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Who’s Afraid of MMT?

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.

As a result, tormenting central bankers is great fun. John Maynard Keynes famously tormented Montagu Norman, Governor of the Bank of England (BOE) from 1920 to 1944. Wright Patman and Henry Reuss, two US congressmen who chaired the House Banking Committee in the 1970s, did the same to Federal Reserve Chair Arthur Burns. I know that Reuss enjoyed it; I assisted him at the time.

In our day, the voices of Modern Monetary Theory (MMT) 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.

For example, King begins, “If you can’t explain something, try an abbreviation. The latest in economics is MMT—Modern Monetary Theory or, in other words, a magic money tree.” Does King mention that there are whole books explaining MMT, including The Deficit Myth , a current bestseller by a fully credentialed economics professor, Stephanie Kelton? He does not. Nor does Rajan mention books by Pavlina R. Tcherneva of Bard College or L. Randall Wray of the Levy Institute, to mention just three prominent exponents of the MMT school.

The inconvenient fact that two leading advocates of MMT are women will perhaps have caught the reader’s notice. Especially given the record of modern mainstream economics with respect to its female practitioners, it would be too generous to attribute the omission of names to a misplaced chivalry. One rather suspects that King and Rajan know very well who Kelton and Tcherneva are. Both are forceful and formidable foes, of exactly the type that central bankers tend to fear.

King and Rajan characterise MMT as an argument about the low cost of “printing money.” In King’s description, the thinking is that money created by the central bank can “be given to the public… to enable people to spend more, so raising output and employment.” He then claims that such an approach has already been tried, “from Roman emperors through Henry VIII and the Weimar Republic to present-day Zimbabwe and Venezuela.” That does sound pretty bad.

But those with long enough memories may recall the turbulent spring of the year 2020, when in the face of the Covid-19 collapse, the United States disbursed USD 2.2 trillion in fresh money to the public to enable people to spend more, thereby raising output and employment. The US economy did not have a great year in 2020; but it did not experience runaway inflation. It did not become Zimbabwe, Venezuela, or the Weimar Republic. Is it possible that King did not notice this? Rajan, to his credit, does not push quite so hard on the Zimbabwe string.

King and Rajan both complain that MMT is not new, and this is a sure “tell” that neither has done his homework. MMT advocates do not claim novelty. Unlike their critics, they understand that “modern” and “new” are not precise synonyms. The word “modern” in MMT is deployed in the precise sense used by Keynes in his 1930 Treatise on Money, in which he describes the nation-state’s prerogative to define what money is for those subject to its laws: “This right is claimed by all modern states, and has been so claimed for some four thousand years at least .” It is a bit sad—even shocking—that King, one of my contemporaries at King’s College, Cambridge, has so thoroughly forgotten his Keynes.

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, a former executive director of the Joint Economic Committee, is Professor of Government and Chair in Government/Business Relations at the Lyndon B. Johnson School of Public Affairs at the University of Texas at Austin.

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Illustration: Benedetto Cristofani