all that.
In its opening salvo against the broken Republican strategy of leaving the economy to be run, not by capitalism, but by vulture capitalists who dominate in an environment of too little regulation, and who think nothing of being unfair to and uncaring of their downtrodden countrymen, the new Administration has its work cut out for them. Biden’s team, under Janet Yellen, an accomplished practitioner of public policy, has already succeeded in creating the legislative framework for massive deficit spending. And there are, as during FDR and Reagan’s inflexion points in American economic history, fawning followers who articulate new economic theories to justify the prevailing ideology. Or to rationalise away any fallout from inevitable mismatch of theory to actual reality. Mr Kordik pointed that out. The new rationalization of big spending to be hemmed in only by inflation, and not by a concern over the debt itself, is what Kordik has labelled “the Modern Monetary Theory”. Now, under this school of thought, it’s okay to spend more than you earn or own… Really?
There is nothing new in the “new” theory. It is same old, same old. Reaganomics no longer works, because there has been a problem of overshoot, as in all human endeavours, of people getting complacent with something that works and sticking with “why change anything if it works”. The proverbial pendulum swings too far. Until it is too late. It happened with Keynesian economics and now with Reaganomics.
Now, it is time to change Reaganomics because its failure, twice in just over a decade (the Global Financial Crises of 2008, caused by lax regulation over the financial industry, and the Pandemic Recession caused by a gig economy running on an unsustainable and vicious employment model without social safety nets), has already shown that it has become untenable in the circumstances of the 21st century global economy.
At the end of the day, whether it is adulating economists, genuine reformers or otherwise, it is not so important. Bidenomics may be just a left leaning departure from the Reaganomics which had favoured little regulation, low taxation and the rise of a class of the super-rich. The pendulum from the old Keynesian interventionist economics of FDR which also stopped working when left on inertia for too long, swung too far to the right and is now swinging back leftwards. The new economic policies of the Biden Administration may be just a tweak of the old models of Keynesianism and Reaganism. It is not entirely new, as propounded in the “Modern Monetary Economics”.
Let’s hope the adjustment works. My sense is that this is a necessary revival of government participation in the economy. Under Reaganomics, the disparity of income has become unsustainable and this new charge by Biden and his team back towards a more balanced distribution of the fruits of an entire economy has to happen before some kind of civil strife breaks out. It is in fact quite an irony, because the free-wheeling capitalist economy favoured by Reaganites has reduced the traditional Republican base in the rural areas of America to obsolescence, as Big Tech and the knowledge economy in the dynamic cities favouring Democratic ideas have forged ahead.
It is indeed time for change.
Wai Cheong
Investment Committee
The writer has been in financial services for more than forty years. He graduated with First Class Honours in Economics and Statistics, winning a prize in 1976 for being top student for the whole university in his year. He also holds an MBA with Honors from the University of Chicago. He is a Chartered Financial Analyst.
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