Modern monetary realism

Does this mean that “deficits don’t matter”? I know of no MMT adherent who has made such a claim. MMT acknowledges that policy can be too expansionary and push past resource constraints, causing inflation and exchange-rate depreciation – which may or may not be desirable. (Hyperinflation, on the other hand, is a bogeyman, which some MMT critics deploy as a scare tactic.)

But the issue with budget deficits isn’t 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’s proposed job guarantee would keep real resource use exactly at the level required for full employment – not less, but also not more.

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 “parent company, the U.S. Treasury Department” creates a misleading impression of the actual relationship between the Fed and the government as a whole.

The 1913 Federal Reserve Act gave the new central bank’s leaders long terms in office, and therefore independence from the executive branch (of which the Treasury Department is a part). They do not serve – as Treasury secretaries do – 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.

But the Fed is not and never has been independent of the U.S. Congress. It is created by statute and subject to regular congressional oversight, codified by the 1978 Humphrey-Hawkins Act, which specified the Fed’s famous “dual mandate” 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.)

True, Congress exercises this oversight power loosely and with considerable deference. At least formally, though, the Fed is – and always has been – subject to congressional instruction.

And MMT is not about Congress ordering the Fed to use its “balance sheet as a cash cow.” 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 recognising that the dual mandate is not a collection of empty words, but something that can – and should – be pursued on a regular and sustained basis.

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’ fears, global investors would not flee in terror from US government bonds and the US dollar.

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James K. Galbraith is a professor at the Lyndon B. Johnson School of Public Affairs, 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’.

 Copyright: Project Syndicate, 2019.