This is not quite what the World Bank comes out and says directly but it is something that’s easy enough to derive from its current warnings – Modern Monetary Theory is a load of old tosh. Hey, maybe we could put that in more formal terms but the basic and underlying thought, insistence even, is that we cannot trust the politicians to act as MMT says they must therefore MMT isn’t going to work.
Pity, but there we are, for MMT does describe what actually happens in parts of the monetary system entirely faithfully. It’s that interaction between reality and the actions of and incentives faced by politicians where it fails.
World Bank Urges ‘Leave Central Banks Alone’ As Global Economic Outlook Darkens
Indeed they do urge that but why?
Hard-won central bank independence and transparency could erode in the face of pressures to finance government. Mounting debt could weaken commitment to strong fiscal and monetary regimes. If global inflationary pressures rise, policymakers can protect their constituents by redoubling their support for central bank independence, building fiscal frameworks to ensure debt sustainability and maintaining adequate buffers to ride out economic downturns. As the global economic outlook darkens, the imperative of sustaining economic momentum will require making the most out of growth opportunities, avoiding pitfalls, and building buffers against possible shocks. Lessons from the past about debt, faith in public institutions, food security, and price stability can offer guidance in an increasingly challenging environment.
The unwritten bit there being that we and they would say exactly the same thing about the money supply. And it’s central bank independence on that issue which has led to the collapse of inflation expectations – and thus the collapse of inflation – in recent decades. That’s the benefit that central bank independence has brought us, that we no longer have to trust that politicians will set interest rates at the “right” rate for anything other than their re-election probabilities. Instead, we’ll have that central bank having a look at, as far as is possible at least, objective conditions and thus attempting to gain that correct rate. The interest rate and the size of the money supply, given bank activity in credit creation, being really one and the same thing even if opposite sides of the coin.
What is it that MMT says? Don’t fuss about debt and taxes and all that to fund spending. Just print the money and go spend it. Sure, when we’ve no spare resources any further will turn up as inflation but we can just suck that out of the economy with tax rises. OK, true so far as it goes. But that’s what the World Bank is saying – we don’t believe politicians will.
We derive this from that insistence that central bank independence has reduced inflation. The abolition of that independence – which MMT does indeed insist upon as the bank runs an ever larger overdraft for government to spend from, ceding all power over the size of the money supply to fiscal policy – will increase the inflation rate. Why? Because we can’t trust the politicians to tax the correct amount to curb the subsequent inflation. If we could then central bank independence wouldn’t matter.
So, MMT, as the World Bank is pointing out, nice idea it just doesn’t work with politicians in the loop – you know, in this world we inhabit?