Modern Monetary Realism By James K. Galbraith March 15, 2019 – Project Syndicate

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 of the mark, and Rogoff himself sometimes undermines his own arguments.

Is Modern Monetary Theory (MMT) a would have predicted,” while “the US dollar potential boon to economic policymakers, or, has become increasingly dominant in global as Harvard’s Kenneth Rogoff recently argued, trade and finance.” Perhaps the US budget a threat to “the entire global financial system” deficit is not an immediate cause for panic after and the front line of the “next battle for central- all? bank independence”? For Rogoff, the threat MMT is not, as its opponents seem to think, seems to stem partly from the fear that MMT primarily a set of policy ideas. Rather, it is adherents may come to power in the United essentially a description of how a modern States in the 2020 elections. But he also makes credit economy actually works – how money is several substantive arguments, common to created and destroyed, by governments and by many critics of the MMT movement. banks, and how financial markets function. First, there is the claim that, as Rogoff puts it, Nor is MMT new: it is based on the work of MMT is all about “using the [US Federal John Maynard Keynes, whose A Treatise on Reserve’s] balance sheet as a cash cow to fund Money pointed out back in 1930 that “modern expansive new social programs.” Second, States” have functioned this way for thousands Rogoff and other MMT opponents strongly of years. reject the idea that, quoting Fed Chair Jerome From this description, certain straightforward Powell, “deficits don’t matter for countries that facts flow. Governments create money by can borrow in their own currency.” spending and extinguish it via taxation. It Yet, as Rogoff admits, “the Fed itself is follows, therefore, that a large country, responsible for … confusion surrounding the borrowing in its own currency, cannot be use of its balance sheet.” Indeed, while Rogoff forced into default. That is why the US is not decries the Fed’s “quantitative easing” – Greece, and cannot become Venezuela or involving the purchase of trillions of dollars in Zimbabwe. public (and private) debt after the financial Does this mean that “deficits don’t matter”? I crisis – his argument is that QE didn’t really know of no MMT adherent who has made such work, not that it was destabilizing or a claim. MMT acknowledges that policy can inflationary. He sees no threat to the global be too expansionary and push past resource financial system in that experiment. constraints, causing inflation and exchange- Similarly, despite his full-throated backing of rate depreciation – which may or may not be Powell on deficits, Rogoff reverts to cautious desirable. (Hyperinflation, on the other hand, realism about the US national debt. As he is a bogeyman, which some MMT critics points out, today’s long-term real interest rates deploy as a scare tactic.) are “about half their 2010 level, far below what But the issue with budget deficits isn’t interest markets were predicting back then.” And he rates, which remain under government control. acknowledges that inflation has remained Nor is it the possible crowding out of private lower than “virtually any economic model investment, which assumes that the pool of 2 finance is fixed. The issue is real resources. full employment. (As a young staff member of Here, MMT’s proposed job guarantee would the House Banking Committee at the time, I keep real resource use exactly at the level drafted the monetary-policy provisions of that required for full employment – not less, but law and supervised the hearings.) also not more. True, Congress exercises this oversight power What about the fraught topic of central-bank loosely and with considerable deference. At independence? Rogoff sees the political threat least formally, though, the Fed is – and always to the Fed as a very serious issue. But to has been – subject to congressional instruction. describe the Fed as having a “parent company, And MMT is not about Congress ordering the the US Treasury Department” creates a Fed to use its “balance sheet as a cash cow.” misleading impression of the actual Rather, it is about understanding how relationship between the Fed and the monetary operations actually work, how government as a whole. interest rates are set, and what economic The 1913 Federal Reserve Act gave the new powers the US government has. This, in turn, central bank’s leaders long terms in office, and requires recognizing that the dual mandate is therefore independence from the executive not a collection of empty words, but something branch (of which the Treasury Department is a that can – and should – be pursued on a regular part). They do not serve – as Treasury and sustained basis. secretaries do – at the pleasure of the president. There are practical, straightforward, and The Fed is also self-financing, which gives it realistic ways for policymakers to meet this independence as well from the Office of mandate. Implementing them would Management and Budget in the White House. strengthen the country, not bankrupt it. And, But the Fed is not and never has been contrary to opponents’ fears, global investors independent of the US Congress. It is created would not flee in terror from US government by statute and subject to regular congressional bonds and the US dollar. oversight, codified by the 1978 Humphrey- James K. Galbraith is a professor at the Lyndon B. Hawkins Act, which specified the Fed’s Johnson School of Public Affairs, University of Texas at famous “dual mandate” of price stability and Austin.