Monday, August 24, 2015

Brian Romanchuk — Mosler On Krugman On Debt

Warren Mosler offers a good analysis of Paul Krugman's article "Debt is Good." I try to avoid writing "Paul Krugman does not get it" articles, as that is already a crowded field. However, since the article caught a lot of attention, and is right up my alley, I feel I should comment on it.
One could summarise Mosler's article as that Krugman is directionally correct, but he is still not thinking about things properly. His idea (which he attributes to Ricardo Caballero of M.I.T.) that government debt is "good" because it provides a "safe asset" to investors is hardly novel. It was discussed in depth decades ago by Hyman Minsky, and probably many other economists that I am less familiar with. This offended some fiscal conservatives, but this is because many of them refuse to accept that a central government liability is an asset to the non-central government sector. (We could say "private sector," but that may seem like a strange label for entities like the Chinese reserve managers. It is actually reasonable, since those Chinese reserves are being accumulated to advance Chinese business interests.) Although they want to reduce government debt, they do not offer any mechanism to reduce private sector financial assets.
In Understanding Government Finance, one of the key themes is the central role of central government liabilities for liquidity management. The only way to avoid the use of government bonds in liquidity management is to create bank reserves, which are just a form of government liabilities that have particular restrictions on which entities can (and must) hold them. Although I am allergic to the term, reserves are a form of "financial repression" on the banking system.….
Bond Economics
Mosler On Krugman On Debt
Brian Romanchuk

6 comments:

Michael Norman said...

Krugman: "And how much is sufficient? Maybe more than we currently have. That is, there’s a reasonable argument to be made that part of what ails the world economy right now is that governments aren’t deep enough in debt."

Mosler: "Yes, it’s called unemployment, which is the evidence that deficit spending is insufficient to offset desires to not spend income. Something economists have known by identity for at least 300 years."

Since 2010 the deficit has fallen by over $1 trillion and there have been 11 million jobs created and the unemployment rate has fallen in half, to 5.3% from 10%.

I'll just say this about Mosler: he keeps repeating stuff that's wrong and repeating and repeating and repeating.

Dan Kervick said...

This whole business about "safe assets" troubles me. If a safe asset is just an inflation protected, money-like asset - a bank account or government security with an interest rate roughly equal to the inflation rate - then sure, there is always some demand for safe assets given that people always want a certain degree of money-like liquidity.

If a safe asset is instead an asset that makes a small, low risk positive real return, then again sure, there will always be a demand for free, easy, risk-free gain.

None of this means that it is the business of government to meet investor demand for free, easy, risk-free gain. At some point these shivering little safety-seeking birdies need to be kicked out of the nest. Meeting their incessant "demand" for safety can be a recipe for stagnation.

Mosler is right on this point (though not perhaps on the deficit point). You don't build roads and bridges because you need to provide private sector investors with a safe investment vehicle. You build them because the real benefits to the public of the new roads and bridges exceeds the cost to the public of building them.

Remember that these safe, publicly-provided assets are only safe investment vehicles because because the private sector bond buyers bear none of the risk. If the roads and bridges in question turned out to be a bad investment - i.e. their benefit to the public doesn't exceed the cost to the public of building them - then its not as though the bond-buyers don't get paid. They get paid and the public absorbs 100% of the loss.

Random said...

"None of this means that it is the business of government to meet investor demand for free, easy, risk-free gain. At some point these shivering little safety-seeking birdies need to be kicked out of the nest. Meeting their incessant "demand" for safety can be a recipe for stagnation."
No. This is the "secular stagnation" BS. The "recipe for stagnation" is because of lack of demand. There is a lack of demand and so we are stagnating! And a lot of bonds (at least in the UK) are for private pensions.
"the cost to the public of building them"
As to the "bad investment" this is bullshit. The govt does not need to make money! You cannot view it like that. "The public" "The taxpayer" does not take a "loss." If spending is wasteful resources are wasted.

Random said...

Right Mike what the US needs is more SPENDING. More bank lending or tax cuts or govt spending. Will this raise or lower the "deficit"? Who cares!

Dan Kervick said...

The govt does not need to make money! You cannot view it like that.

I didn't say the government needs to make money. What the public does need however is a positive return on its investments - even if that return comes in the form of collective goods, public goods, widely distributed capital development etc. that aren't associated with positive monetary returns.

If the public invests some portion of its wealth stock in building infrastructure, and as a result the value of the wealth stock is less after the investment than it was before the investment, then that was a bad investment. The reason we actually need to build infrastructure is because there are abundant opportunities for good investments available to us.

The public certainly can take a loss from bad investments. For example, taking a few trillion dollars of real resources and blowing them up in Iraq and Afghanistan for a decade was a huge loss for us. We are poorer than we would have been otherwise.

Michael Norman said...

Right, Random. You got it!