A masked Japanese citizen is reflected in an electronic board showing stock prices. Photo: AFP

In a long career spent confronting mistaken economic-policy decisions, I have seen the harm done by slavish obedience to conventional wisdoms. Today the harm continues as economies try to cope with the damage caused by the Covid-19 pandemic.

This career began back in the 1970s, trying to oppose Canberra’s policies of forcing manufacturing industries into unbridled competition. The conventional wisdom said such competition was healthy.

The result today is that Australia has virtually no serious manufacturing left.

It continued when I crossed swords with a Japanese establishment that saw austerity as the only solution to the country’s post-bubble collapse. Japan has needed almost two decades to recover from that mistake.

Even qualified economists seem to have problems dealing with new and unexpected problems requiring out-of-the-box solutions. In the wake of the global Covid-19 attack, most seem to assume there are limits to the amounts the central authorities can hand out in rescue operations.

Yet there is a well-argued theory that says there are virtually no limits. MMT – modern monetary theory – says that nations with fiat currency and not burdened with overseas debt obligations can and should issue as much of their currency as is needed to rescue their domestic economies when in difficulty.

The only constraint is the risk of creating out-of-control inflation or hyperinflation – something most unlikely in the nations suffering deflation caused by the pandemic. In any case, the central authorities today have adequate control mechanisms if there are inflationary pressures. 

Despite all this, many remain tied to the conventional wisdom that says that funds can only be issued if there are commitments to repay. Even as governments and central banks mount rescue efforts promising handouts in the billions and trillions to overcome the economic harm caused by the pandemic, they feel obliged to say they expect or hope this money will be repaid some time in the future. Otherwise the value of the currency will collapse, they say. Some derisively criticize MMT theorists as advocating “helicopter money” – money that can be scattered at random throughout an economy.

For a time it seemed as if Japan could escape this mistaken thinking. A small group of MMT adherents under Osaka University professor Haruki Niwa has been trying for more than a decade to provide the theoretical basis for Japan to embark on massive fiscal spending to break free from its post-bubble slump.

It calls itself the Nihon Keizai Fukkatsu on Kai (group for the revival of Japan’s economy), and since one of its aims is boosting funds for the military, it has signed up a large number of Liberal Democratic Party members, including Prime Minister Shinzo Abe, as supporters.

This in turn could help explain Abe’s willingness to embrace heavy quantitative easing (QE) under Bank of Japan president Haruhiko Kuroda as a way to stimulate Japan’s moribund economy.

But conservative Japan suffers even more than most from conventional wisdom when it comes to problem of debt.

Now that QE spending has pushed Japan’s public debt relative to gross national product to a level seemingly much higher than in other advanced economies, conventional wisdom has begun to kick in, with Abe complaining there is a limit to the amounts he can approve to rescue his economy.

As Japan and the rest of the world edge closer to the brink of economic disaster, maybe it is time to get rid of this particular conventional wisdom.

Gregory Clark is a former Australian diplomat and then member of the Policy Coordination group in Canberra’s Department of the Prime Minister and cabinet handling economic affairs. He has also been a member of several policy-making committees in Japan and emeritus president of Tama University in Tokyo.