rogoff178_ Chip SomodevillaGetty Images_fed Chip Somodevilla/Getty Images

Modern Monetary Nonsense

A number of leading progressive US politicians advocate using the Federal Reserve's balance sheet to fund expansive new government programs. Although their arguments have a grain of truth, they also rest on some fundamental misconceptions, and could have unpredictable and potentially serious consequences.

CAMBRIDGE – Just as the US Federal Reserve seems to have beaten back blistering tweets from President Donald Trump, the next battle for central-bank independence is already unfolding. And this one could potentially destabilize the entire global financial system.

A number of leading US progressives, who may well be in power after the 2020 elections, advocate using the Fed’s balance sheet as a cash cow to fund expansive new social programs, especially in view of current low inflation and interest rates. Prominent supporters of this idea, which is often referred to as “Modern Monetary Theory” (or MMT), include one of the Democratic Party’s brightest new stars, congresswoman Alexandria Ocasio-Cortez. Although their arguments have a grain of truth, they also rest on some fundamental misconceptions.

Fed Chair Jerome Powell could barely contain himself when asked to comment on this new progressive dogma. “The idea that deficits don’t matter for countries that can borrow in their own currency I think is just wrong,” Powell insisted in US Senate testimony last month. He added that US debt is already very high relative to GDP and, worse still, is rising significantly faster than it should.

We hope you're enjoying Project Syndicate.

To continue reading, subscribe now.

Subscribe

Get unlimited access to PS premium content, including in-depth commentaries, book reviews, exclusive interviews, On Point, the Big Picture, the PS Archive, and our annual year-ahead magazine.

http://prosyn.org/2uv476D;

Handpicked to read next

  1. velasco94_YoustGettyImages_headswithbooksstaring Youst/Getty Images

    The Experts We Need

    Andrés Velasco

    Policy gurus spend too much time with others like them – top civil servants, high-flying journalists, successful businesspeople – and too little time with ordinary voters. If they could become “humble, competent people on a level with dentists,” as John Maynard Keynes once suggested, voters might identify with them and find them trustworthy.

  2. benami152_KiyoshiOtaPoolGettyImages_trumpmelaniaeatinginJapan Kiyoshi Ota - Pool/Getty Images

    Don’t Feed the Donald

    Shlomo Ben-Ami

    For Japanese Prime Minister Shinzo Abe, appeasing US President Donald Trump is not so much a choice as a necessity: he must prove to Japan’s people and their neighbors, particularly the Chinese, that he knows how to keep Trump on his side. But Abe's strategy won't work with a US administration as fickle and self-serving as Trump’s.

Cookies and Privacy

We use cookies to improve your experience on our website. To find out more, read our updated cookie policy and privacy policy.