Friday, March 25, 2011

Paul Krugman Marginalizes MMT

Paul Krugman does a great job of destroying a strawman and revealing his ignorance of MMT in Deficits and the Printing Press (Somewhat Wonkish) as many commentators point out to him. (It's only "wonkish" because Prof. Krugman doesn't get it.)

Cullen Roche responds with a post at Pragmatic Capitalism that sums it up nicely.

The good news is that Krugman mentions Modern Monetary Theory by name on the #1 economics blog on the net, and it is a truism of public relations and marketing that all publicity is good publicity — and it is even better when it is unsolicited and free. Thank you for the shout out, Prof. Krugman.

For the wonks:

The crux of Krugman's hit piece is this: "I could go on, but you get the point: once we’re no longer in a liquidity trap, running large deficits without access to bond markets is a recipe for very high inflation, perhaps even hyperinflation. And no amount of talk about actual financial flows, about who buys what from whom, can make that point disappear: if you’re going to finance deficits by creating monetary base, someone has to be persuaded to hold the additional base."

Prof. Krugman presupposes "no IOR (interest on reserves)." But the Fed is already paying interest on reserves. Why suppose that if there are excess reserves that the Fed would not pay a support rate (IOR) consistent with the interest rate it targets (FFR), especially if no Treasury securities are draining the excess reserves?

As Anon points out in a comment at The Center of the Universe in this thread:

"IOR is not an option – its mandatory – if there are excess reserves and if the Fed runs a positive fed funds target – i.e. if the Fed wants to tighten at some point in the future. And he’s talking about excess reserves as a result of what he calls “monetizing” the deficit.

"That makes the difference between excess reserves and t-bills immaterial in terms of the interest rate and economic effect.

"He [Krugman] doesn’t seem to understand this.

"The failure to differentiate reserves and currency as distinct monetary components is quite foolish. That’s a trap that all economists who don’t understand the monetary system fall into."


UPDATE: Prof. Scott Fullwiler tweets:

Another for @NYTkrugman & anyone else interested: Do Not Confuse Solvency with Sustainability


Warren Mosler responds to Krugman 1 here.


Prof Bill Mitchell responds to Krugman 1 here and here.


Rob Parteneau responds to Krugman 1 here.


Marshall Auerback responds to Krugman 1 here


ses responds to Krugman 1 here with citations.


William Allen (traditional economist, convert to MMT) responds to Krugman 1 here.


hbl responds to Krugman 1 here.


Canadian BD responds to Krugman 1 here.


Adam responds to Krugman 1 here. (Ouch)


Andy Harless respondes to Krugman 1 here.


Charles Jurcich responds to Krugman 1 here and brings in the job guarantee.


Here Steve Sherman thinks that Krugman may be responding to a post by Dean Baker, Krugman Is Wrong: The United States Could Not End Up Like Greece.


obsvr-1 responds to Krugman 1 here. (Proposal for reform)


Letsgetitdone (Joe Firestone) posts on Krugman 1 at DailyKos:


Prof. Krugman reacts with another post, dragging Prof. James K. Galbraith into the fray and claiming that deficits can lead to federal insolvency.


Tom Hickey responds to Krugman 2 here.


JKH responds to Krugman 2 here.


beowulf responds to Krugman 2 here.


Prof. James K. Galbraith comments on Krugman 2 here.


Marshal Auerback responds to Krugman 2 here.


Andy Harless responds to Krugman 2 here.


Ron T. responds to Krugman 2 here.


Tschaff Reisberg responds to Krugman 2 here.


John K responds to Krugman 2 here.


rpiert responds to Krugman 2 here.


Roger Erickson responds to Krugman 2 here.


Cullen Roche posts at Pragmatic Capitalism on Krugman 2:

CR: "Unfortunately, his argument is the logical equivalent of debating with someone about the potential decline in oxygen levels in the atmosphere and concluding with the absurd statement that “if the oxygen runs out tomorrow we will all die”. Of course this is true, but one must first explain what will lead to the lack of oxygen and the specific sequence of events. If you fail to do so you have failed to prove a point in the first place….Professor Krugman fails to connect the dots in a rational and logical sequence of events and it entirely discredits his conclusions."


Letsgetitdone (Joe Firestone) posts on Krugman 2 at DailyKos:


Steve Randy Waldman posts on Krugman 1 and 2 at Interfluidity. (See the comments there, too)


BTW, I have tried to select a representative cross-section of the best comments and haven't included every relevant comment, so please don't be disappointed if yours doesn't appear. If Prof. Krugman reads only a few of these comments, I don't see how he can continue to hold his basically monetarist position.



Matt Franko said...

"#1 economics blogs on the net"

Hopefully not for long! ;)

Krugman is NOT an economist.

googleheim said...

thank you

evidently he is dressing it all up

however what is his point with stimulus ?

