MMT’s Kelton Sees Central Banks Quietly Yielding to Governments
The world’s central banks are likely to start following the lead set by their governments, according to the economist who’s become the public face of Modern Monetary Theory -- even if they don’t acknowledge what they’re doing.
“Greater coordination between fiscal and monetary authorities is almost certainly the wave of the future,” Stephanie Kelton, a professor at Stony Brook University in New York, said in an interview in Tokyo. While they won’t openly say that they’ve lost their independence, she predicted, “you’re going to see central banks responding in more accommodative, coordinating ways.”
MMT says governments should take the lead in managing economies via spending and taxes, instead of delegating the task to monetary policy. After a couple of decades of obscurity, the school of thought has been gaining traction -- part of a wider search for new approaches to generating growth, amid concern that central banks are short of tools.
Critics say that MMT is a recipe for spiraling government debt and would revive now-dormant inflation with a vengeance. There’s also growing concern about central-bank independence, driven by President Donald Trump’s Twitter tirades against the Federal Reserve, and similar pressures in Turkey and India.
Heating the Room
MMT argues that government spending is the most direct way to spur growth -- and sees no reason why central banks shouldn’t support it.
The shift in that direction will likely accelerate as it dawns on more people that monetary policy alone simply isn’t powerful enough to create growth, said Kelton, an economic adviser to Senator Bernie Sanders in his 2020 presidential run. She said policy makers have been fretting about the size of government debts for too long.
Japan has in many ways been a policy pioneer, according to Kelton -- leading the way on zero interest rates and quantitative easing. While it now has the world’s biggest government debt load, the fact that inflation and bond yields haven’t rocketed in response is often cited by MMT advocates.
For an economy like Japan, says Kelton, fiscal outcomes shouldn’t be a policy goal in themselves. She compares the size of budget deficits to the temperature setting of a room -- what matters is whether it’s comfortable, or whether you are hitting your wider goals for the economy.
Brake and Gas
Still, senior Japanese policy makers are not supporters of MMT. BOJ Governor Haruhiko Kuroda has labeled it as extreme, and both he and Prime Minister Shinzo Abe reject the view that extra taxation isn’t needed to address Japan’s budget deficit and debt.
The government is set to raise its sales tax to 10% in October. Some economists expect an additional spending package too, and one former BOJ official has speculated that the central bank could support the tax move by committing to buy additional bonds.
While that might seem in line with Kelton’s call for greater coordination, her view is that Japan keeps falling into the trap of pulling in opposite directions at the same time.
“Your policy has constantly been one foot on the brake and one on the gas,” Kelton said, calling for bolder steps. It’s extra fiscal spending, not negative interest rates, that can generate enough consumer demand to get companies to borrow and invest, she said.
Either way, she expects government policy to shift -- and central banks to fall in line.
“The language will be that somehow everything that they do is their choice, and justified by their read of economic conditions,” she said. “But at the end of the day, they’re going to be accommodating fiscal.”
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