Paul Krugman’s macro framework is leading him astray.
Stephanie Kelton takes on Paul Krugmen. It looks like Albert Edwards is right, MMT has excellent models. MMT is becoming confident.
He [ Paul Krugman] used the same model to fight the deficit scolds, who were pushing austerity during the Great Recession. (And he deserves credit for being on the right side of that debate!) But his defense of deficits was always contingent on being in a depressed economy, where he argued that monetary policy had become largely powerless (a flat LM curve) due to the zero lower bound (ZLB) so fiscal policy needed to do more to help the economy recover. Now that the economy has escaped the ZLB, Krugman has returned to warning that “deficits matter again.” In his words:
What changes once we’re close to full employment? Basically, government borrowing once again competes with the private sector for a limited amount of money. This means that deficit spending no longer provides much if any economic boost, because it drives up interest rates and ‘crowds out’ private investment.
He then goes on to say that “by crowding out investment,” deficit spending “will somewhat reduce long-term economic growth.”
This follows directly from his model, and these are the arguments I disputed in my most recent reply. Our differences derive from our different analytical frameworks: Mainstream Keynesian versus MMT.
In the U.S. context, modern monetary theory begins with the observation that the currency itself is a simple public monopoly. From the earliest stages of the project (mid-1990s), MMT held that currency regimes matter. MMTers argued that governments cannot become insolvent when they borrow in their own non-convertible currencies and that the currency issuer never has to accept “market-determined” interest rates.
We explained that Social Security faces no long-term financial crisis and warned that the budget surpluses in the Bill Clinton administration were unsustainable. We warned of the housing bubble before it burst. We explained that quantitative easing wouldn’t be inflationary. We knew Reinhart and Rogoff were wrong about deficits and growth even before the Excel spreadsheet error was discovered.
We warned that the euro was susceptible to a debt crisis. And, once the crisis occurred, we insisted that the U.S. could never end up like Greece.
Bloomberg
To finish the thought experiment, consider what would happen if Congress decided to dispense with Treasury auctions and simply allow budget deficits to supply the system with base money instead of Treasuries. Clearly, that would drive the overnight rate to zero. If it wanted to, the Fed could still achieve a positive overnight rate, simply by paying “interest on reserve,” or IOR, balances. That, too, would be fighting against the natural tendency for rates to go to zero. Stephanie Kelton [bold added]
ReplyDeleteThe tendency of lending rates in fiat to tend toward ZERO percent is only natural if it is natural that only depository institutions, aka "the banks", may use fiat in inherently risk-free account form at the Central Bank and if all other privileges for the banks, such as government-provided deposit insurance, are natural too.
So is it natural for citizens to not be able to use their Nation's fiat*? But must instead use deposits at a member of a government-privileged usury cartel?
What say ye MMT advocates?
And what about you, Bob Roddis?
*except for grubby, inconvenient, unsafe, totally useless for electronic commerce physcial fiat, aka "cash."
We're in that sweet spot where people understand the concepts and can dream their utopian vision but don't have to confront differing value systems on policy priorities. MMT is fairly non partisan even though the socialists making MMT proposals have used their priorities, I'm 100% certain as congress adjusts course, unpopular progressive policies will remain unpopular progressive policy. It's not affordability that makes progressives unpopular.
ReplyDeleteAnd the gloves are off! Krugman gets set back on his heels, looking stunned and disoriented, His face is a little bloody.
ReplyDeleteiirc, one time I read on the Fed's own website about how it conducts monetary policy, basically explaining what Kelton explained in this article. I can't remember exactly what the Fed's website said and I'm not interested enough to go look it up, but this stuff isn't exactly a secret.
And what on earth is Krugman talking about when he says "a limited amount of money"? He's referring to loanable funds, isn't he? He got smashed on that, in public, by Steve Keen many years ago. I also recall the IMF or the Bank of England (again I don't care enough to look it up) said that belief in the loanable funds was the "hallmark" of someone who doesn't understand banking. In any case, I'm pretty sure they've both put out papers disregarding "loanable funds". So Krugman's position is even more puzzling.
