Covid 19 has hit the economy hard; But where is the recovery going to come from?

The simple truth is that the public sector might have to pick up the slack on the economy for some time to come if there is to be any chance of a recovery. And if we navigate this in the right way it can present an opportunity.

Modern Monetary Theory (MMT) holds that as the issuer of the currency the government can create money at will to invest and ensure a 'full employment guarantee'. Though this is limited by real economic constraints concerning the scale and nature of goods and services actually produced in the economy at the end of the day. In some instances there might also be inflation ; and you cannot 'create money' to fund an infinite influx of imports.

But full employment is in everyone's interests: so long as there is an 'efficiency dividend' which provides benefits for all ; and so long as consultation with unions ensures there is no endless 'wage-price spiral'. Higher employment has a 'multiplier effect' on the broader economy that also makes debts easier to service. At the same time, the wage share of the economy has been falling for decades ; and long term there is a need for a structural correction which could also create extra demand in the economy.

As part of this picture there should be reform of the labour market improving compensation in low-paid jobs – either with regulation, or through the social wage. (or both)

Modern Monetary Theory has been somewhat sceptical of the role of taxation, claiming it 'takes money out of the economy'. But this need not be the case if all that money is spent ; if indeed there is a stimulus. Taxation also allows for a much more finely targeted redistribution of wealth: which should be desirable for progressives.

As MMT theorists also recognise, state governments in Australia cannot issue currency.

The current public health crisis is going to cause much more pain before it is overcome. But the right kind of policies on investment, industry policy, welfare and stimulus can minimise that pain, and even help ensure in the end we come out of the crisis stronger.