Guest Post: The RJS Aggregator – Government deficits and MMT

Introduction: Here’s another timely compilation of economic commentary by Rj from the Global Glass Onion. His thread highlights a recent interchange between straight Keynesian economists, Paul Krugman, for example, and Modern Monetary Theorists (MMT), like Jamie Galbraith, Bill Mitchell, Randy Wray, and Warren Mosler.

I’ll add just one link to The RJS Aggregator today. At his Benzinga column , Randy Wray describes the monetary mechanics of MMT, which is the cornerstone of several theories (like how government deficits drive down short rates through reserve creation). Rebecca Wilder

Guest Post: RJs Analysis: The debate about government deficits – MMT

by RJ

The Austerity Delusion, by Paul Krugman – “Portugal’s government has just fallen in a dispute over austerity proposals. Irish bond yields have topped 10 percent for the first time. And the British government has just marked its economic forecast down and its deficit forecast up.What do these events have in common? They’re all evidence that slashing spending in the face of high unemployment is a mistake. Austerity advocates predicted that spending cuts would bring quick dividends in the form of rising confidence, and that there would be few, if any, adverse effects on growth and jobs; but they were wrong.It’s too bad, then, that these days you’re not considered serious in Washington unless you profess allegiance to the same doctrine that’s failing so dismally in Europe.Why not slash deficits immediately? Because tax increases and cuts in government spending would depress economies further, worsening unemployment. And cutting spending in a deeply depressed economy is largely self-defeating; any savings achieved at the front end are partly offset by lower revenue, as the economy shrinks.”(Read more after the jump!)

Krugman Is Wrong: The United States Could Not End Up Like Greece – Dean Baker – “I have to disagree with Paul Krugman this morning. In an otherwise excellent column criticizing the drive to austerity in the United States and elsewhere, Krugman comments: “But couldn’t America still end up like Greece? Yes, of course. If investors decide that we’re a banana republic whose politicians can’t or won’t come to grips with long-term problems, they will indeed stop buying our debt.” Actually this is not right for the simple reason that the United States has its own currency. This is important because even in the worst case scenario, where the deficit in United States spirals out of control, the crisis would not take the form of the crisis in Greece. Greece is like the state of Ohio. If Ohio has to borrow, it has no choice but to persuade investors to buy its debt. However, because the United States has its own currency it would always have the option to buy its own debt.”

Deficits and the Printing Press – Paul Krugman – “Right now, deficits don’t matter — a point borne out by all the evidence. But there’s a school of thought — the modern monetary theory people — who say that deficits never matter, as long as you have your own currency. I wish I could agree with that view — and it’s not a fight I especially want, since the clear and present policy danger is from the deficit peacocks of the right. But for the record, it’s just not right. Suppose that we eventually go back to a situation in which interest rates are positive, so that monetary base and T-bills are once again imperfect substitutes; also, we’re close enough to full employment that rapid economic expansion will once again lead to inflation. Suppose, now, that we were to find ourselves back in that situation with the government still running deficits of more than $1 trillion a year, say around $100 billion a month. And now suppose that for whatever reason, we’re suddenly faced with a strike of bond buyers — nobody is willing to buy U.S. debt except at exorbitant rates. So then what? The Fed could directly finance the government by buying debt, or it could launder the process by having banks buy debt and then sell that debt via open-market operations; either way, the government would in effect be financing itself through creation of base money. So we’re talking about a monetary base that rises 12 percent a month, or about 400 percent a year. Does this mean 400 percent inflation? No, it means more — because people would find ways to avoid holding green pieces of paper, raising prices still further.”

Krugman, Galbraith, and others debate MMT – “Paul Krugman slugs it out with our colleague Jamie Galbraith and many other “modern monetary theory” partisans at Krugman’s New York Times blog website. Jamie’s most recent retort is at the top of this page of the blog site. Many of the points raised in the discussion there are central to our work here at the Levy Institute and to the views of Galbraith and others in our macro research group”.

A Further Note On Deficits and the Printing Press – Paul Krugman – “A followup on my printing press post: I think one way to clarify my difference with, say, Jamie Galbraith is this: imagine that at some future date, say in 2017, we’re more or less at full employment and have a federal deficit equal to 6 percent of GDP. Does it matter whether the United States can still sell bonds on international markets? As I understand the MMT position, it is that the only thing we need to consider is whether the deficit creates excess demand to such an extent to be inflationary. The perceived future solvency of the government is not an issue. I disagree.”

