Guest Post: Ralph Musgrave — Paul Krugman doesn’t realise that demand can be raised by creating and spending fiat.

Paul Krugman doesn’t realise that demand can be raised by creating and spending fiat.

In this article, Krugman goes along with the newly fashionable and totally absurd idea put by Lawrence Summers, namely that we’re in for a prolonged bout of deficient demand. I don’t know whether to laugh or cry. I always held Krugman in high esteem.

And Krugman is far from the only so called “professional economist” who goes along with the Summers’s ridiculous “secular stagnation” theory. See for example Martin Wolf and Frances Coppola.

So how do we raise demand at the zero bound? Well it’s desperately simple. Every MMTer knows the answer. Warren Mosler, one of the leading lights of MMT spelled out the answer in one short sentence in the form of “Mosler’s law”, which appears in yellow at the top of his site. The law states: “There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.” Put another way, demand can be raise by any amount at any time simply by printing money and spending it into the economy (and/or cutting taxes).

And finally I ought to give credit where credit is due. That is, Summers does at least admit he isn't sure what he’s talking about. He said, “Now this may all be madness and I may not have this right at all.” Quite right Larry, my friend. You really are mad, and you haven’t “got it right at all”. But you’re no madder than the rest of the economics profession. But please, if you half suspect you’re mad, why not just save everyone a lot of time and keep quiet? Or to put it less politely, just belt up – put a sock in it.

For more on Krugman’s muddled thinking see this more recent article of his.

Ralph Musgrave