"unpopular progressive policies will remain unpopular progressive policy. It's not affordability that makes progressives unpopular."
ReplyDeleteTo which policies are you referring? Many progressives policies are wildly popular, like medicare for all, raising the minimum wage, strengthening social security, etc. Or are you referring to their popularity among members of congress?
Andrew, Re your request for Bob Roddis's views, you don't seriously think you'll get any inspiring ideas that way, do you?....:-)
ReplyDelete“What changes once we’re close to full employment? Basically, government borrowing once again competes with the private sector for a limited amount of money. This means that deficit spending no longer provides much if any economic boost, because it drives up interest rates and ‘crowds out’ private investment.” ~ Krugman
ReplyDeleteKrugman is a neoliberal who calls himself a “liberal” in order to keep his audience from thinking. For example, he claims that money is limited, when he knows that money is limitless. He implies that the US government borrows its spending money, which he knows is false.
Like most economists, Krugman is alarmed by the growing call for Nationalized Health Insurance (i.e. Universal Medicare), and he is working hard to sustain mega-profits for insurance giants.
Therefore Krugman is now repeating the standard trash that there is “no money” for Universal Medicare, and “drives up interest rates,” and we need more austerity, and “Zimbabwe!” and blah, blah, blah. All lies. No wonder Krugman was given a Nobel Prize.
Neoliberal Democrats are also alarmed. Rep. Cheri Bustos (D-Ill.), chairwoman of the Democratic Congressional Campaign Committee, says Medicare for All is “too expensive,” and the US government “has no money,” and “Zimbabwe!” and blah, blah, blah.
Ms. Bustos was a lobbyist for the for-profit health insurance industry before she was elected. She also demands a balanced federal budget (zero deficit).
These liars never shut up.
I left a comment after the Bloomberg article saying:
ReplyDeleteRe the effect of deficits on interest rates, there's a crucial difference between where deficits are being used legitimately, i.e. to cut unemployment (where my hunch is that the effect on interest rates is neutral or nearly so) and where deficits arise simply from politicians falling for the temptation of funding public spending via borrowing rather than raising taxes so as to ingratiate themselves with voters, a temptation to which David Hume pointed three hundred years ago. In the latter case, a deficit will clearly push up rates because the excess demand stemming from the deficit will have to be countered some way or other: e.g. by the central bank raising interest rates.
"...politicians falling for the temptation of funding public spending via borrowing ..."
ReplyDeleteThe US government does not borrow one penny of its spending money from anyone.
Instead, the US government creates its spending money out of thin air.
Basic MMT.
But his defense of deficits was always contingent on being in a depressed economy, where he argued that monetary policy had become largely powerless (a flat LM curve) due to the zero lower bound (ZLB) so fiscal policy needed to do more to help the economy recover. Stephanie Kelton [bold added]
ReplyDeleteOf course there is no zero lower bound, at least not since the invention of negative numbers.
But, if one applies negative interest to bank reserves, they will simply pass them on to their depositors, including poor ones, who need to save, not be forced to consume or take risks.
Just one more reason among very many why all citizens should be allowed accounts at the Central Bank itself - so negative interest can be applied to large accounts but not small ones.
"Just one more reason among very many why all citizens should be allowed accounts at the Central Bank itself..."
ReplyDeleteCitizens already are allowed. When you buy a Treasury security, your purchase money is credited to a Federal Reserve savings account in your name.
T-securities function exactly the same as CDs (Certificates of Deposit) at regular banks.
The so-called "national debt" is the total amount of money that people have on deposit in savings accounts at the central bank (the Fed).
