Home > Uncategorized > MMT — Krugman still does not get it!

MMT — Krugman still does not get it!

from Lars Syll

mmtKrugman complains that Lerner was too “cavalier” in his discussion of monetary policy since he called for the interest rate to be set at the level that produces “the most desirable level of investment” without saying exactly what that rate should be.

It’s an odd critique, since Krugman himself subscribes to the idea that monetary policy should target an invisible “neutral rate,” a so-called r-star that exists when the economy is neither depressed nor overheating. For what it’s worth, research suggests the neutral rate “may be flat-out wrong,” and Fed Chairman Jerome Powell has admitted that the Fed has been too cavalier in relying “on variables that cannot be measured directly and which can only be estimated with great uncertainty.”

But Lerner wasn’t trying to use interest rates to optimize the economy. That was a job for fiscal policy. He argued that the government should be prepared to spend whatever is necessary to sustain full employment without raising taxes or borrowing …

Krugman’s other objection is that Lerner “didn’t fully address the limitations, both technical and political, on tax hikes/or spending cuts” as a means of fighting inflation.

In fact, Lerner actually had quite a lot to say about this. Here’s the opening sentence to an entire chapter on the subject in his 1951 book “The Economics of Employment”: “We have now concluded our treatment of the economics of employment, but a word or two must be added on the politics and the administration of employment policies in general and of Functional Finance in particular” (emphasis in original) …

Where does that leave us? Paul Krugman and I agree on a great many things, but we come at certain questions from a fundamentally different place.

He believes there are inherent tradeoffs between fiscal and monetary policy. Outside of the so-called liquidity trap, Krugman adopts the standard line that budget deficits crowd out private investment because deficits compete with private borrowing for a limited supply of savings.

The MMT framework rejects this, since government deficits are shown to be a source (not a use!) of private savings. Some careful studies show that crowding-out can occur, but that it tends to happen in countries where the government is not a currency issuer with its own central bank.

This seems like a disagreement we should be able to resolve either empirically or intuitively. But who knows? As Lerner wrote, “a man convinced against his will retains the same opinion still.”

Stephanie Kelton

  1. MichaelLucasMonterey
    February 24, 2019 at 1:13 am

    Well, of course. As Mr. Orwell noticed, it is very hard to explain anything to a person paid not to understand you. Thus, who among the plutonomics elite understands Lenin’s prophetic insight, that “the surest way to destroy a capitalist democracy (society) is to debauch its currency.” The Fed’s commercial sponsors & owners engineered that successfully since long before 1913. Which plutonomic sykophants now care about that, or even think about it?

    Right, none of them. Why should they? Their paradigm makes the answer unthinkable.

    As truthful Green psychologist Ralph Metzner realized, they eat, drink, dance and play musical deck chairs as the Titanic ship of state sinks, while the lower-class passengers locked into the lower decks scream and drown in icy water. So, the movie “Idiocracy” remains the only comedy turning into a documentary.

    Hi ho! Hi ho! Off to work they go.

  2. February 24, 2019 at 2:13 am

    In economics, the majority is always wrong.
    John Kenneth Galbraith

  3. John Hermann
    February 24, 2019 at 3:13 am

    The link below is to Stephanie Kelton’s response to Paul Krugman’s criticism of both functional finance and MMT (which Krugman mistakenly thinks are much the same thing). And this is nothing new – he has been criticising MMT on false grounds for more than a decade .


    • Calgacus
      February 24, 2019 at 5:36 pm

      MMT and functional finance are pretty much the same thing. And they’re both the same thing as genuine Keynesian economics.

      Not making pointless, actually nonsensical distinctions like that between bonds and money is one major MMT / FF point. So why should one should make pointless distinctions between theories, where one is a direct descendant of the other, practically a twin. People don’t wildly change labels like this in the serious sciences and humanities, why should they in economics?

      • John Hermann
        February 25, 2019 at 12:21 am

        FF and MMT are not the same thing, because MMT contains economic reforms like the job guarantee, which are missing from Lerner’s narrative.

    • Calgacus
      February 24, 2019 at 5:51 pm

      Kelton’s slighting of Lerner in favor of Godley and Minsky is nonsense. Refuted by many MMT books and papers, including her own.

