MMT on the march?

Boil it down, however, and MMT – despite its roots as a heterodox approach to macroeconomic analysis – is really about the current policy framework. It is a full-frontal assault on its core design feature: central bank independence.

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Supporters of MMT have raised credible objections to both the aims of the policy-making elite (too much emphasis on narrowly defined ‘price stability’) and the levers they use to achieve them (dependence on monetary policy).

But the MMT agenda is as much about politics and power as it is about the technical operation of macroeconomic policy. Especially in the US, it is intimately bound up with the populist backlash against the technocrat-led, internationalist liberal world order although, I imagine, many of its academic proponents would not see it this way. It is about ‘taking back control’ – in this case, from the pro-capital, ‘sound money’, unelected central bankers in order to return it to the people’s elected representatives. It is this whiff of revolution that has turned off so many on the centre-left who otherwise might have been sympathetic to the proposed rebalancing towards fiscal policy.

Control has not been taken back, yet. In that sense, the MMT revolution has not been successful. The existing order limps on. But in another way, much of the MMT critique of the pre-covid policy consensus has proved prescient. Moreover, as demanded by MMT supporters, we are entering a regime dominated by fiscal policy – and by extension the political dynamics that drive it. Central bankers are no longer the only game in town. Indeed, their conspicuousness after the GFC is matched only by their seeming irrelevance to the average voter in the face of the virus-induced collapse.

In many ways, this is the most remarkable element of the recent policy response. Enormous fiscal deficits have opened up, in many cases on a scale not seen since the second world war. Yet even on the centre-right, there has barely been a flicker of dissent. The ‘bond market vigilantes’ have gone into hibernation. This is even stranger given the extent to which these deficits have, in effect, been financed via the creation of central bank money.

Central bankers argue vehemently that this is not ‘monetary financing’, as Bank of England governor Andrew Bailey’s 5 April article in the Financial Times exemplifies. In a narrow sense, this is true: the Monetary Policy Committee has not provided direct financing to the government and could, in theory, unwind the gilt purchases it has made at any point. In practice, however, the fiscal response in the UK and elsewhere has been supported not just by a huge expansion of the central bank’s balance sheet – which the experience of the past decade tells us is unlikely to be unwound – but also by an implicit pledge that monetary policy will do all that is required to support the politically necessary fiscal response.

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The essence of the MMT case has always been that fiscal policy is both potent and need not be financed solely by debt issuance. It holds that there is a perfectly sound case for the government to use the bank it owns, the central bank, to finance its fiscal choices and that creating central bank money is constrained only by the outlook for inflation. Is that not exactly what is happening today?

Central bankers protest that their decisions today are driven solely by the outlook for inflation, which is subdued, and that ‘monetary financing’ can only exist in a world where their independence is constrained or removed. As long as the freedom to act solely on the basis of the ‘price stability mandate’ remains, then huge fiscal deficits coinciding with vast bond-buying programmes are nothing out of the ordinary. Maybe, but this feels a bit like winning on a technicality. In practice, the MMT playbook to fighting recessions – rapid and dramatic fiscal expansion, financed by the government’s own bank, not bond issuance – has been adhered to in this downturn. And with little resistance from the existing policy-making elite.

Central bankers do not operate in a political vacuum, they answer to political masters and their decisions are shaped by the background political environment. The ‘low and stable inflation’ paradigm that underpins the existing policy framework must be understood in the context of the wider post-1970s liberal agenda, which quite openly drained power from elected national governments. Equally, the incipient unravelling of that framework cannot be understood without reference to the increasingly successful populist resistance to rule-by-technocrat.

How far we will travel in this direction is unclear. I believe, and fear, we are transitioning into a new, more volatile and inflationary macroeconomic regime, with a more politicised and fiscally-orientated policy process. The era of the omnipotent central banker is over. This shift did not begin with the Great Covid-19 Recession: for that we have to blame policy errors and liberal overreach through the 2000s and the financial shock in 2007-2008. But the dramatic swing of the pendulum towards fiscal policy in this recession will be hard to reverse.

Monetary policy is now nearly out of bullets everywhere. If the viral outbreak takes a turn for the worse, and more stimulus is needed, voters will look to governments, not the central bank. If the virus burns itself out more quickly than expected, and economic normality is quickly resumed, fiscal policy makers and politicians will gain all the spoils.

Governments of all stripes have fallen back on the power of the state in this crisis and projected an image of the state as a force for good. ‘Big government’, it appears, is back with a vengeance. MMT supporters will raise a glass to that.