First, Baker presumes that the US needs to borrow to spend:
"Paul Krugman added another post on the potential impact of large deficits on the U.S. economy in which he argues that it doesn't matter that the U.S. can print its own currency; it still faces the same constraints from financial markets. I would argue that it matters a great deal for two reasons that I laid out in my previous post.
"The first reason is that at any point in time the Fed would have the option to intervene in bond markets and buy up debt, if private investors were demanding very high interest rates. This is important because the decision by the Fed to not buy debt would always be a policy choice, not an economic fact."
Worse, Baker concludes:
"For these reasons it is important that the U.S. has its own currency. It can never be Greece. It may end up as Zimbabwe, but this sort of hyper-inflation would be the result of long period of badly failed policies in which our economy essentially unraveled. While that may not literally be impossible, even the biggest pessimists would have to acknowledge that we are very far from seeing this situation."
OMG. Zimbabwe! The Godwin's law of economics. Tell me it ain't so.
Krugman responds to Baker:
Krugman begins: "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."
Zimbabwe? Really?
8 comments:
Dean Baker is disagreeing with Krugman. Being monetarily sovereign does make a difference. And 'buying your own debt' is a policy choice.
He seems to be saying that a Zimbabwe outcome would be the result of a long series of failed policies.
I may be reading this wrong, but its far from clear what Dean Baker is thinking from this post alone.
Laura,
Both of these guys are pretty high profile 'lefties'.
Perhaps they are beginning to understand MMT, but are succumbing to ego. For them to make an immediate 'adjustment' in their thinking would require them to also immediately admit that they have 'had it all wrong' for a long time. They may want to take it slow so it looks like they have made a reasoned transition in their thinking, and protect their reputations.
I'm still angry with Krugman's disrespect of the MMT scholars, but maybe all we can expect from here is a too slow, public evolution in their thinking. (I hope)
We'll see i guess.
Resp,
There is no doubt that both Krugman and Baker get the basics of MMT. Warren spent a couple of hours explaining it to PK, and I know from reports that in private conversation Baker gets it too,
I think that they are both moving in the direction of coming out. I see the "Zimbabwe" reference as cover for their admitting that the US is not like Greece.
It's high kabuki. The "Zimbabwe" move is to establish that you're still a Very Serious Person.
This dance isn't over yet.
I was just reading a comment at Warren's. Warren reports having talked with Baker and given him a copy of his book, too.
So things are happening behind the curtain.
Tom,
It's really juvenile if you think about it.
Just like Mike's treatment in the Gasparino segment, Mike's trying to make a reasoned, researched case and then giggling, laughing, ad hominem, etc... juvenile, childish.
Resp,
They need cover, for sure. At least Baker needs cover. I think he's the closest to actually "coming out." I don't think Krugman will ever capitulate on this. He's a Nobel. It's intellectual divinity.
It occurs to me that the conventional wisdom regarding the monetary system is analogous to conventional wisdom regarding religion not so long ago. The conventional wisdom is plainly absurd, but the truth is regarded as unknowable, and to challenge the basic morality is beyond the pale. To deny the desirability of balancing the budget is the equivalent of denying the existence of God, heaven, and hell. It can only lead to a downhill spiral of decadence. It's moral common sense that overrides basic logic.
Krugman is on the cutting edge as a mainstream economist who pushes the boundaries of acceptable discourse, while vigorously defending the system itself. While challenging the establishment, he is an apologist for absurd monetary beliefs based upon a gold standard morality that is generally unquestioned...
The way I read Baker sounds pretty similar to point being made here:
http://www.newdeal20.org/2010/07/20/deficits-do-matter-but-not-the-way-you-think-15355/
I quote
[quote]First, OK, let us accept your premise. Will the government be able to make all payments (including interest paid on debt) as they come due? The answer is, of course, “yes — by crediting bank accounts”. Insolvency is not possible when one spends by a simple keystroke. The critic then quickly changes the subject: Weimar! Zimbabwe! You are a destroyer of the currency! Yes, but it was your scenario, not mine. And even in your worst case scenario, the government cannot be forced to default. Instead, Krugman argues “the government would decide that default was a better option than hyperinflation”. In other words, Krugman veers off into politics — government “decides” to default — because the economics does not give him the result he wants."
[/quote]
That's what Baker is saying. That after such a long period of failed policies would a Zimbabwe happen. It is theortically possible to be a Zimbabwe even under MMT. Again from the same article by L. Randall Wray
[quote]OK, we never claimed that a sovereign government will necessarily adopt good economic policy. The last time the US approached such a situation was in the over-full employment economy of WWII. Rather than bidding for resources against the private sector, the government adopted price controls, rationing, and patriotic savings. In that way, it kept inflation low, ran the budget deficit up to 25% of GDP, and stuffed banks and households full of safe sovereign debt. By the way, Jamie Galbraith’s father, John Kenneth Galbraith, was the nation’s chief inflation fighter. After the war, private spending power was unleashed, GDP grew relatively quickly, and government debt ratios came down (not because the debt was retired but because the denominator — GDP — grew more quickly than the numerator — debt; see here). In other words, Galbraith, senior, used rational policy to avoid the Zimbabwean fate. I do not understand why Krugman prefers to believe that our policymakers would choose hyperinflation over more rational policy. [/quote]
It sounds to me that is what Baker is saying.
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