Dean Baker — "Savings Glut" Means Much of Economics Is WRONG

Dean Baker presents an account of saving and demand leakage that is in agreement with MMT.

CEPR — Beat the Press
"Savings Glut" Means Much of Economics Is WRONG
Dean Baker

Stephanie comments:

written by Stephanie Kelton, August 03, 2013 10:09 
Hi Dean, 

Saving is just another way of saying "demand leakage". Only those with a loanable funds/Say's Law view of the world see it as anything else. Unfortunately, Krugman appears to be stuck in the latter camp. He gets insufficient AD only under exceptional (short-run) conditions, currently his zero lower bound Liquidity Trap argument. This is why he can write a piece titled "The Price is Wrong" and assert that the lack of insufficient aggregate demand is due to the failure of a single price -- the real interest rate -- to adjust to its market clearing level. 

Absent the ZLB problem, you end up in a Say's Law world, which Krugman is committed to defending: 

"So why do AS-AD? First, you do want a quick introduction to the notion that supply shocks and demand shocks are different, that 1979-80 and 2008-2009 are different kinds of slump, and AS-AD gets you to that notion in a quick and dirty, back of the envelope way. 

Second — and this plays a surprisingly big role in my own pedagogical thinking — we do want, somewhere along the way, to get across the notion of the self-correcting economy, the notion that in the long run, we may all be dead, but that we also have a tendency to return to full employment via price flexibility." 

http://krugman.blogs.nytimes.com/2013/06/02/a-sad-story-i-mean-as-ad-story-wonkish

Dean Baker replies:

Krugman still believes that the economy tends to full employment
written by Dean, August 03, 2013 1:52 
Stephanie, 

i think you're right that Krugman considers the current downturn an exception because of the ZLB. In more normal times he would say that we can count on declines in the interest rate to move the economy quickly (fast enough not to need fiscal policy) to full employment.