InvestmentsNov 26 2020

How can modern economic theory inform the recovery?

  • Explain the the current state of the UK economy
  • Identify the implications of high government debt levels
  • Describe how MMT differs from other economic strategies
  • Explain the the current state of the UK economy
  • Identify the implications of high government debt levels
  • Describe how MMT differs from other economic strategies
pfs-logo
cisi-logo
CPD
Approx.30min
pfs-logo
cisi-logo
CPD
Approx.30min
twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
pfs-logo
cisi-logo
CPD
Approx.30min
How can modern economic theory inform the recovery?
Pexels/Pixabay

Now a second wave is under way, sparking a new round of national lockdowns, the chances of a V or U-shaped recovery are fast diminishing. 

It is possible we see a selective K-shape, where different parts of the economy recover at different speeds - for example, technology giants and their owners will expand their wealth, rising on the upward arm of a K-shaped recovery, but conditions for gig economy leisure, retail and hospitality workers will worsen as they descend the leg of the K. 

When the cost of living rises but wages do not, and jobs are hard to come by, many people invariably struggle. 

Historically this has also been a good breeding ground for populism - or even if we see a ‘Nike tick’ (a stuttering comeback over a long period) remains to be seen.

What is increasingly clear is that recovery across Western economies will be slow and patchy in some cases.

Certain industries will suffer more than others. Hospitality will continue to struggle as businesses operate reduced services in light of this second phase of national lockdown.

This means unemployment will rise, consumption will drop because people will be concerned over their job stability, and consumer sentiment will be low. 

In the UK, unemployment levels could rise to where they were at the end of the financial crisis, which was around 8.5 per cent. On top of that, Brexit tensions do not paint a pretty picture for recovery, as they add an extra layer of uncertainty, and potential cost, with which businesses and consumers have to grapple.  

In this challenging environment, MMT could allow governments to bail out their economies and keep people employed. However, the trillion dollar question is: can it work in practice this time?

There is no doubt that the ideas underpinning MMT will gain credence over the coming years. 

One of the biggest concerns of MMT relates to a central tenet: namely, central bankers passing over control of the printing presses to politicians

Politicians like our very own Boris Johnson and France’s President Emmanuel Macron have realised that austerity does not make for popular politics and is, arguably, ineffective, so they are keen to veer away from these policies.

Plus, they need to justify running larger deficits to support economies through this difficult period.

Nevertheless, MMT may not be a panacea for the problems we face today, or in the future. There are too many question marks. . 

One of the biggest concerns relates to a central tenet of MMT: namely, central bankers passing over control of the printing presses to politicians.

PAGE 2 OF 4