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Critique of Rajan on debt

from Asad Zaman 

“my views are based on insights acquired from MMT, but  .  . . . . . . . . . . . ”         

In this post, I will provide a critique of Raguram Rajan’s article “How Much Debt is Too Much?”. (Alternative link to Rajan’s article)

The article opens with a description of the governments “opening their coffers, to support small households and firms” in the COVID era. Required spending has been on the order of 15-20% of the GDP, and the article examines the extent to which government can finance this extra expense by borrowing at low interest rates from the private sector.

The language reminded me Robin Hood and his team swooping down on government convoys laden with coffers of gold. In face of this generosity by the government, it seems churlish to examine their coffers, to see if they contain gold, or just paper promises. Rajan’s theories are based on archaic understandings of money as gold. Rajan’s article assumes, without discussion, the following premises:

  1. Government are like households. Spending must by financed by taxes or borrowing.
  2. Borrowing from private sector increases the amount of money available for government spending.
  3. Government ability to pay off the debt created by private borrowing depends on the interest rate, and on its capabilities to raise revenues (by taxation or borrowing) in the future.

All three of these propositions are false, as would be evident to readers of my earlier post on ABC’s of MMT. It is worth clarifying that my views are based on insights acquired from MMT, but need not coincide with the official doctrines of MMT.

To begin with, we must ask why . . .  read more

  1. Biagio Bossone
    February 2, 2021 at 12:49 pm

    Dear Asad,
    for a critique of MMT you may be interested in this article just published, which suggests that MMT cannot work as an effective and sustainable macroeconomic policy program aimed to achieve and maintain full-employment output through persistent money-financed fiscal deficits in economies suffering from Keynesian unemployment or underemployment.
    https://link.springer.com/epdf/10.1007/s42495-020-00055-w?sharing_token=gdp4lb2cvcOvBxTg6evjYve4RwlQNchNByi7wbcMAY7yl0_L73c6xMwMuNvV8X_kQ1p6bpTPnEbXdBPD4eW_ee–ZZH3EgQgNRBSW1wiqIZ-7soOR5Xk31Lht0I5UVOCx5o2TV6By_exPKPxAeeUyubik09o8yOWoNhu-Flq3FY%3D

  2. February 3, 2021 at 4:46 am

    Dear Biagio – I did try to read your paper, but did not get too far – the link allows online reading but no downloads. I have some fundamental problems with the way you have discussed the issues. FIRST, MMT is NOT a policy prescription, it is a way of analyzing the economy, and in particular the ROLE of money in an economy – so the terminology that MMT may or may not WORK represents a confusion between the positive analysis, and policy prescriptions emerging from that analysis. SECOND: MMT does NOT prescribe printing of money to reduce unemployment in the Keynesian fashion (this confusion seems to be common; Rajan makes the same mistake). In fact, MMT’er think that expansion of the money supply will lead to inflation long before it affects unemployment because the excess of money will not reach the sectors of the economy with excess capacity. THIRD: The IS-LM model is based on assumptions about how prices, money, interest, and employment work within an economy which are mostly rejected by MMT. FOURTH The key MMT PRESCRIPTION is the Job Guarantee program, NOT creation of money, for creating full employment. So it seems to me that it would not be worth my while to go through your paper in any detail, beyond the first page.

    • Biagio Bossone
      February 3, 2021 at 6:34 am

      Dear Asad, I am afraid you are missing the main point – the way the program is financed. If, as MMT “prescribes,” this is done by printing money and crediting the Treasury account ad libitum, sooner or later the stock issue will rise. Also, if you had gone a little beyond the first page (as one who wants to comment a paper should do) you would have read a full explanation on why ISLM is used and why it is acceptable to analyse MMT economics. So, yes indeed, I think it would be worth your while to read the article and to avoid the pre-judgemental attitude that is so often criticised in mainstreamers.

  3. February 4, 2021 at 12:16 am

    Dear Biagio, (1) in this late stage of my life, the number of books I have marked as MUST READS is longer than the time I have left to live. (2) Because our time is precious, I also try to write with care for the value of the readers time – cutting out non-essentials – and trying to ensure that what readers get is worth the time they invest. (3) In the connection, one of the best pieces of advice I read was that research papers are not mystery stories, where we find out who the murderer was at the end of the novel. Rather the first paragraph should spell out the heart of the matter, and also explain why the paper is worth reading. (4) Your abstract states that you will explain why MMT does not work, but it is a mystery which you have to read the paper to discover the answer to. (5) Knowing how the IS-LM model works, I could replicate your result – within an IS-LM framework, pushing exogenous money into the system will OBVIOUSLY result in inflation — The IS LM treats money as exogneous, ignoring role of private credit creation. Also, it implements long run Say’s law – a proposition which Keynes STARTS his book by rejecting. Also, it treats Investment as a function of r and Y, which is rejected by Keynes. (6) At a deeper level, the problem is that Job Guarantee creates jobs and PRODUCTS which are NOT part of the production function F(K,L) — we overcome the limitations of the private sector by creating products which private sector cannot create for a number of reasons. This possiblity is NOT ENVISAGED within conventional models. (6) the search for TRUTH – highly advisable – is dramatically in conflict with the search for advancement of career via publications (7) I have already invested more time than cost-benefit calculations can justify, in writing and posting this response, and wont have time to respond further, but I hope this response will be of benefit to you

    • Biagio Bossone
      February 4, 2021 at 5:48 am

      Dear Asad, in the model money grows with government spending, precisely as MMT “prescribes”. The issue is the on the money demand side (not the supply).
      You should avoid commenting on what you haven’t read. A little more humbleness…?
      Anyway, since further replying to you is obviously hopeless, I am writing to your readers who are interested in thinking critically about MMT, rather than just following MMT propaganda.
      Thanks for your so much precious time.

  4. February 4, 2021 at 12:23 am

    PS: To express point (6) a little more clearly — the Job Guarantee program creates production possibilities which would not be profitable for private sector,

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