Paul Takes Another Swipe at MMT – The Modern Monetary Theory (MMT) approach to economics must be starting to make some waves, because today, Paul Krugman, followed his earlier attack on it and his debate with Jamie Galbraith and others last summer, with another swing at MMT. The debate last summer was an extensive one at Paul’s blog site at the New York Times, and, in addition, there were a number of posts at other sites replying to Paul. The debate was a classic in the developing conflict of views between the “deficit doves” (represented by Paul) and the “deficit owls” (represented by Jamie Galbraith and other MMT writers). Given the earlier debate, you’d expect that Paul’s second try at MMT would reflect a bit of learning on his part, and also a characterization of the views of MMT practitioners that is a little more fair than he provided in his first attempt. This post will analyze Paul’s new attack and assess how much he’s learned. But first, I’ll review the earlier debate.

The Euro Straitjacket – Paul Krugman – I think Dean Baker and I are converging on deficits and independent currencies. He asserts that having your own currency makes a big difference — you can still end up like Zimbabwe, but not like Greece right now. I’m fine with that. Specifically, the reason Greece (and Ireland, and Portugal, and to some extent Spain) are in so much trouble is that by adopting the euro they’ve left themselves with no good way out of the aftereffects of the pre-2008 bubble. To regain competitiveness, they need massive deflation; but that deflation, in addition to involving an extended period of very high unemployment, worsens the real burden of their outstanding debt. Countries that still have their own currencies don’t face the same problems. I like to use this picture, showing deficits and debt as of the end of 2010: Source.
Dear Paul Krugman, You Do Not Understand MMT – Paul Krugman is out with another misrepresentation of MMT. For some reason, he has come to the false conclusion that MMTers believe deficits don’t matter. He says:“Right now, deficits don’t matter — a point borne out by all the evidence. But there’s a school of thought — the modern monetary theory people — who say that deficits never matter, as long as you have your own currency. But for the record, it’s just not right.”This is an absurd misrepresentation of the MMT position and proves that he has not taken the time to fully understand MMT. In my treatise on the subject I specifically say this is not the case:“Some people claim that MMTers say deficits don’t matter. That is a vast misrepresentation of MMT. No MMTer would ever say such a thing. Deficits most certainly do matter. Maintaining the correct level of deficit spending is, in many ways, a balancing act performed by the government. It is best to think of the government’s maintenance of the deficit like a thermostat for the economy.

The MMT solvency constraint – Steve Randy Waldman – “It is good to see Paul Krugman prominently discussing “modern monetary theory”, although I don’t think his characterization is quite fair. I am an MMT dilettante, so I’ll apologize in advance for my own mischaracterizations. But I think the MMT view of stabilization policy can be summed up pretty quickly: …I think this is a clever and coherent view of the world. I do not fully subscribe to it — in my next post, I’ll offer point-by-point critiques. But first, let’s see where I think Paul Krugman is a bit off in his characterization: A 6 percent deficit would, under normal conditions, be very expansionary; but it could be offset with tight monetary policy, so that it need not be inflationary. But if the U.S. government has lost access to the bond market, the Fed can’t pursue a tight-money policy — on the contrary, it has to increase the monetary base fast enough to finance the revenue hole. And so a deficit that would be manageable with capital-market access becomes disastrous without.

More on Modern Monetary Theory – “I view this debate as another round of “deficits don’t matter,” which was the hue and cry from both the left and the right a decade or so back as we were digging the hole we’re now in. Let me say at the outset that I sympathize with the goals of Jamie Galbraith and others who would like to see the Fed finance Great Depression-type jobs programs, education, and other investments in human and physical capital. It is what the country needs.However, I view the problem not as insufficient aggregate demand but as our broken social contract, our broken government, our broken American dream. Printing more money will just go into the pockets of the plutocracy if the banking bailouts and the Stimulus are any indication. MMT is a joke in the present monetary historical context.”

Paul Krugman gets it wrong…. Again. – I’d say the deficit debates were heating up again, but I don’t think they’ve let up since before last year’s Peterson Foundation Fiscal Summit (orthodoxy for neoliberal deficit hawks) and the grass roots Fiscal Sustainability Teach-In and Counter-Conference, both held on April 28, 2010. The Teach-In provided an important corrective, known as Modern Monetary Theory (MMT), to the false narratives of both deficit hawks and deficit doves. Yesterday, Paul Krugman’s blog post Deficits and the Printing Press (Somewhat Wonkish), once again showed his ignorance of MMT, and in the process misinformed his readers (my emphasis): Right now, deficits don’t matter.. But there’s a school of thought — the modern monetary theory people — who say that deficits never matter, as long as you have your own currency. I wish I could agree with that view. But for the record, it’s just not right. The bolded statement, as I’ll show below, is completely false.

