Rethinking Monetary Policy for Public Good after the Pandemic

Government spending has been focused on the safety and security of societies around the world. Can this become the norm?

After a decade of austerity politics, world capitals suddenly seem happy to spend money. Responses to the economic pain and disruption of the pandemic and related public-health measures resulted in governments are passing relief packages of record size, numbering into billions of dollars. More relief is likely as governments continue to spend money to support social welfare and economies further.

New policy ideas are being embraced in this crisis — even ideas dismissed just a few months earlier. Both Spain and South Korea are seriously discussing the possibility of implementing a universal basic income that would survive past the immediate crisis. Central bankers are experimenting too: as Fed Chair Jerome Powell noted,

“[We’ve] crossed a lot of red lines that have not been crossed before … this is that situation in which you do that, and you figure it out afterward.”

Before the pandemic, governments steeped in ideological obsessions have long been sceptical of spending too much money. Even politicians nominally on the left-wing were wary of massive public programmes to resolve pressing social issues or provide basic needs, due to ideological constraints. The question “but how do you pay for this?” was common when discussing massive public programmes in both legislatures and in the media. This happened even over the past decade: an era, as the following diagram shows, of near-zero interest rates, and thus near-zero costs of government borrowing:

The ideological constraints that resulted in these historically low yields were three-fold. The first was a concern that public spending “crowds out” private spending: that massive government programmes would force competing private firms out of the economy, thus ensuring that markets rely too heavily on the public sector and the absence of creativity would change capitalism as we know it. The second was a general ideological wariness towards “big government”: in general, mainstream politicians and economists believe that goods and services, even critical ones, are best provided by the private sector wherever possible, which means jobs are created.

Finally, the left feels that increased spending must be carefully targeted and that without tough conditions and monitoring the money would fall into the hands of the so-called market makers, enrich the status quo and artificially inflate the stock market.

The pandemic torpedoes these beliefs.

In crises like this, government spending is the only thing that can keep things afloat. Refusing to support the economy means forcing people to go through economic pain longer than they should or allowing businesses to die.

Hesitance to go further meant that recovery from the 2008 Financial Crisis took at least a decade for some countries (if they ever fully recovered at all). This pandemic, which threatens to be a longer and deeper depression, should not be allowed to fester.

But more broadly speaking, it is not clear that the free market and the private sector is providing the critical goods and services that sustain economies and societies. More on this point will be discussed later in this piece, but in short: the private sector often does not put money where it can do the most good despite decades of insistence by neoliberal economists. Governments can and should spend money to support important economic activity and decision-making that the private sector is incapable or unwilling of making. But it must be directed towards addressing inequalities and solving other socioeconomic ills.

The peculiar thing is that the world was operating in an era of easy money throughout the 2010s. Central banks around the world slashed interest-rates to near zero levels to encourage borrowing and spending, only starting to gingerly increase them again in the past few years. While this had distorting effects on the private sector — such as the increased reliance on the stock market and venture capital as investors chased returns — it appeared to have no effect on the public sector, where spending should actually have been oriented towards the social good and wholly justified.

In fact, some countries had negative yields for their bonds in real terms: people were literally paying the government to take their money. It was a massive missed opportunity that governments did not seize that initiative to launch massive spending programmes, whether in basic needs provision, supporting important local industries, cleaning and restoring the environment, research and development or even just building and repairing infrastructure.

Governments need to start considering that loosening the purse-strings targeted at special provisions of public good may be the best option for countries even outside of major crises. When countries have excess savings, or when citizens want to buy government bonds as safe assets, governments should seize that opportunity and determine how it can be spent in order to best serve the public good particularly in the provision of important government services such as education and health care.

Not every country will always remain in this situation. Some countries have too much debt already; others may be offering unsustainable yields on their bonds; finally, others need to be wary of funding their projects through debt from overseas. But when countries have the opportunity to invest in their future, they should not let ideological constraints prevent them from doing so.

Many ambitious national programmes, from the “Green New Deal” in the United States to “Housing For All” in India have been constrained, if not dismissed entirely, by concerns that it would be too expensive. If governments suddenly felt free to unleash public spending, they could invest in necessary infrastructure, pay for public provision of basic needs and important public services, and invest in research and development to prepare society for future challenges.

They could embark on a programme to radically transform the economy to be better suited for a world marked by global warming, resource constraints, and even more pandemics. This would be money well spent and provide a good return, though would not be reflected in the stock market or the wealth increase of the 1%. Thus, the key is to target the spending and not allow it to be funnelled through existing market channels into the hands of the financial markets and, by extension, the wealthy. All of this also leads to the following question: is this the time to rethink the legitimacy of certain sacred cows of public spending? Citizens should be asking their government to cut bloated military spending — often a source of great corruption — and excessive and expensive infrastructure like massive airports and ports, or even excessive emphasis on digitisation, and instead direct money to healthcare, education, water and sanitation, ecological restoration, and food self-sufficiency. That would certainly ensure more balanced spending of the public purse.

Providing everyone with low-cost housing, for example, would give low-income families security, giving them more flexibility to invest in themselves and their households; assets that they can use to start their own businesses; and better health, expanding their ability to contribute to society. This expanded economic activity will help to pay back the public debt. Investments in these areas would help improve the quality of life for ordinary people. Public debt is not harmful if it is used to improve living standards and provide safety and security.