Tom Hickey said...

g, PK has constructed a hypothetical case that is extraordinarily unlikely in order to push his hyperinflation hypothesis. It's just confused because no one who understands MMT would either recommend a policy that gets to where he posits, or fail to understand the steps necessary to deal with such an unlikely eventuality if it arose. For example, he presupposes no payment of interest on excess reserves. Why? — when that is an obvious escape.

Anonymous said...

Despite saying he's not aiming for a fight in the blog, it is my sincere belief that is exactly what he is inciting and indulging in. An economic cultural war ala Rupert Murdoch.

And with a paywall going up he could probably do with the traffic

Tom Hickey said...

modernmoney, that's the tone I picked up, too. His argument is quite similar to the kerfuffle he had with Jamie Galbraith on his blog last year, when played the hyperinflation card. That is a really, really weak card, because it presumes your opponent is an idiot, which is an ad hominem argument .

I Would Do Anything For Stimulus, But I Won’t Do That (Wonkish), followed immediately by "More on Deficit Limits."

If he reads comments, he can't claim ignorance. Many MMT heavyweights weighed in back then. I expect the same on this post. The comments aren't up yet, though.

Anonymous said...

I believe he understands MMT, he just can't bring himself to accept it. Hence the latest kerfuffle.

Neil Wilson said...

Have you all written to the New York Times editor requesting that they commission a guest column from an MMT published economist.

Get those emails in telling the editor Krugman is misinterpreting something that is of vast value to the American people and there should be a right of reply from Randy/Bill/Scott/Warren, etc.

Matt Franko said...

9:00 AM EST here Saturday morning: Still no comments up when I access the NYT site....

This is childish.

googleheim said...

HI Matt and Tom

I think if someone uses reverse strategy to confront Krugman, a better reaction can be incited -

His regular column is MMT ( stimulus, anti deficit terrorista, ) except for the tax thing which is aimed at who knows what.

Therefore, some could accuse him of being for MMT ( like me ) full blast.

Krugman already has enemies. If you attack him from the opposite side than the hardcore defict terrorist conservative dill weeds, then you are just pushing Krugman into the center lane and the rightful middle way. This will justify his position and continue to marginalize MMT.

So, some but not all by any means, have to point out his MMT characteristics. Then he'll just fend it off. The more he is labeled MMT, then the more he will have to either embrace it or detract from it.

Either way it is good exposure to MMT since if he is MMT, then a lot of people will look into it.

And if he continues that he is NOT MMT then a lot of people will look into it because he is talking about it.

Label him as an almost MMT and see what happens. I know it is crass and unworthy, but gosh he needs to step up to the plate.

Or he is baiting MMT to come forth and step up to plate.

How exciting !

Matt Franko said...


That is an approach that Warren Mosler often takes: declare victory and move forward, it has merit I agree.

But it is hard to take when Krugman repeatedly mis-represents. Especially when other scholarly people in the academic leadership of MMT are slighted in this fashion of his columns.

Tom is a PhD also. I could not see Tom misrepresenting another scholar without doing objective and thorough analysis of the other side's position, ESPECIALLY IF TOM WAS GOING TO PUT IT IN A NYT COLUMN.

This is "sophomoric" scholarship, and also bad journalism if you think about it.

Krugman fails both as an economist AND a journalist in this situation.

NYT should re-label it: "The incompetence of a liberal"

My bet is he will not post any comments to the blog. He will get another post up quickly to try to change the subject...

googleheim said...

This gets back to what you and Mike refer to as "agendas" whether it's the Austrian's or the Krugmans or even the Chomsky's.

Krugman has an agenda to steer Obama and to support Obama when Obama has steered.

of course there's more to it.

googleheim said...

Then I also just have to point out that Krugman uses MMT just enough to support his Keynes and his agenda. After that it's like wham bam thank you m'ame you get back over there.

he dogs china but does not dog the Euro boys who give out the Nobels evidently.

Райчо Марков said...

I can say now that Mr. Krugman is not smart - that's a fact after his stupid article about MMT from yesterday.

He had three choices:

- accept MMT totally - the right choice

- refute MMT - stupid

- ignore MMT - still stupid

MMT will become mainstream sooner or later - that's a fact. Mr Krugman will be forgotten and you know where he can stick his Nobel prize...

Matt Franko said...

To perhaps build on Anon's comments, Krugman writes:

"So suppose that we eventually go back to a situation in which interest rates are positive,"

How do interest rates get to higher levels in the first place? They get there by the Fed setting them there.

They get there via the Fed's conduct of Monetary Policy. Krugman is not assuming an abandonment of Monetary Policy in his hypo.

The Fed has 2 choices in how they do this:
1. Open market operations in the TREASURY market, or

2. Paying interest on reserves (IOR).

I guess Krugman's hypothetical situation assumes choice #1 is out, so that leaves only choice #2: Interest on Reserves.

Krugman continues: "if you’re going to finance deficits by creating monetary base, someone has to be persuaded to hold the additional base."

This higher interest rate paid on reserves will be the rate setting mechanism, and will be the mechanism to "persuade someone to hold the additional base" as they will be paid the IOR rate.

