Why current and retired central bankers feel threatened by Modern Monetary Theory?

The year has been full of debate on MMT with strong arguments for and against the topic. I just blogged about an article which argued what Alexander Hamilton would have made of MMT.

James Galbraith in this piece takes a stand for the  MMT:

It is not surprising that current and retired central bankers feel threatened by Modern Monetary Theory. With deep roots in the Keynesian tradition and a consistent commitment to achieving full employment, MMT shows that good economics and sound policy doesn’t have to be shrouded in obscurantist cant.

 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 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 publishedcommentaries, 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.

So what is MMT?

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.

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