Saturday, February 17, 2018

Simon Wren-Lewis — Do Trump’s deficits matter?

Mentions MMT. See comments also.

Mainly Macro
Do Trump’s deficits matter?
Simon Wren-Lewis | Professor of Economics, Oxford University
ht Ralph Musgrave


Ralph Musgrave said...

Wren-Lewis claims that MMTers argue for adjusting demand by adjusting the deficit rather than by adjusting interest rates. And he claims MMTers think that because “they think the central bank, in changing interest rates to control inflation, is wasting its time, because they believe rates do not have a predictable impact on demand and inflation.”

Certainly Warren Mosler has argued for a permanent zero rate more than once. Strikes me another very good reason for a permanent zero rate is that if the base rate is above zero, that indicates the state has supplied the private sector with more state liabilities than the private sector wants. In that case, the private sector has to be induced not to spend that unwanted money by being offered interest on some of the money.

I think Warren made that point in his “parents, children and business card” story: i.e. if the parents issue the children with more cards than they want, the parents have to offer the children interest.

To summarize, letting interest rates rise above zero is actually a nonsense in that it involves every mortgagor paying more than need for their mortgages just so that the central bank can use interest rate adjustments to influence demand.

Matt Franko said...

"MMTers argue for adjusting demand by adjusting the deficit "


Tom Hickey said...

MMT economist recommend adjusting demand through fiscal flows, ideally managed by automatic stabilization including a JG, and supplementally only as needed, which should be rare in a well designed system. The fiscal balance floats with non-government saving desire.

Monetary policy is based on interest rates affecting borrowing costs, cost of investment in particular.

Matt Franko said...

Well then where did Ralph get this idea?

Matt Franko said...

Warren’s latest:”Consequently, even with what may seem to be what historically has been a sufficiently high Federal deficit, GDP can retreat”