I actually disagree with Paul Krugman for once

This is an exiting day. I disagree with something Paul Krugman wrote.

In 2017, private insurance paid about a third of America’s medical bills — $1.2 trillion, or 6 percent of GDP. Having the government pay those bills directly, without a revenue offset, would therefore be a spending increase — a fiscal stimulus — of 6 percent of GDP.

Suppose — as MMTers tend to assume — that interest rates nonetheless didn’t rise. Then this stimulus would have a multiplier effect, probably raising GDP, other things equal, by 9 percent.

I have 2 objections. First the replacement of private insurance with debt financed single payer is effectively a tax cut not a spending increase (as indicated by the phrase “those bills”) as such, the direct effect on demand is less than 6% of GDP. Krugman likes to do two kinds of analysis IS-LM and New Keynesian.

In a standard new Keynesian model, the shift would have no effect on demand — ultra rational consumers would assume that they would have to pay the public debt eventually, so they would save the money that isn’t being paid as insurance premiums (which would presumably be paid as salaries instead).

In an IS-LM model, the incrase would be 6% times the marginal propensity to consumer. Going full Hicks (the orignal IS-LM model) that is 1-1/(the multiplier) = 1/3. To consistently apply the original IS-lm model, Krugman should calculate (multiplier -1)(the tax cut) = 3% of GDP.

Second Krugman writes “a multiplier effect” when he means “a multiplier greater than one”. I hate that. It does not follow from the definition of “to multiply” If I have to multiply a by something to get b, that doesn’t mean b is greater than a. Mutiplying by 0.9 is multiplying.

I insist on this, because anti Keynesians often play the 1=0 trick. When fiscal stimulus is proposed, they claim to prove that the multiplier is zero. When data is analyzed they claim to have been proven right, because there isn’t proof that the multiplier is greater than 1.

But the important point is that the correct calculation implies a 3% increase in GDP. Okun’s law (click the link) implies a 1.5% reduction in unemployment to 2.5% which would probably scare the Fed into raising interest rates, but which is a lot more possible than -0.5% as calculated by Krugman.

Now I don’t think that the marginal propensity to consume is 1/3, but that means that Krugman and I have to explain why estimate multipliers are only 1.5 and not much higher. I suspect this explanation would imply that MMTers predict a negative unemployment rate, so I suspect thaat, in the end, I would agree with Krugman’s conclusion.

But I find his calculation suspect.