The third method of financing is called monetary financing or monetization of public debt. It is popularly referred to as "money printing. As in the previous method, the government borrows, but not from the private sector, but directly from the Central Bank. The Central Bank creates money in the accounts of the government.
In terms of inflationary pressure, these three methods do not differ from each other: we are convinced that what matters is the total amount of spending, not how it was financed (although traditional economic theory, which assumes complete control of the state over the supply of money, believes the opposite). The government can spend billions of rubles on aluminum and collect billions of rubles in customs duties on textiles - this will not stop price increases, it will only expand them. By financing deficits by issuing bonds, the government provides depositors with a security that can be used as collateral to create more money, which in turn will provoke inflation
. Monetary financing, in terms of its macroeconomic effect, is no different from financing from "earned" government revenue.
The legalization of monetary financing would ease the tax burden on the economy and decouple the cost of interest payments on the national debt from the banking sector. It should be noted that the provision of spending through the conditional sale of frozen National Wealth Fund balances to the Central Bank is also essentially monetary financing, but with an intermediate stage.3. Increasing government spending.
Having stopped artificially restricting itself, Russia will be able to conduct a sovereign economic policy aimed at improving the welfare of the population.
In recent years, Russia has traditionally underutilized the possibilities of fiscal policy. Over the past twenty years, government financial injections in almost every sphere could have improved the lives of the population and accelerated economic growth. Today we face global, long-term, and severe supply-side constraints in many industries. Modern monetary theory cannot help here - it is a crisis of real resources.
However, by following the principles of "austerity"
and cutting spending, we will exacerbate social tension, bankrupt many enterprises, and massively reduce demand. This will be a second, internal blow to the production potential of domestic companies, which will significantly reduce the rate of both current and potential growth. The government's current plans call for freezing nominal federal budget expenditures at the 2022 level for the next three years.
Budget support should be directed primarily toward the least well-off citizens. Supporting aggregate demand through social payments may lead to short-term inflation against the background of objective production constraints, but over time, a strong domestic market will help local producers expand production of consumer goods.
A state program is needed to create inexpensive social housing. Affordable housing will support competition
in the real estate market and create leverage for consumers to influence developers. Large-scale investment in construction will create jobs and support import substitution in the light industry by increasing demand for Russian building materials. The provision of housing will also become an additional tool for labor management in the labor market.
Social unemployment benefits should provide a decent livelihood. A large part of Russia's population is not able to stay for a long time in search of jobs due to lack of savings and low benefits, which doom people to marginalization in the event of job loss. This prevents competition among employers and forces workers to accept low wages and unhealthy working conditions. Reform in this part is necessary and inextricably linked to the expansion of benefits.4. Reform of the labor market.
It is necessary to eliminate the large bonus part in the actual wage. Bonuses allow companies to cut costs following market fluctuations: instead of firing people, companies cut actual salaries
. This contributes to corruption at enterprises and blunts incentives for technological re-equipment. Adjustment to external fluctuations should take place primarily through fluctuations in the number of people employed in the private sector, rather than through manipulation of the bonus part of the wage. Bonuses should not be taken into account in the calculation of the minimum wage.
The capacity of trade unions must be expanded and strengthened. Labor conflicts must be resolved on a legal basis at the enterprise level, including through strikes and other forms of protest by workers. Strong independent labor is the key to healthy competition in markets and the best way to undermine paternalistic relations in enterprises.
The right to work should be enshrined in the Constitution. The program of guaranteed public works at the municipal level should acquire a permanent institutional status and support temporary jobs in the areas of urban improvement, capital repair, and environmental projects at a flat wage rate. Jobs should be made available to everyone who is willing and able to work: in this way the state would become the employer of last resort. Unlike simply expanding government employment, the program carries no serious corruption risks: by definition, decent jobs will be available to everyone
Guaranteed jobs will set the floor for wages and social support in the private sector and increase competition in labor markets. The government will be able to effectively manage wages, enforce labor rights on the part of private companies, and avoid the reduction of the working capacity of the population due to long-term suspension of labor activity (this will also help preserve the supply of quality labor for the private sector in periods of economic recovery). In addition, the formation of labor reserves of various skill levels will also help in the implementation of programs related to forced import substitution and overcoming the social consequences of the Special Military Operation.5. Import substitution.
Budget expenditures should focus on the technological re-equipment of enterprises. The main problems arise in those areas where equipment is manufactured for highly specialized, project-oriented applications. Parts for such goods are difficult to import substitution, so enterprises should be temporarily switched to Russian-made analogues, if they exist, if possible. Such changes will lead to a decrease in productivity, but will buy time to re-evaluate the possibilities of import substitution.
Stratification by category of importance is necessary. The possibilities of internal design and manufacture of technical products are not unlimited. The available production capacity is ample, but insufficient given the scale of forced transformation. We should strive to localize all stages of the technological cycle at least in key industries
, including civil aircraft construction, the oil and gas industry and the chemical industry wherever possible.
In the short term, it will be useful to take advantage of China's and India's manufacturing base. Russia will partly continue to rely on technological support from friendly countries. When replacing imports, a high degree of personal responsibility on the part of government officials as well as the introduction of public control mechanisms are particularly critical.