Tom Hickey said...

Even without a reserve drain with tsys, or paying a support rate (IOR). where does PK think the monetary base is going anyway. Excess reserves sit in banks' deposit accounts at the Fed. Does PK think that because a bank has excess reserves. they will then be somehow impelled to lend them out? Is he presuming the money multiplier?

Apparently, PK doesn't get that banks don't lend out reserves/deposit or even lend against reserves. They lend against capital. That's what value at risk is all about for banks. A bank stress test shows the need for more capital, not more reserves. It's a solvency issue, not a liquidity issue.

As Warren says, set the overnight rate at zero, close the Fed, let Treasury handle settlement and FDIC takes care of regulation, use fiscal policy to address price stability, and save 5B that can be used to lower taxes.

Tom Hickey said...

Good point, Neil. Submit a letter to the NYT editor here, asking for "equal time" by an MMT expert, since PK's blog post is so unfairly dismissive.

Mario said...

great discussion here. I have a few questions I am still confused on.

#1. Are you proposing that the IOR rate be the same as the FFR? How does this work if you are also suggesting the overnight rate go to zero? The FFR is the overnight rate no?

#2. If the FFR rate is always at zero, isn't that always going to be inflationary? How do we combat against that? What am I missing?

#3. Won't the IOR rate generally speaking always be lower than bond rates? Therefore won't banks not be as interested to agree to this kind of system? I'm not saying we shouldn't still do it but I am just saying...

#4. Wouldn't excess bank reserves grow ad infinitum forever and ever as the government spends each and every year? That doesn't seem fair to me. Isn't there a way that the government can spend without giving any subsidy to the banks? Why does government spending need to "matched" by anyone or anything? Why can't the new money in people's bank accounts simply be accounted for at the required fractional reserve rate that banks are required to hold for all their outstanding liabilities? In other words when the Treasury deposits a $1,000 check into Sue Bob's checking account for social security, (assuming a 1/10 reserve requirement for banks), then the Fed just adds $100 to Sue Bob's bank's reserves. No bond sales, no excess reserves, just straight up accounting. This of course means that the Treasury doesn't need to compensate the Fed when it spends. The Fed and Treasury can still be one on the books but operationally they can still be separate as they are now.

#5. What would happen to the bond market if banks stopped buying so many bonds at auction all the time? Wouldn't the US bond market implode or at least take a serious hit? What are the repercussions of that?

#6. I don't see how the Fed are "technocrats." I mean somebody has to adjust rates...whether it's at the Fed or at the Treasury...somebody is going to do it. Why not have the Fed do it? They are more insulated against political hamstringing than the Treasury is.

Mario said...

I just wrote to the NY Times editor and suggested randy, warren, mike, or bill write a proper MMT article.


Letsgetitdone said...

Good comments on this! I've completed my response to Krugman and posted it at

In includes a review of the first kerfuffle and shows that Paul K. hasn't learned anything or added anything new.

Matt Franko said...

I didnt think he'd do it, but he is getting SCORCHED in the comments.

Now this new post in response, is more respectful, but is a head-first descent into monetarism.

But at the end he says "So at the moment this is just an intellectual exercise."

Maybe that is a leading statement implying that he wants to hash this out once and for all for himself...

Who knows, he may want to be the "first one out" of the mainstream to adopt MMT, but he may have to do it in a reasoned and very public way that looks like an educational process that he transitioned thru, in order to minimize the perception that he 'had it wrong' all along... I hope...

Great reporting on this by the way!


Tom Hickey said...

Most of the comments are excellent, Matt. Turns out that a lot of people are onto MMT. If PK reads the comments, I don't see how he can miss seeing it.

googleheim said...

Congratulations guys and gals

MMT found the back door.

I commend Krugman for set up and I commend you guys for the statute of liberty so to speak.

Since his blogs are as wonkish as he gets for the NY Times, he's certainly a wonky tonker !

This is a good score for MMT and you should be thank you to Krugman even if you aren't, since he even mentioned MMT and now we can have some exposure.

Now if you can only get this going on the bottom end of society at the local level, that would be another helper

Unknown said...

"it is a truism of public relations and marketing that all publicity is good publicity"

True. Maybe this is Krugmans hidden agenda? I.e. He doesn’t want to be viewed as a supporter of this, still heterodox, view - but do want people to know about it – and fast forwarding it into public recognition by bringing it into the mainstream discussion.

I agree that this interpretation is farfetched – but I don´t see any other explanation why such a skilled economist otherwise would get it so wrong (or put up such a perfect opportunity for the MMT supporters to debunk its primary straw man objection).

Anonymous said...

We need someone who can write assertively and clearly to really work on this. I would vote for Jamie or Marshall.

The point to get across is that the government does not have to issue treasuries, it has the constitutional right to create money, and it can is in control of interest rates.

Some people (this apparently includes PK) get pretty confused if you start talking about sectoral balances and accounting.