Three Moral Reasons Why Economics Will Not Save Us

Three Moral Reasons Why Economics Will Not Save Us
Three Moral Reasons Why Economics Will Not Save Us

When the economy goes down, monetary theories start circulating. Since most people dislike austerity, today’s most popular theory is spending the nation out of its crisis.

The popularity makes sense in a world where no one wants to suffer toward a solution. Magic solutions are much preferred, as all pain is thus averted. Throw another multi-trillion-dollar stimulus package at the crisis and everything will be all right.

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Such theories never work in the real world. But reality has never stopped people from engaging in  wishful thinking. Memories prove very short when dealing with the optimism of printing up ever-greater amounts of money. Economic pseudo-dogmas die hard, and each sect has its fanatical followers.

Looking for Moral Reasons Outside Economics  

Perhaps the most enduring false dogma is that only economic theories must solve economic crises. To these people, major problems are resolved by money manipulation, fiscal policy or Federal Reserve tool kits. A mechanistic approach of tweaking the system is their solution to getting things back on the right track.

However, the focus of economics is limited to a very specific part of human activity. It describes the process of wealth creation, acquisition, production, and consumption. These economic processes often involve moral actions outside the realm of the dismal science, but which must be considered.

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People need to understand that bad moral decisions can cause economic problems. Crises often occur in an atmosphere of moral decay that zaps people’s strength and character. Recoveries stumble because people lack the virtue to sacrifice for the common good.

Monetary theories will crash together with economies unless reinforced by morals and sacrifices.

An Economy Needs a Moral Climate

There are three moral reasons why this financial crisis will prove modern monetary theorists wrong. No one denies that economic factors must be considered. However, these three moral reasons are much more important and drive to the present problem’s core. They point to causes, not just the effects of human action.

The first moral reason these theories will fail is that every economy needs a moral climate to flourish. Without this climate, there are no conditions for economic laws to work properly and for society to flourish.

The Case of Friedman’s Monetarist Theory

One monetary theory that relies upon a moral climate is the monetarist theory associated with economist and Nobel laureate Milton Friedman. His theory holds that the money supply is key to pulling out of a crisis. By tweaking the amount of money in circulation, Fed money printers can adjust supply to hold down unemployment and inflation and spur maximum growth.

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The theory can prove helpful in times of crisis. Injecting money into an economy can increase liquidity. Contracting the money supply can rein in inflation. However, the dynamics of money circulation depend on money’s velocity, which is the speed at which money changes hands in the markets. An increased yet steady velocity signals healthy growth.

Velocity of Money Is Crashing

Economists admit there is little the Fed can do to regulate velocity since it involves a psychological factor that depends upon how consumers feel about economic prospects. A climate of confidence and stability depends upon a moral society that practices justice and temperance in its economic affairs. On the contrary, when things are out of balance, consumers will be reluctant to spend or save money. When dishonesty and distrust exist in the economy, it hinders growth.

Thus, pumping money into an economy will not guarantee a jumpstart. The pre-COVID economy was already receiving massive cash infusions to little effect. Since the 2008 subprime mortgage crisis, the velocity rate has steadily declined. The value of one injected dollar on GDP stood at $2.00 in 2006 just before the global financial crisis. In mid-2009, at the crisis’ lowest point, it crashed to $1.70. In early 2020, the rate stood at $1.37. Some economists fear a collapse of the dollar, which could take the velocity rate under one dollar and trigger a deflationary spiral.

The Intemperance of Modern Monetary Theory

The second reason why modern monetary theory will fail is that an economy depends on the practice of temperance. Through the virtue of temperance, individuals govern their natural appetites and passions following the norms prescribed by reason and Faith.

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Postmodern economists promote what they call Modern Monetary Theory or MMT. It represents an explosion of frenetic intemperance. They believe that governments can spend much more than they take in. They claim that the size of the federal deficit does not matter for countries like the United States that borrow in their own currency. Governments can issue new money, using mechanisms like the Federal Reserve, to self-finance their budgets.

Promoters claim that once MMT has liberated the country from the shackles of budgetary constraints, governments should use taxes as an inflation control instrument, not as a federal revenue generator, and to achieve broad socioeconomic equality.

Most conventional economists hold that MMT is absurd because it does not deal with the long term and creates an atmosphere of uncertainty and distrust that destabilizes markets. Moreover, the MMT fantasy has never been tested. It puts the economy in the hands of enlightened politicians who could care less about America’s future as long as their political prospects can be enhanced today. It avoids the temperance and joy of living within one’s means at both the individual and national level. Meanwhile, no one answers the real question of who will pay down the federal debt that intemperance has created. The can is just kicked down the road.

Economies Need Prudence

The third moral reason modern monetary theory will fail is that economies need prudence.

Prudence is the virtue whereby individuals apply right reason to decisions and actions. In its natural form, prudence introduces those norms of experience, common sense, and balance that make an economy human, flexible, and practical. For this reason, prudence is also called practical wisdom.

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Modern economy already suffers from a lack of prudence. Years of neglect of right reason have yielded a system full of debt, deadwood and bad fiscal policy. These ills were dragging down the economy before the COVID crisis. It is not prudent to use the same old tools to jumpstart an economy that needs an overhaul.

The Multiplier Effect

One imprudence is the issuing of new debt at unprecedented levels amidst a contracting economy. This year’s national federal deficit of $3 trillion, augmented by COVID stimulus packages, will total more than the cumulative federal debt from presidents George Washington to Bill Clinton. This new debt will take America over the 120% debt-to-GDP ratio threshold now held by countries like Japan, Italy and Lebanon. It is at the highest level in American history, including the 1946-post World War II ratio, the previous record.

The monetary theory of John Maynard Keynes says that deficit spending stimulates stalled economies. He claimed that each government dollar spent should generate what he called a “multiplier effect” of goods and services worth more than a dollar. The higher the multiplier effect, the more likely the spending would pay for itself in growth and tax revenues.  The velocity of money would likewise grow.

Strong evidence suggests that when the debt-to-GDP ratio exceeds 90%, it reaches a threshold that negates Keynes’ multiplier effect. It clogs up the economy and takes the multiplier effect below one dollar of growth. This, in turn, leads to increased debt burden and interest rates. Default or austerity measures could follow.

Moral Solutions Needed

Modern economy needs moral solutions to its problems. The theories and specialized tools are limited in what they can do. What America needs is a moral foundation upon which to build its economy. The sooner America realizes that these Band-Aid solutions do not work, the closer the nation will be to the true solution: a return to a virtuous order.

However, these solutions do not come without sufferings and sacrifices. This return entails a rejection of the frenetic intemperance of today’s hyper-consumer society. It means a return to the permanent institutions of family, community and faith that keep society and economy in balance. Above all, moral solutions favoring economic abundance mean living lives in conformity to God’s law. Anything else is wishful thinking.

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