{"id":134719,"date":"2019-06-03T12:00:03","date_gmt":"2019-06-03T11:00:03","guid":{"rendered":"https:\/\/www.transcend.org\/tms\/?p=134719"},"modified":"2019-06-02T12:17:16","modified_gmt":"2019-06-02T11:17:16","slug":"modern-monetary-realism","status":"publish","type":"post","link":"https:\/\/www.transcend.org\/tms\/2019\/06\/modern-monetary-realism\/","title":{"rendered":"Modern Monetary Realism"},"content":{"rendered":"

Kenneth Rogoff’s criticism of Modern Monetary Theory assumes that MMT advocates don’t care about budget deficits or the independence of the US Federal Reserve. But these assumptions are wide off the mark, and Rogoff himself sometimes undermines his own arguments.<\/em><\/p><\/blockquote>\n

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Getty Images<\/p><\/div>\n

15 Mar 2019<\/em> \u2013 Is Modern Monetary Theory (MMT) a potential boon to economic policymakers, or, as Harvard\u2019s Kenneth Rogoff recently argued<\/a>, a threat to \u201cthe entire global financial system\u201d and the front line of the \u201cnext battle for central-bank independence\u201d? For Rogoff, the threat seems to stem partly from the fear that MMT adherents may come to power in the United States in the 2020 elections. But he also makes several substantive arguments, common to many critics of the MMT movement.<\/p>\n

First, there is the claim that, as Rogoff puts it, MMT is all about \u201cusing the [US Federal Reserve\u2019s] balance sheet as a cash cow to fund expansive new social programs.\u201d Second, Rogoff and other MMT opponents strongly reject the idea that, quoting Fed Chair Jerome Powell, \u201cdeficits don\u2019t matter for countries that can borrow in their own currency.\u201d<\/p>\n

Yet, as Rogoff admits, \u201cthe Fed itself is responsible for \u2026 confusion surrounding the use of its balance sheet.\u201d Indeed, while Rogoff decries the Fed\u2019s \u201cquantitative easing\u201d \u2013 involving the purchase of trillions of dollars in public (and private) debt after the financial crisis \u2013 his argument is that QE didn\u2019t really work, not that it was destabilizing or inflationary. He sees no threat to the global financial system in that experiment.<\/p>\n

Similarly, despite his full-throated backing of Powell on deficits, Rogoff reverts to cautious realism about the US national debt. As he points out, today\u2019s long-term real interest rates are \u201cabout half their 2010 level, far below what markets were predicting back then.\u201d And he acknowledges that inflation has remained lower than \u201cvirtually any economic model would have predicted,\u201d while \u201cthe US dollar has become increasingly dominant in global trade and finance.\u201d Perhaps the US budget deficit is not an immediate cause for panic after all?<\/p>\n

MMT is not, as its opponents seem to think, primarily a set of policy ideas. Rather, it is essentially a description of how a modern credit economy actually works \u2013 how money is created and destroyed, by governments and by banks, and how financial markets function. Nor is MMT new: it is based on the work of John Maynard Keynes, whose A\u00a0Treatise on Money<\/em> pointed out back in 1930 that \u201cmodern States\u201d have functioned this way for thousands of years.<\/p>\n

From this description, certain straightforward facts flow. Governments create money by spending and extinguish it via taxation. It follows, therefore, that a large country, borrowing in its own currency, cannot be forced into default. That is why the US is not Greece, and cannot become Venezuela or Zimbabwe.<\/p>\n

Does this mean that \u201cdeficits don\u2019t matter\u201d? I know of no MMT adherent who has made such a claim. MMT acknowledges<\/a> that policy can be too expansionary and push past resource constraints, causing inflation and exchange-rate depreciation \u2013 which may or may not be desirable. (Hyperinflation<\/em>, on the other hand, is a bogeyman, which some MMT critics<\/a> deploy as a scare tactic.)<\/p>\n

