A specter is haunting mainstream economics. It is the specter of . . . modern monetary theory? So recent essays from Harvard luminaries Kenneth Rogoff and Lawrence Summers attest. For Rogoff, MMT is “just nuts,” “folly,” and “nonsense.” For Summers, MMT adherents are “fringe economists”; their ideas are “voodoo,” or what is worse, “supply-side economics.” The flood of invective suggests that the two professors feel a threat. Probably not to themselves, but to the orthodoxies they represent and uphold.
There are reasons for worry. As Rogoff tells us: interest rates today are “far below Fed and [IMF] forecasts.” And “[at] the same time, inflation has also been far lower for longer than virtually any economic model would have predicted, given current robust US growth and very low unemployment.” Despite Trump’s deficits and many mainstream warnings, the dollar has been amazingly solid. Is something, perhaps, wrong with the mainstream’s models?
MMT is built on the work of John Maynard Keynes and Hyman Minsky. A core insight is that money in “modern States” — meaning, as Keynes wrote, for the “past four thousand years at least” – is defined by government. Money is created (mostly) by public spending and bank loans. Money is not something “out there” that the government must borrow from the public in order to function. It is created as government functions; only afterward, those who take payment may then trade the cash for a bond.
MMT is about the way the world actually works. It explains why big deficits do not drive up interest rates or “crowd out” private investment, and why big governments in big countries don’t go bankrupt.
Such countries can support big public debts if they have to. Contrary to mainstream wisdom, there is no “threshold” beyond which public debts produce financial disaster.
For example, Japan has a debt-to-GDP ratio of 236 percent (in 2017), with a large share held by the central bank. The yen has not collapsed. During the great financial crisis, the United States Federal Reserve Bank “monetized” both the public and even more (in trillions!) the private debt, a policy known as quantitative easing. The dollar did not collapse. Why not? MMT explains: Countries with effective tax systems can support the value of their money. It is countries without effective tax systems that cannot.
It is true that open economies seeking to protect their exchange rates operate under constraints. But the US dollar isn’t very vulnerable, and MMT explains why: We have a large, liquid bond market, with no default risk precisely because the Treasury can always pay, in dollars, whatever interest and principal are due.
Summers objects that since government today pays interest on bank reserves, deficits are not cost-free. But MMT points out that government pays interest (as well as for everything else) by the electronic version of writing a check. This actually doesn’t cost anything: Again, money is created when you deposit the check. You can’t do this, but governments can. I once said this at the Council on Foreign Relations in front of former Treasury secretary Robert Rubin. He did not dissent.
Summers and Rogoff claim that doing too much of this will lead to hyperinflation. Perhaps. But hyperinflation is hard to arrange. Today public debt-to-GDP ratios have risen toward or above 100 percent in many countries, but no advanced country has seen it. In fact, as Rogoff admits, we have hardly seen inflation in the advanced world in nearly 40 years. It is possible (barely) for a very large country to run a policy so expansionary that it will drive up the world price of oil, food, and labor. MMT does not favor this; quite the opposite, as Stephanie Kelton has explained.
What MMT does favor is a a “public option” for employment, also called the job guarantee. The job guarantee would eliminate involuntary unemployment. It would require more federal spending – around 1 to 2 percent of GDP, or half the military budget. But it would not raise spending beyond what is strictly necessary to bring about full employment, efficiently and without giveaways to the rich.
I am not a contributing modern monetary theorist. I was raised in older traditions at Harvard, Cambridge (Britain), and Yale. The scholars of MMT know their underlying ideas are not new; they are congenial with what I learned, especially from Keynes’s followers at Cambridge more than 40 years ago. They are supported, as statements of how the world actually works, by many current practitioners of high finance. So I admire and support the MMT group, which is voicing a powerful common sense in the face of grumpy resistance.
What, then, is the threat? Simple: if the mainstream’s weaknesses and the power and truths of modern monetary theory were ever admitted, it would become necessary to cite the work — even giving names such as Kelton, Tcherneva, Mitchell, Wray and Mosler — and to describe their ideas in classrooms and in textbooks. It would even be necessary to make places for MMT scholars in economics departments, even at universities like Harvard. Control over the paradigm, over the training of future economists, over the minds of the young, might begin to slip away.
Hell, it’s already happening. My students read the arguments on the Net, and ask questions in class. Perhaps the same is true, even up there along the Charles? It must be terribly annoying.
James K. Galbraith holds the Lloyd M. Bentsen Jr. Chair in government/businees relations at the LBJ School of Public Affairs at the University of Texas at Austin. His most recent books are “Inequality: What Everyone Needs to Know’’ and “Welcome to the Poisoned Chalice: The Destruction of Greece and the Future of Europe.”