A Permanent Wartime Economy
“Governments create money all the time. We do that for war.”
“This whole notion that you run government like you run a household…is a complete myth”
Economist Prof Mariana Mazzucato tells #Newsnight Government’s should address social issues through taxhttps://t.co/P0zxS1DNGF pic.twitter.com/I6NLtXgDqN
— BBC Newsnight (@BBCNewsnight) March 6, 2023
This is the argument for more money printing, and perhaps unlimited money printing, recently advanced by Professor Mariana Mazzucato on prime-time BBC.
Channeling Warren Mosler, the godfather of modern monetary theory, Dr. Mazzucato argues against “austerity”—by which she means any natural restraints on government spending. In order to spend, sovereign states need not “earn” tax revenue like a household must earn money, nor do they need to borrow.1 There is a third option: they can print new money at will and enjoy the profit of seigniorage. Just look at Germany, she says approvingly, which recently conjured up €100 billion by executive edict for the war effort in Ukraine!
She certainly is correct that governments print money to pay for wars. America was effectively born into debt during the Revolutionary War, and borrowed/printed money for every war thereafter.
But beyond that she is entirely and embarrassingly wrong. The fundamental reality is that more money does not create any new goods or services in the economy. Money is not wealth. Wealth is productive capacity; the ability to create actual goods and services. Germany and the European Central Bank can create euro stretching to the moon, but that will not produce a single missile or aircraft for the Ukrainians.
Actual production requires the allocation of real resources and real capital. Resource allocation requires choices, whether made by political edict or in the marketplace. In both cases there are inherent opportunity costs to not allocating those resources and capital to other uses. Politics doesn’t magically eliminate tradeoffs. Resources are scarce even when money is not.
A case in point, courtesy of economist Peter Schmidt: “During WWII, the Germans fielded an airplane that made every other airc
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