      For what was Minsky’s relation toward Lerner? – “I was not quite a student of Lerner” meaning he, Minsky was very close to being one. Godley was a Keynesian, but much of the Keynesianism of his era was based on Lernerian Functional Finance. And that’s a good thing. Lerner’s functional finance is true and make sense. It is unavoidable if you want to say true things that make sense about economics. It is MMT. Often enough, he says things better. The acknowledged best historian among the MMTers is Mathew Forstater. I haven’t seen him say such silly things. (The worst historian by a long shot is Bill Mitchell)

      Historical confusion should not be sowed for the purpose of a silly dispute with Krugman.

      • February 25, 2019 at 1:08 am

        Calgacus’ reasoning strikes an odd note for me. It comes across to me as “An apple is a fruit, any distinction between an apple and an orange is a silly dispute.” Functional finance may indeed be part of MMT but it is not the totality of MMT.

        Krugman states that “MMT seems to be pretty much the same thing as Abba Lerner’s “functional finance” doctrine from 1943” and that “budget policies should be entirely focused on getting the level of aggregate demand right”. MMT is far more nuanced and sophisticated and advocates targeted spending such as on a Job Guarantee that hires off the bottom, mobilizing human resources that the private sector is not using.

      • Calgacus
        February 25, 2019 at 7:07 pm

        I think that it is just unusual behavior to rename theories like mad. And it is bad propaganda. MMTers didn’t do that in their earlier academic work, but more emphasized how they were working within and developing a tradition, that their work was mainly putting it all together, the main “novelty” being the analysis of the JG.

        “Botany” is a better parallel than “apples” & “fruit” studied in Botany. 1919 Botany may indeed be only a part of 2019 Botany, which may have discovered new fruit, become more nuanced and sophisticated. But still people call it the same thing, would think it odd to rename. It’s kind of a mark of second-rate or pseudoscience to change names or disavow associations. So again, Krugman is right. FF/MMT/ genuine Keynes is all pretty much the same thing. The problem is that people like Krugman have fallen away from the One True Church. ;-), without realizing it have become quack phytotherapy pseudoBotanists, while the MMTers are the ones continuing the genuine study.

        Krugman is somewhat simplifying and distorting Lerner, all of whose works deserve to be read more, not just a few papers; this would support my case. For one of many instances, his idea of an “Ideal Gold Standard” was rediscovered in detail by Wray, who doesn’t cite Lerner, I think he would have if he had known of Lerner’s parable – as a way of explaining the Job Guarantee.

        People of Lerner’s era did not explicitly advocate AND analyze a JG as a theoretical policy, but they danced around it. Ridiculously so IMHO – it was an elephant in the room that they did not see, although they came very, very close. They walked around it, petted it, fed it, shoveled the poop, but they just couldn’t say – “Lo! An Elephant!”

  4. Mike Ryan
    February 24, 2019 at 5:35 pm

    I’m sorry – MMT is regurgitated nonsense from Friedman. It’s only purpose is the confuse the masses about what the investment banks and crooked politicians are actually doing to our economy and commonwealth. Government deficits are bad – extremely bad considering what we are doing today. They provide a methamphetamine like high as the US government spends trillions of dollars that our kids and grand kids will be stuck with.. All of this was done just to “juice” the stock markets – oh yeah, stocks go up when taxes go down. The deficits along with 1.5 trillion in college debt continue to grow – while economist dabble with MMT nonsense.

    Shame on all of you for falling for this nonsense.

    The problem with Stephanie Kelton and all economists is they never think in the moral dimension of life. Is it immoral for one generation to borrow trillions of dollars, in effect not paying their way, and pass the debt on to the next? Is it immoral for billionaires to seek tax cuts that will hamper future generations? Is it immoral to pass laws protecting banks from student bankruptcy – keeping students like indentured slaves? How much greed does someone have to demonstrate before economists like Kelton wake up? Oh, that’s right – she and most economists work for the 1%.


    • Calgacus
      February 24, 2019 at 5:56 pm

      You clearly do not understand what you are talking about. In essence Government deficits are inevitable. Balanced budgets are a mere, unstable theoretical possiblity, like an ideal gas, like an egg balanced on the pointier end. Surpluses are logically impossible to sustain. God could not sustain government surpluses indefinitely, because that would violate grade school arithmetic. So the only alternative is deficits = money creation. After all, if there’s money, somebody created it. It HAD to come from deficit spending. Where else, from “immaculate conception”?

      • Craig
        February 25, 2019 at 8:12 pm

        Rob is both right and wrong. Economists generally don’t give moral and ethical considerations their due. That’s because they get stuck at the theoretical level of thought and don’t get to the philosophical level where ideas themselves and ethics are an integral part of its mindset.

