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Untitled 1 ECON2050 Money and Finance Compulsory Essay Assignment (20%) Due Sunday, 03 May 2020, 11pm Instructions: The assignment is comprised of a review essay of two articles relating to what has become known as ‘Modern Monetary Theory’ (MMT). The essay must be written in your own words, and should be between 1,500 – 1,650 words. The assignment is worth 20 marks and accounts for 20% of the total mark for the unit. The marks awarded will depend on the quality of the reasoning exhibited and the ability to express the arguments in a concise manner. Submission: The assignment must be submitted online via the unit’s web page by 11pm on Sunday 3 May 2020. Please do NOT include this document in your submitted assignment. Plagiarism: Each assignment must represent the student's own work. In particular, this means that the written answers submitted by the student should be composed by that student. Copying of another student's answer or from textbooks, or getting someone else (with or without payment) to do the assignment for you, or part thereof, is clearly regarded as plagiarism. Cases of plagiarism will be dealt with severely. For further information on plagiarism and how to avoid it, please refer to the university policy about academic honesty and integrity. 2 Late submission: No extensions will be granted. There will be a deduction of 10% of the total available marks made from the total awarded mark for each 24- hour period or part thereof that the submission is late (for example, 25 hours late in submission incurs a 20% penalty). Late submissions will be accepted up to 96 hours after the due date and time. This penalty does not apply for penalty does not apply for cases in which an application for Special Consideration is made and approved. Note: applications for Special Consideration must be made within 5 (five) business days of the due date and time. Other requirements: Any font with a font size of 12. Referencing of sources is required. Probably the best method of referencing for economics is the so-called ‘Harvard Style’ – see: https://libguides.mq.edu.au/referencing/Harvard Make sure your name and ID are on every page of the submitted document. The Task: In recent times, an idea that goes by the self-anointed title of ‘Modern Monetary Theory’ (MMT) has garnered much attention. The purpose of this essay is to write a review of two cases, for and against, this idea – and then (in no more than a paragraph of 100 words), tell us which of these you find the most convincing. The two articles are: 1. For the ‘pro’ case, the Congressional testimony of L. Randall Wray, to the US House of Representatives Budget Committee, November 20, 2019. (You may want to start with the Introduction of this paper, and then the Conclusion and ‘Questions’ following the bibliography). 2. For the ‘con’ case, the working paper by Sebastian Edwards, ‘Modern Monetary Theory: Cautionary Tales from Latin America’, published by the Hoover Institution, April 25, 2019. You do not need to consult other sources – the purpose of this exercise is to evaluate the arguments of the protagonists and for you to then judge, not to survey the broader debate surrounding MMT. Untitled CONGRESSIONAL TESTIMONY: Reexamining the Economic Costs of Debt Hearing before the House Budget Committee, November 20, 2019 210 Cannon House Office Building Statement by L. Randall Wray1 Introduction In recent months a new approach to national government budgets, deficits, and debts—Modern Money Theory (MMT)—has been the subject of discussion and controversy.2 A great deal of misunderstanding of its main tenets has led to declarations by many policymakers (including Federal Reserve Chairman Jerome Powell and Japan’s Prime Minister Shinzō Abe) that it is crazy and even dangerous. Supposedly, it calls on central banks to just print money to pay for ramped-up spending. It is purported to claim that deficits don’t matter. It is said to ignore the inflationary consequences of spending without limit, and even to invite hyperinflation. None of these claims is true. MMT is based on sound economic theory. Most of it is not even new. Rather it represents an integration of a number of long-standing traditions that heretofore had not been linked. It does reach some surprising conclusions, but these conclusions are more consistent with real world outcomes that mainstream theory has trouble explaining. Further, a growing number of prominent economists and financial market participants have recognized that it is worth examining MMT. Its conclusions—especially those regarding the fiscal policy space available to sovereign governments—are being embraced by some policymakers. In this testimony I do not want to rehash the theoretical foundations of MMT. Instead I will highlight empirical facts with the goal of explaining the causes and consequences of the intransigent federal budget deficits and the growing national government debt. I hope that developing an understanding of the dynamics involved will make the topic of deficits and debt less daunting. I will conclude by summarizing the MMT views on this topic, hoping to set the record straight. But first let’s look at the indisputable facts. 