Should Corvid handouts be funded via tax or money printing?

Governments are handing out large amounts to the swollen ranks of the unemployed and to businesses large and small right now. Unsurprisingly there’s been some agonising about whether that will cause excess inflation and excess national debt in a few months’ or a year’s time: e.g. see this article by Olivier Blanchard (former chief economist at the IMF), and this by Dean Baker. (Title of Baker's article: "Debt and deficits with the Coronavirus", and Blanchard's article: "Whaterver it takes....".)
 
So what’s the answer to the latter “agonising” question? Well I suggest it’s more or less as per what I said in the right hand column of this blog on 16th April, which is as follows.

First there is the question as to whether the effect of Corvid related layoffs has raised aggregate demand (AD) relative to aggregate supply (AS). Well I suggest that if a group of people are told they can’t go out to work and continue making and selling stuff, then AD and AS decline by the same amount, roughly speaking. To illustrate, if someone is told they must stop making and selling £X of goods a week, then AS obviously falls by £X a week, plus the £X a week that that person would have spent on consumer goods will also decline by £X a week.

But that’s not the end of the story of course: as a result of that person’s unemployment, government will give that person £Y a week by way of unemployment benefit and perhaps other benefits. Ergo the deficit rises by £Y a week in respect of that person, while obviously £Y (or thereabouts) must be multiplied by the total number of people layed off to arrive at the total deficit, plus amounts handed to businesses must be added in, of course.

If that extra government spending (net of government income from tax etc) comes from plain old money printing, which certainly seems to be the case in the UK at the moment, then clearly there’ll be a sharp rise in the national debt or the stock of base money. As MMTers have long tried to explain, the debt and base money are essentially the same thing, the only difference being that debt is money that has been locked up for a period of time, and on which interest is normally paid. Plus MMTers sometimes refer to the sum of base money and national debt is “Private Sector Net Financial Assets” (PSNFA).

Now it’s a pretty safe bet that peoples’ weekly spending varies approximately with the size of their stock of money, or more generally with the size of their stock of “debt plus money” i.e. PSNFA. Certainly it is true to say that all else equal, the most reasonable assumption here (which could of course be wrong) is that the increase in PSNFA will result in excess demand and excess inflation in a year or so’s time, when things get back to normal, or at least something nearer normal than we are experiencing at the moment.


Conclusion.
 
So the conclusion is that the most reasonable thing governments should do (which in eighteen months or so could turn out to be the wrong thing to have done) is to start raising taxes to pay for the large handouts currently being given to the unemployed, businesses, etc. Certainly I don’t see the basis for the claim by Gita Gopinath (IMF chief economist) that we should plan for extra stimulus when the Corvid crisis subsides. (Title of her article: "IMF Urges Post-Pandemic Stimulus....".