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.