But the issue with budget deficits isn\u2019t interest rates, which remain under government control. Nor is it the possible crowding out of private investment, which assumes that the pool of finance is fixed. The issue is real resources. Here, MMT\u2019s proposed job guarantee<\/a> would keep real resource use exactly at the level required for full employment \u2013 not less, but also not more.<\/p>\n

What about the fraught topic of central-bank independence? Rogoff sees the political threat to the Fed as a very serious issue. But to describe the Fed as having a \u201cparent company, the US Treasury Department\u201d creates a misleading impression of the actual relationship between the Fed and the government as a whole.<\/p>\n

The 1913 Federal Reserve Act gave the new central bank\u2019s leaders long terms in office, and therefore independence from the executive branch (of which the Treasury Department is a part). They do not serve \u2013 as Treasury secretaries do \u2013 at the pleasure of the president. The Fed is also self-financing, which gives it independence as well from the Office of Management and Budget in the White House.<\/p>\n

But the Fed is not and never has been independent of the US Congress. It is created by statute and subject to regular congressional oversight, codified by the 1978 Humphrey-Hawkins Act<\/a>, which specified the Fed\u2019s famous \u201cdual mandate\u201d<\/a> of price stability and full employment. (As a young staff member of the House Banking Committee at the time, I drafted the monetary-policy provisions of that law and supervised the hearings.)<\/p>\n

True, Congress exercises this oversight power loosely and with considerable deference. At least formally, though, the Fed is \u2013 and always has been \u2013 subject to congressional instruction.<\/p>\n

And MMT is not about Congress ordering the Fed to use its \u201cbalance sheet as a cash cow.\u201d Rather, it is about understanding how monetary operations actually work, how interest rates are set, and what economic powers the US government has. This, in turn, requires recognizing that the dual mandate is not a collection of empty words, but something that can \u2013 and should \u2013 be pursued on a regular and sustained basis.<\/p>\n

There are practical, straightforward, and realistic ways for policymakers to meet this mandate. Implementing them would strengthen the country, not bankrupt it. And, contrary to opponents\u2019 fears, global investors would not flee in terror from US government bonds and the US dollar.<\/p>\n

______________________________________________<\/em><\/p>\n

\"\"<\/a>James Kenneth Galbraith – <\/em>Chair in Government\/ Business Relations, Lyndon B. Johnson School of Public Affairs, and Professor, Department of Government, The University of Texas at Austin. Executive Director, Joint Economic Committee, Congress of the United States, 1981 – 1982; Deputy Director, 1983 – 1984. Economist, Committee on Banking, Finance and Urban Affairs, United States House of Representatives, 1975-76 and 1977-80. Ph.D., Yale University, May 1981. Awards: Carnegie Scholars Program, 2003-2004. Fulbright Distinguished Lecturer, China, Summer 2001. Marshall Scholar, King’s College, University of Cambridge, England, 1974-75. Texas Excellence in Teaching Award, 1990. Affiliations: Senior Scholar, Levy Economics Institute; Chair, Board of Directors, Economists for Peace and Security; Honoray Vice President, Americans for Democratic Action. Nonresident Fellow, Center for Global Development. Associate Member, Cambridge Center for Economic and Public Policy, University of Cambridge. Galbraith@mail.utexas.edu<\/a><\/em><\/p>\n

Go to Original \u2013 project-syndicate.org<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Is Modern Monetary Theory (MMT) a potential boon to economic policymakers, or, as Harvard\u2019s Kenneth Rogoff recently argued, a threat to \u201cthe entire global financial system\u201d and the front line of the \u201cnext battle for central-bank independence\u201d?<\/p>\n","protected":false},"author":4,"featured_media":134723,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[146],"tags":[232,354,1159],"class_list":["post-134719","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-economics","tag-capitalism","tag-economics","tag-modern-monetary-theory-mmt"],"_links":{"self":[{"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/posts\/134719","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/comments?post=134719"}],"version-history":[{"count":0,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/posts\/134719\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/media\/134723"}],"wp:attachment":[{"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/media?parent=134719"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/categories?post=134719"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/tags?post=134719"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}