PAC: Why government should cut interest rates to zero and increase spending

The national lockdown is supposed to stop the spread of the virus, and I hope it is doing so already.

On the flip side, the lockdown has made money move slowly; it is a fact that money has practically stopped moving from buyers to sellers in those branches of the economy which are not deemed “essential services”. Sadly, it has come to a complete halt with respect to a specific category of people, the dejected and dispossessed: the economic nothing – those men who were at the red robot to sell a car-charger, newspaper; hawkers, trolley-pushers, and car-washers. Also those who earn their living through commissions; and the causal and temporary workers are affected. This large category cannot save money; it does not have the money to buy food to eat as we speak: their situation is hopeless under the lockdown. There is, properly speaking, money lockdown on their part.

Clearly, money pronounces itself as a vital part of the economy, now apparently the most important.

This brings us to the following proposition: that the monetary and fiscal policy tools should be used to counterbalance the economic consequences of the lockdown. It is proposed here that the South African Reserve Bank (SARB) through the Monetary Policy Committee (MPC) must cut the repo rate to zero and decrease taxes on the poor. An uncritical reader will quickly dismiss these propositions as theoretically problematic and practically dangerous for the economy. This reader, no doubt, belongs to the category of those who consciously or unconsciously subscribe to the current economic model, capitalism, and its caveats in relation to fiscal discipline and inflation targeting. After all, every economist graduates in a capitalist university. What could one expect!

But I want to assure such a reader that the proposition to cut interest rates and increase government spending has always been implemented throughout history for this or that reason; it is not necessarily a new proposition. When wars break out and governments need money to wage those wars, they increase their spending to buy arms, and naturally national debts increase. In other instances, we have historically seen nations such as Britain in 1815, and after world wars, with debts of more than 240% to GDP. Japan for more than two decades has kept interest rates at zero. I am not proposing a fantastic invention; I am proposing these measures to advance a war against hunger, poverty, diseases, and exploitation. Is that too much to ask?!

Having said this, I am not oblivious to the fact that adding more money into the economy may create inflation. Suffice to say that whether there is inflation, and the extent of it, depends on the amount by which more money is added in the economy and the uses to which it is directed as much as it depends on the resource capacity of the country, such as productive labour available. Of course, printing money beyond the nation’s resource capacity could be highly problematic. By increased spending I also do not mean the state needs to increase taxes on the poor to finance its spending; that (austerity) does not work, and the history of austerity by the International Monetary Fund and World Bank against developing nations deprives them of national economic development and becomes a strain on workers and the poor. An economy actually grows when people are engaged in productive labour and have money to buy commodities, not when more taxes are imposed on them.

In this connection, government spending should not be done merely on consumptive grounds, it must have in mind the idea of wealth generation. If, for example, government directed money to a community chicken farming project, the project would generate wealth and increase the state revenue in the long run, while sustaining itself beyond the need for help from government so that loan finances to this community are paid back. Thus, just like the state pumps billions of rands to keep SOEs so must money be pumped into value-creating economic activities.

I must stress that inflation does not follow automatically from the printing of more money: that would be silly to believe. It would be like saying that since the USA has signed a sum of $2.3 trillion (an economic stimulus) into existence, inflation will necessarily follow. Nothing of the (automatic) kind. The issue is one of creating the appropriate conditions for money increase (interest rate cut) to not create unnecessary inflation. This requires other mechanisms such as price ceilings, rationing and the central coordination of economic activity.

I have space to address these mechanisms here. The implication of the last condition is that the SARB cannot be assumed to be independent, as we are often told, nor has it ever been independent: It can either remain an instrument at the hands of ruling minority elites or be turned into the hands of the people.

Interestingly, if to appear to digress, capitalist principles are recognised (in a subtle way) as inherently problematic by the most developed capitalist economy, especially when dealing with crises. For example, the United States of America has a law (the Production Defense Act) which empowers a president to compel companies to divert their resources to much-needed uses, for example, to the production of sanitisers, ventilators, hospital beds, masks, test kits, etc – things that we really need right now. This very act recognises the inherent problem of selfishness of private corporations. It appreciates the disjointed – though not also the exploitative – nature of a capitalist system. It also unwittingly admits that “free market” principles – coordinated by demand-supply-price mechanisms, not by conscious socialist principles – cannot solve social and national crises. And this makes the case for central planning and coordination of economic activities more legitimate.

Cutting interest rates and increasing government spending must be an immediate plan, and giving the poor money in exchange for productive labour at the end of the virus could provide real temporary relief. Yet only a bold Africanist socialist democratic government can attempt these mechanisms.

Lunga Mantashe is deputy president of the Pan Africanist Congress of Azania (PAC)

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