Giving MMT the credit it is due

Discussions of Modern Monetary Theory elicit surprisingly strong passions. Many of the critiques of MMT by conventional macroeconomists are valid, yet there is a resistance to giving MMT the credit it deserves. MMT puts a comprehensive framework for describing the quantity and price of money at its center, while conventional macro has framed fiscal policy choices through a narrow prism of loanable funds, which suggests higher budget deficits will compete with private borrowers leading to higher rates and lower investment. That prediction has not been born out precisely because broader drivers of money demand and supply have undergone major shifts reflecting demographics and the evolution of credit availability. For me, the most problematic aspect of MMT is the political economy prescription that fiscal authorities be responsible for maintaining low and stable inflation. In an era of dysfunctional and polarized politics, the value of an independent central bank is likely to be greater than ever. Getting the relationship between deficits and interest rates wrong has dented the credibility of conventional macroeconomics and it would be wise to put a broader framework for money at the center of discussions around policy tradeoffs.