James-Galbraith-responds-to-Paul-Krugman – There are many excellent comments on the recent Paul Krugman vs. MMT story (see an excellent summary of the comments here), but I wanted to highlight the comment by James Galbraith, which really cuts to the chase: What do you mean, exactly, by the phrase, “solvency of the government”? According to my dictionary (Webster’s Third New International) an entity is “solvent” when it is “able… to pay all legal debts.” If you will look in your wallet, you will find, on any Federal Reserve Note: “This Note is Legal Tender for All Debts Public and Private.” Can we agree that the United States government, of which the Federal Reserve is a part, can always produce the Federal Reserve Notes required to pay its public debts? It follows, without any possibility of misunderstanding or error, that the United States Government is always going to be solvent.

billy blog » Letter to Paul Krugman – “Dear Paul..We are both academics and have been trained to PhD level in economics. We should therefore understand the difference between good scholarship and bad scholarship whether the final outcome is a peer-reviewed journal article, published book or Op-Ed piece for a popular media publication (such as the New York Times). Examples of poor scholarship:

  • 1. Representing an argument by relying on statements by critics of the argument as a reliable construction of the argument.
  • 2. Creating a stylisation of an argument that is could not be constructed from a thorough reading of the primary sources in the field. This is the, straw person tactic.
  • 3. Presenting analytical arguments to support an attack on a school of thought which are erroneous.
  • 4. Making stuff up – this embraces the previous three examples. I refer to your two articles in the New York Times:
  • (a) Deficits and the Printing Press (Somewhat Wonkish) – March 25, 2011 and then what seems to be a qualifying article –
  • (b) A Further Note On Deficits and the Printing Press – March 26, 2011.”

Paul Doubles Down On Ignorance, Misconstrual, and Vague Scenarios – “After the scorching he received in many of the comments on his printing press post Paul Krugman decided to dig his MMT blogging hole even deeper. He says: “. . . I think one way to clarify my difference with, say, Jamie Galbraith is this: imagine that at some future date, say in 2017, we’re more or less at full employment and have a federal deficit equal to 6 percent of GDP. Does it matter whether the United States can still sell bonds on international markets? The most important thing to note about this scenario illustrates Paul’s penchant for simplistic examples that mean nothing without further context. There are many ways in which Paul’s scenario can be fulfilled, and they would make a big difference in the reactions of the bond markets, even if the Government chose not to manage bond interest rates to drive them down to zero. For example, let’s say that the world still desires to send the United States more goods and services than it receives from us, about 3% of US GDP more, and let’s also say that the US private sector wants to run a surplus of 3% of GDP; then the Government will be running a deficit of 6% because its deficit must equal the sum of the absolute value of the negative current account balance, and the private sector savings surplus. In that realization of Paul’s scenario, would the US have any trouble selling bonds? It’s very doubtful, since what would those who exported to us do with USD they received in payment for their goods and services, except to buy our bonds?”

If you like large error bounds – “And lousy correlation coefficients, then the Modern Money Theorists are right. We can regulate money with printing and taxes. Unfortunately, 90% of the economy has much better estimates of taxes and printing then the MMT folks. The economy figures this stuff out before taxes go haywire. The economy is much more accurate about itself than Martin Wolf, Paul Krugman or the MMTs. If you want to be a good economist, I suggest you would have at least the same accuracy as the economy. How can we have an economic theory that depends on economic agents reading our columns? I get that entanglement is part of economics, the same as in physics. But it is too far fetched to go from a NYT op ed to the demand for eggs. The economy lives on information, suggest the economists keep up.”

US Employment and Wages, Modern Monetary Theory, Trade, and Financial Reform – Jesse – “On another note, there is renewed discussion of ‘Modern Monetary Theory,’ and some have asked me again to address this, as I have done previously. I have only this to add. I see no inherent problem with the direct issuance of non-debt backed currency as there is sufficient evidence that it can ‘work.’ Indeed, my own Jacksonian bias toward central banking would suggest that.I think the notion that the Fed is some objective judge of what is best for the public welfare without effective oversight or restraint is anti-democratic and probably un-Constitutional, at least in spirit, as it has been implemented. And this notion that the FED and the discipline of the interest markets could reliably emulate an external restraint on excessive money creation is deeply flawed.The problem becomes then how to implement a fiat currency without the discipline of issuing debt through private markets. This is the important point that most MMT adherents seem to ignore, but it is their greatest area of strength.”

What’s the difference between government bonds and bank notes? – Ed Harrison – “In light of a recent post by Randy Wray, I’d love to have some readers here answer my question. The Treasury doesn’t have to issue [government] bonds at all. In fact, since the Treasury does control the electronic printing press, it could legitimately buy stuff with money it prints out of thin air. Sounds a bit like counterfeiting, doesn’t it? But, let’s step back for a second: what is the functional difference for the federal government between Treasury securities and bank notes? Both are liabilities of the federal government. But liabilities of what? The only obligation they enforce on the government is the promise to repay with more paper (or electronic bank credits, if you will). For all intents and purposes, bank notes, reserve deposits, and Treasury securities are fungible: they are obligations to be repaid in the same fiat currency.”