        He’s wrong in thinking that MMT would necessarily run up debt any more than neo-classical economics. It would probably make it a little less likely and the effects of the build up would probably be less harsh then now.

        MMT’s problems are that it focuses too much on governmental debt when private debt is the larger problem. It also believes that it could control inflation which is flimsy at best because the operant cause of “monetary” inflation….isn’t money at all, but rather not having/creating a better alternative to our monetarily austere situation where when commercial agents perceive more money coming into the system they raise their prices in the hopes of garnering more business revenue/available individual income. And that (the better, more beneficial alternative for all agents) is what my Wisdomics-Gracenomics does in spades. Wisdomics-Gracenomics also incorporates a job guarantee into the policy framework as an assist to anyone having problems finding purpose without necessarily putting in their time on a job. Thus it is more an adjunct to the primary and paradigm changing policies of a universal dividend and discount/rebate policies at the point of retail sale. There will be much more employment with a Wisdomics-Gracenomics than any other theory because the investment climate will be so good and stable, but it also enables us to see clearly that employment is only a subset of all positive and constructive human purposes.

        Some MMTers who “knock” a universal dividend betray the fact that their theory is largely stuck in the old paradigm of Debt Only for the sole form and vehicle for the distribution of credit/

    • John Hermann
      February 25, 2019 at 12:29 am

      Mike, clearly you do not understand what MMT and FF are all about. You need to do some background reading before talking off the top of your head. I suggest starting with a study of the subject of sectoral balances. Government budget deficits have been the norm in almost all countries over a very long time-span, and surpluses have been the exception. There is a fundamental reason why this is so.

  5. Craig
    February 24, 2019 at 6:38 pm

    The bane of human consciousness is duality wed to egotism. Its resolution is the thirdness greater oneness of wisdom and its pinnacle unitary natural philosophical concept of grace. True wisdom includes, encompasses and integrates science.

    MMT and the rest of heterodox economic thought are pointed in the right direction. Now what they need to do is commence a study of the signatures of accomplished historical paradigm changes and a thorough exegesis of the natural philosophical concept of grace and see how the operations that define and determine every paradigm change have also been aspects of that concept.

    It’s not that difficult a study, and its conclusions thoroughgoingly applied in policy clarifies the path forward for economics.

  6. Rob Reno
    February 25, 2019 at 2:12 am

    Is it immoral to pass laws protecting banks from student bankruptcy – keeping students like indentured slaves? ~ Mike Ryan

    I am simply to ignorant to comment on much of this debate, but one thing I can speak to from experience is Mike’s comment above. Both my wife and I were the first to attain higher education in our families. She came from poverty and I from a barley lower-middle class family. We both had to take in debt to achieve or education goals. We know what the burden of such debt does to one’s economic wellbeing and stress levels. I watched the republicans make it ever harder for students to escape predatory lending by decreasing affordable student aid while empowering predatory banks while these same banks orchestrated Wall Street M&As which stripped businesses they acquired of assets, laid off vast workforces, and through bankruptcy courts that favored corporations over people destroyed and/or defaulted on promises made to pensioners.

    I have worked in corporate accounting and witnessed the corruptive influence of regulatory capture. I have worked within the technology field first as a software engineer at Microsoft and then as the owner of our own technology corporation. I have first hand experience of how the tax code is used to favor the rich at the expense of the middle class. I have at times had to use those favorable tax rules myself, all the while aware at an earlier time I would not have been able to use such benefits (e.g., deducting personal medical cists5 which at one point in time was only available to corporations, but not family wage earners).

    How long is such an unjust system sustainable before we collectively reach a breaking point?

  7. Hele Sakho
    February 26, 2019 at 3:33 am

    The ” breaking point” for the vast majority of human beings has already been reached and surpassed. The decreasing number of the super-rich will never have a care in the world, as they will not have to face wars, poverty, homelessness and destitution. Their fingers remain buttoned to nuclear weapons with which they can love or hate each other depending on how hateful or romantic their relationships have been or become on the spot. The most important points of today’s world economy remain the points one has always stated here. Even the most prominent abusers of power (religious and political) have been openly discredited. May some better gods decent upon mainstream “educated” economists to guide them towards repentance. Someone should pray for them, and particularly for their students whom they continue to misguide.

  8. Vladimir Masch
    February 26, 2019 at 11:08 am

    Please email me once more The Review of magazines, books etc. that was sent yesterday, February 25.


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