Executive Summary
This paper elaborates Modern Monetary Theory to achieve three goals: 1) critique the myth of sound finance in mainstream economics; 2) provide theoretical justification for the fiscal sustainability of the Chinese “New Infrastructure,” a 40 trillion RMB mega investment project that was just announced by the Chinese state media; and 3) propose a Chinese Green Job Guarantee to complement the “New Infrastructure” to eliminate unemployment, promote sustainable development, upgrade industries, and stabilize the Chinese society.
In 2013, a top-level Chinese leader elaborated his understanding of government finances, “What to do when facing economic downturn? To stabilize growth and employment, we have two options. One is to expand fiscal deficit and increase money supply to encourage investment. But though doing so may work temporarily, it requires fiscal and monetary policy spaces. More importantly, such short-term stimulus cannot be sustainable because our deficit to GDP ratio already reaches 2.1%. What does it mean? The European Union set a standard that deficit to GDP ratio must not exceed 3%. Of course, many member countries did not follow this rule. They exceeded it. The result is well-known: the euro debt crisis. From then [2008] till now [2013], some countries experienced even negative growth and expanding unemployment, and could not maintain its welfare that was in place before.”
The above “sound finance” view is clearly a reflection of the influence of the mainstream neoclassical economics in China, especially the mainstream theory of money and banking as represented by Milton Friedman’s Monetarism and Lucas’s Rational Expectation Theory. In these theories, government deficits are demonized, and large and persistent deficits are to be avoided. According to this economic logic, China’s 40 trillion RMB “New Infrastructure” plan is bound to be unsustainable.
However, this is not true. This paper uses two key findings in the Modern Monetary Theory (including Professor Randall Wray’s testimony to the U.S. Congress on November 20, 2019) to critique the theoretical myth of “sound finance” in mainstream economics. The purpose is not simply to argue for the fiscal sustainability of the “New Infrastructure” but also to help the Chinese government as well as other monetarily sovereign governments to liberate productive forces of its government spending. “New Infrastructure” is one way to achieve public purposes by intelligently using government finances. Other important reform policies, such as a Chinese Green Job Guarantee program can be another example of using government finances to address economic, environmental, and social issues in China.
