12 March 2020

Economic considerations in the fight against Corona: Good measures require reliable data - these must be collected urgently

The SARS-CoV-2 (2019 novel coronavirus) is a great unknown compared to the seasonal flu. We still don’t have reliable infection rate projections, and the burden the healthcare system will undoubtably undergo is also currently undeterminable. Unsurprisingly, however, circulating throughout the media are numerous scenarios speculating on the seriousness of the virus, it’s effect on the health of the population, and what interventions in public life are necessary. This leads to uncertainty among citizens and presents decision-makers with difficult decisions. In a rather pessimistic scenario, a medium-term "infection" of two-thirds of the population and a mortality rate of 0.7 percent is assumed. This could result in nearly 400,000 deaths. If the infection numbers explode quickly, the healthcare system could also become overloaded and significantly more people would likely die. In another scenario ("Corona is like the flu"), 10 million people become infected and the death rate is "only" 0.2 percent. In this scenario, 20,000 people would die. The German healthcare system wouldn’t come close to its capacity limit and significant interventions in public life could be avoided. The truth probably lies somewhere in between these two scenarios, depending on the containment and prevention measures taken in Germany. Neither of the two scenarios currently seems absurd.


As a reaction to the virus, unprecedented countermeasures have been taken. In Europe, entire regions are now quarantined, borders are closed, and freedom of assembly is restricted. The right degree and timing of interventions in public life and the economy - and their potential relaxation - are also controversial in Germany. It’s become clear that essential information for good, proportionate decisions remains missing. If the measures are too lax and if they are implemented too late to curb the spread of the virus, the healthcare system will quickly reach its capacity limit and all seriously ill people cannot be adequately cared for. If the measures are too restrictive, social and economic life will be restricted longer than necessary. In the worst case, a severe recession is unnecessary triggered, with dire consequences for the community. The current stock market freefall provides a glimpse into such a situation.


Reliable data must therefore be collected as soon as possible. Vital information is still missing.

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06 February 2020

On Modern Monetary Theory

The availability of better (micro-) data has enabled modern mainstream macroeconomics to make substantial progress during the last decades. Surprisingly, however, some rather fundamental questions either remain largely unanswered or still lack satisfactory answers within the prevailing paradigm of economics. These deficiencies are regularly pointed out by lateral thinkers who propose alternative “theories” that often reside outside of mainstream economics. One such new macroeconomic theory is the Modern Monetary Theory (MMT), and it has recently attracted some attention in the press.


The MMT stems from the criticism that there continues to be no established satisfactory theory about the optimal level of government debt. It is rather remarkable that this is true. Policy makers in many countries seem to know better; they have recently been adopting stringent debt limits. In both Germany and Switzerland, for example, the constitution requires that nominal debt does not (systematically) increase over time. The USA also has a cap on nominal debt (the so-called debt ceiling), although it is regularly lifted via painful negotiations. It is astonishing that mainstream economics lacks the scientific foundation to contribute to this important debate on the “right” level of debt and on the sustainability of increasing levels of debt. On the other hand, it is equally worrying that scientifically unfounded tendencies towards “low” debt and limits to nominal debt have found their ways into constitutions. The MMT supporters have positioned themselves in this debate with the claim that high levels of debt are sustainable. This claim is based on the blunt observation that a government can always avoid defaulting on nominal debt denominated in its own currency by printing money, that is, by creating unlimited amounts of money to respect its debt obligations.


A second criticism of mainstream economics by MMT supporters is worth mentioning. It relates to the monetary transmission mechanism, that is, the question about how the actions of central banks affect the (real) economy. Mainstream thinking centers around the belief that central banks successfully affect the price level and inflation by adjusting (nominal) interest rates, thereby affecting the real economy, that is, consumption, savings and investment decisions. In fact, actual monetary policy around the world is still based on the assumption that this monetary transmission channel is powerful. However, recent research has shown that the empirical evidence for this channel is, at best, limited. The MMT thus correctly questions a central pillar of monetary policy. MMT supporters instead suggest that the real economy can be affected more effectively by relying on fiscal policy. The positive nature of the main MMT message may have contributed to the attention it has recently attracted not only in the US, but also in the German press (FAZ, Handelsblatt): full employment at “acceptable” wages can be achieved through expansionary fiscal policy, which, in turn, is sustainable if supported by monetary policy setting a sufficiently low interest rate.

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