TS Lombard with the note:
In a recent podcast, the influential MMTer Stephanie Kelton claimed victory in the debate about fiscal policy, suggesting the US Congress was now taking her advice. Other commentators also sense a “regime shift” in macro policy, claiming we have reached the end of the Neoliberal era. While these declarations are premature–both in the US but especially in other parts of the world–there has long been a certain inevitability to MMT’s success. The idea that fiscal policy must take over from monetary policy has been increasingly obvious for years, especially given the perversity of the macro policy mix we have had since the Global Financial Crisis. Nominal bond yields at 700-year lows were a clear signal something had gone wrong. As we explained in a previous Macro Picture, policy-stabilization efforts have been retracting the long historical “supercycle”, with the recent era of secular stagnation putting the authorities back where they were in the 1930s. Not to take anything away from MMTers, but there has been a degree of “endogeneity” to their success. We can also place the policy supercycle into a series of macro-financial-political regimes since the late-19th century, the“three phases of Capitalism”. While some pundits were surprised there wasn’t a “regime change” after the 2008-crash, there was no clear alternative to neoliberalism.
Today, MMT provides the “software” for a new paradigm. Mainstream economists love to point out “there is nothing new in MMT”. When interest rates are zero, all MMT’s big macro claims should be uncontroversial even for traditionalists–monetary policy will struggle to reflate the economy, bond and “money” financing are equivalent (so QE is meaningless), there is no “crowding out”, and fiscal policy must take over. But the mainstream had forgotten this analysis and has spent the last decade assumingthe zero-rate environment would be temporary. Not only has MMT always been on the right side of these debates (which makes Kelton a sort of modern day Milton Friedman), but, thanks to the COVID-19 response, MMT now has unambiguous evidence to show fiscal policy is highly effective (with no serious side effects). While MMTcan provide the intellectual rationale for a new form of Capitalism (Capitalism 4.0), it is going to take more than the creation of new fiscal/monetary policy space to get there. It will be crucial to monitor what happens to other institutions and broader political trends in the years ahead. Will there be a Reagan/Thatcher for Kelton’s Friedman? While some commentators believe President Biden has already adopted this role in the US–proving more radical than anyone could have imagined before he entered office–the situation in the rest of the world is murkier (especially in jurisdictions that are less amenable to MMT-style thinking).
