Who’s afraid of MMT?

19 Apr, 2021 at 19:17 | Posted in Economics | 7 Comments

As anyone who has ever been responsible for legislative oversight of central bankers knows, they do not like to have their authority challenged. Most of all, they will defend their mystique – that magical aura that hovers over their words, shrouding a slushy mix of banality and baloney in a mist of power and jargon …

In our day, the voices of Modern Monetary Theory perturb the sleep not only of present central bankers, but even of those retired from the role. They prowl the corridors like Lady Macbeth, shouting “Out damn spot!”

Two fresh cases are Raghuram G. Rajan, a former governor of the Reserve Bank of India, and Mervyn King, a former governor of the BOE. In recently published commentaries, each combines bluster and condescension (in roughly equal measure) in a statement of trite truths with which one can, for the most part, hardly disagree.

But Rajan and King each confront MMT only in the abstract. Neither cites or quotes from a single source, and neither names a single person associated with MMT …

What, then, is MMT? Contrary to the claims of King and Rajan, it is not a policy slogan. Rather, it is a body of theory in Keynes’s monetary tradition, which includes such eminent thinkers as the American economist Hyman Minsky and Wynne Godley of the UK Treasury and the University of Cambridge. MMT describes how “modern” governments and central banks actually work, and how changes in their balance sheets are mirrored by changes in the balance sheets of the public – an application of double-entry bookkeeping to economic thought. Thus, as Kelton writes in the plainest English, the deficit of the government is the surplus of the private sector, and vice versa.

MMT shares Keynes’s view that a proper goal of economic policy in a sovereign and developed country is to achieve full employment, buttressed by a guarantee of jobs to all who may need them. This is a goal that I helped write into law in the US under the Humphrey-Hawkins Full Employment and Balanced Growth Act of 1978, along with balanced growth and reasonable price stability. With occasional successes in practice, this policy objective, known as the “dual mandate,” has been the law of the land in the US ever since.

In short, as an example of good economics made popular, accessible, and democratic, MMT represents what central bankers have always feared – as well they might.

James K. Galbraith

Many countries today have deficits. That’s true. But the problem is not the budget deficit. The real deficits are in the climate, healthcare and infrastructure. How do we tackle those deficits? By spending!

MMT rejects the traditional Phillips curve inflation-unemployment trade-off and has a less positive evaluation of traditional policy measures to reach full employment. Instead of a general increase in aggregate demand, it usually prefers more ‘structural’ and directed demand measures with less risk of producing increased inflation. At full employment deficit spendings will often be inflationary, but that is not what should decide the fiscal position of the government. The size of public debt and deficits is not — as already Abba Lerner argued with his ‘functional finance’ theory in the 1940s — a policy objective. The size of public debt and deficits are what they are when we try to fulfil our basic economic objectives — full employment and price stability.

Governments can spend whatever amount of money they want. That does not mean that MMT says they ought to — that’s something our politicians have to decide. No MMTer denies that too much of government spendings can be inflationary. What is questioned is that government deficits necessarily is inflationary.

What is “forgotten” in mainstream macro modelling, is the insight that finance — in all its different shapes — has its own dimension, and if taken seriously, its effect on an analysis must modify the whole theoretical system and not just be added as an unsystematic appendage. Finance is fundamental to our understanding of modern economies and acting like the baker’s apprentice who, having forgotten to add yeast to the dough, throws it into the oven afterward, simply isn’t enough.

All real economic activities nowadays depend on a functioning financial machinery. But institutional arrangements, states of confidence, fundamental uncertainties, asymmetric expectations, the banking system, financial intermediation, loan granting processes, default risks, liquidity constraints, aggregate debt, cash flow fluctuations, etc., etc. — things that play decisive roles in channeling​ money/savings/credit — are more or less left in the dark in modern macro theoretical formalizations.