1. Growth of government spending Despite all the talk of government spending running amok, over the past 60 or so years government spending relative to GDP has been rather constant. Figure 1 shows postwar growth of government spending, both on a per capita basis and relative to GDP. As we can see, federal 1 Senior Scholar, Levy Economics Institute and Professor of Economics Bard College, Annandale-on-Hudson, NY. He thanks Yeva Nersisyan, Associate Professor, Franklin and Marshall College, Lancaster, PA, for substantial help in preparing this document, and Eric Tymoigne for help with Table 1 and Figure 12. 2 Modern Money Theory itself is not recent; it has been developed and refined over the past quarter of a century. 2 government spending essentially stopped growing relative to GDP around 1960, while state and local government spending stopped growing around 1970. In 2006, just before the Great Recession, US federal government spending was 20.7% of GDP, only slightly above its value in 1960 at 20.1%. It had decreased steadily in the 1990s and only increased again due to the government’s response to the Great Recession. State and local government spending grew through the 1960s, stabilizing at around 11–12% of GDP after that. In 2019, state and local spending stood at 11.59% of GDP, slightly above its value of 11.35% in 1975. Figure 1 also shows that federal government inflation-adjusted per capita spending has been rising at a pace similar to growth of GDP per capita. If we remove Medicare and Social Security spending, federal spending has been growing at a slower pace than per capita GDP, indicating that much of the growth of per capita federal spending has been due to an aging society in which retirement and healthcare spending on the elderly has grown. To conclude: neither state and local government spending nor federal government spending has been growing rapidly relative to GDP and population growth. It does not appear that rising government debt is due to profligate government spending. 0 5,000 10,000 15,000 20,000 25,000 0 5 10 15 20 25 30 35 40 19 60 19 62 19 64 19 66 19 68 19 70 19 72 19 74 19 76 19 78 19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 20 06 20 08 20 10 20 12 20 14 20 16 20 18 U S D ollars% o f G D P Figure 1. US Government Spending, 1960‐2018 Total Government % of GDP Federal Government % of GDP Total Government per capita (RHS) Federal Government per capita (RHS) Federal Government per capita (without SS and MC) (RHS) Source: BEA for Government Expenditures and GDP; FRED for Population and author's calculations. Per capita spending figures are adjusted for inflation. 3 2. Federal government deficits and debt While politicians and commentators tend to talk about the federal government deficit as if it’s abnormal and a problem that needs to be solved, a federal deficit has been the norm for at least the past century. Figure 2 shows the federal budgetary outcome (deficit or surplus—with the deficit as a negative number) as a percent of GDP since 1930. There are several striking features worth noticing. First, the budget deficit reached above 25% of GDP during WWII, and then rebounded to nearly a 5% surplus when the war ended. After that, the deficit moved in an increasingly countercyclical manner—with the budget moving toward a surplus before each recession (shaded areas) and then turning sharply to deficit in the downturn. After the mid-1950s, surpluses virtually disappear until the second half of the 1990s—that is, over the past 70 years, deficits have become the norm—and they have increased on trend relative to GDP. Even the long recovery and expansion phase that followed the global financial crisis (GFC) has not been able to produce a budget surplus, as the deficit only fell to about 2.5% of GDP before rising even in the continuing expansion phase after 2015. Figure 2. Federal Government Deficit (-) or Surplus (+) as Percent of GDP, 1930–2018 Figure 3 shows the post-1970 outstanding federal government debt as a percent of GDP. With the exception of the second half of the 1990s, the ratio has consistently risen because debt has grown faster than GDP. Note that these deficit and debt outcomes are not due to runaway government spending—which has been relatively flat, as discussed in the first section. 1930 1940 1950 1960 1970 1980 1990 2000 2010 -30 -25 -20 -15 -10 -5 0 5 Pe rc en t of G D P Shaded areas ind icat e U.S. recessions Source: Federal Reserve Bank of St . Lou is fred.st lou isfed.org 4 However, as Table 13 shows, this is not an entirely new phenomenon. Even over the period 1791 to 1930, the debt-to-GDP ratio grew on average at a rate of 0.31% per year; since 1931 it has grown at a rate of 4.22% per year—for an average of 1.82% over the entire period. What has changed is the pace of growth. As Tymoigne (2019) shows, until the 1930s the main cause of more rapid growth was war