Our long-term goal should be not military but technological mobilization, unequal to traditional import substitution. Effective work in this direction will allow enterprises to interact with new technology markets, share knowledge, and attract foreign capital. The need for massive investment in science and education is self-evident. Support for science in Russia, unfortunately, will often be equivalent to support for the least well-off citizens.
Limited foreign currency proceeds must be spent on goods that cannot be reproduced within the country. The state has no financial restrictions on spending in rubles, but there are very real restrictions in foreign currency. For the sake of these goals, a ban on imports of luxury goods and other low-priority products is reasonable.6. Initiative budgeting.
The collapse of the social protection system in the Russian Federation has facilitated the development of a number of grassroots civic initiatives. Many of the goals of public policy - assistance to the elderly, sick children, landscaping, and more - are already being implemented to some extent on the resources of citizens themselves. Such organizations represent the interests of the residents themselves and have often already discovered optimal supply chains and methods of support. State intervention would be ineffective.
Part of the state financial resources should be transferred to the municipal budget for proactive budgeting. Area residents can participate directly in the allocation of funds through the tools of direct participatory democracy
. Categories of jobs created under employment guarantee programs can also be supplemented and adjusted during public discussions.7. New methods of fighting inflation.
The main inflation risks over the next 5 years will be on the supply side. Manipulation of the rate under such conditions is not an effective method of controlling inflation, and its frequent changes only increase uncertainty. A high key rate complicates access to credit for businesses and provokes a reduction in output. High interest rates in today's environment have more of a pro-inflationary effect, contributing to a reduction in supply.
At the same time, rate cuts have no decisive effect on the inflation rate, which is especially true in a closed capital account environment. In Russia, the key rate has a relatively weak effect on the volume of non-mortgage consumer lending and does not provoke bursts of excess demand.
The first tool to combat inflation should be the reduction of logistics costs. Investments in infrastructure
and supply chains connecting domestic markets as well as government distribution centers are needed.
The second factor of inflationary pressure will remain the ruble exchange rate. Changes in the exchange rate are almost completely transferred to prices. Today the exchange rate is de facto controlled by the government through the largest export companies. Reducing the presence of non-residents on the Russian financial market will relieve the economy from abrupt capital flows, which have always threatened devaluation and, consequently, inflation. As capital flows open up, the task of currency stability should be entrusted to the Central Bank. In the event of capital flight to the dollar and other currencies, the Central Bank should use international reserves
to neutralize inflationary pressure on the ruble.
In certain industries, controlling inflation will require restricting consumer demand. Post-Keynesians prefer to prevent excess demand rather than reduce it ex post by raising taxes or the key rate. Preventing inflation requires an analysis of sectoral demand at the planning stage of government spending and evidence-based resource coordination. Like a good dentist, economic policy should address problems before they require crisis intervention.8. Central Development Institute.
By abandoning active monetary policy as its main task, the Central Bank must accept the role of a development institution. By casting aside the veil of independence
, the Bank can become an ally and advisor to economic development. The institution is able to use its expertise and economic instruments to create inclusive economic growth.
In addition to government bonds - the previously mentioned monetary financing - the Central Bank can use its balance sheet to buy bonds of a variety of extra-budgetary organizations, including regional development institutions. Environmental and cultural organizations can issue bonds for long-term capital-intensive projects. These bonds would be redeemed both directly by the Central Bank and by citizens. The inclusion of such bonds in the Lombard list
of the Bank of Russia will create a stable and liquid market for instruments of financing sectoral development.
The Central Bank can support the population by creating a liquid and stable market of financial instruments. Individuals will be able to save in government bonds and instruments on the Lombard list. Forming the Lombard list, the Central Bank guarantees the liquidity of savings for the population.
To squeeze aggregate demand in periods of economic overheating, it is appropriate to reduce the volume of lending; however, it should not be done with price instruments
. It is appropriate to implement portfolio caps on industries to limit inflation and socially harmful production. Priority projects, on the other hand, should require less provisioning from banks.9. Control of capital.
Large-scale measures to restrict capital flows, including elements of foreign exchange controls, are often seen as a forced, temporary measure. But there is every reason to believe that the capital controls imposed by the Russian authorities in response to global sanctions can and should become a permanent component of the new economic policy.
Speculative capital flows are often pro-cyclical and exacerbate market volatility. However, capital flows can be linked to macroeconomic policies in the United States and other countries, rather than to the long-term growth potential of our own economy.
After a long period of neglect, capital controls are now getting a second wind. Even conservative institutions such as the International Monetary Fund are beginning to recognize
the effectiveness of such restrictions, pointing to the experience of developing countries during the 2008 crisis.
Capital controls will widen the room for economic policy. They will create significant obstacles to carry-trade
, reducing the need for international reserves and active monetary policy. Restrictions on direct investment will protect nascent industries and prevent a repeat of the experience of the 1990s, when foreign investors were able to buy up Russian enterprises with the short-term goal of reducing unwanted competition in the global market.