Citizens already are allowed. When you buy a Treasury security, your purchase money is credited to a Federal Reserve savings account in your name. konrad
ReplyDeleteIgnoring that you have the details of Treasury purchases wrong, there a huge difference in a savings only account (e.g. US Treasury Direct) which allows one to SAVE fiat and a checking account, which allows one to USE fiat, i.e. spend it, lend it, etc. via a debit card or checks.
As it stands today, except for mere physical fiat, aka "cash", citizens may only SAVE fiat, not USE it directly.
In other words, where is my debit card and a check book that draws on my fiat account at the Fed?
ReplyDeleteThere are no such things since citizens are not allowed accounts at the Fed, only "the banks" are.
And that's the problem in a nut-shell - we are forced to use bank deposits or be limited to mere physical fiat, aka "cash."
FYI, konrad:
ReplyDeletehttps://www.treasury.gov/about/organizational-structure/ig/pages/scams/how-marketable-treasury-securities-work.aspx
“As it stands today, except for mere physical fiat, aka "cash", citizens may only SAVE fiat, not USE it directly. “
ReplyDeleteI use fiat money every day.
You admit this yourself a moment later…
“We are forced to use bank deposits or be limited to mere physical fiat, aka ‘cash’.”
If you meant that you want average people to have regular checking accounts at the central bank, then you should have said so.
You are as self-contradictory as you are muddled.
If you meant that you want average people to have regular checking accounts at the central bank, then you should have said so. Konrad
ReplyDeleteThat's a fair criticism. Even though the Fed does not have the savings accounts you claim it has, it does not hurt to be specific.
The clock runs down on economics
ReplyDeleteComment on Stephanie Kelton on ‘The Clock Runs Down on Mainstream Keynesianism’*
Almost everybody knows by now that mainstream economics is dead. As a matter of fact, mainstream economics was already dead in the cradle 140+ years ago. The real wonder is why it is still around and why failed scientists like Paul Krugman are still producing proto-scientific garbage. For some reason, the basic methodological principle of science, i.e. to discard falsified theories, does not work in economics. The simple idea of scientific progress is that theories that have been proven materially/formally inconsistent are unceremoniously buried at the Flat-Earth-Cemetery and the attention turns to a more promising research program.
Applied to economics, this means that mainstream folks like Krugman are done.#1 However, there is a snag: “… it takes a new theory, and not just the destructive exposure of assumptions or the collection of new facts, to beat an old theory.” (Blaug)
Stephanie Kelton claims that MMT is the new theory that hammers the final nail in Paul Krugman’s coffin: “No economist is going to get everything right. But the odds of getting things right improve dramatically when you’re working with a macro framework that doesn’t lead you astray. The IS-LM framework is a gadget that will often align with sensible real-world analysis. It may perform better than a stopped clock, but it is no match for MMT.” and “The [IS-LM] model remains the workhorse for many mainstream Keynesians. MMT considers it fundamentally flawed.”#2
On this point, Stephanie Kelton is absolutely right: IS-LM is refuted on all counts#3 and only stupid or corrupt economists still apply it.
However, from this does not follow that MMT is the long waited for replacement for mainstream economics. Although MMT is way better than IS-LM it is still flawed. The curious thing is, that IS-LM and MMT share the same foundational blunder which can be traced back to Keynes’ General Theory.#4
From the methodological standpoint, both New Keynesianism and MMT is empirically/logically inconsistent and not much more than commonsensical storytelling. Neither Paul Krugman’s nor Stephanie Kelton’s policy guidance has sound scientific foundations.
In order to make her point, Stephanie Kelton cites Galbraith: “There are two ways to get the increase in total spending that we call ‘economic growth.’ One way is for government to [deficit] spend. The other is for banks to lend. For ordinary people, public budget deficits, despite their bad reputation, are much better than private loans. Deficits put money in private pockets…This is called an increase in ‘net financial wealth’… In contrast, when a bank makes a loan, the cash is not owned free and clear.”
This is a hard to disentangle analytical half-truth and a full political fraud. Because it holds Public Deficit = Private Profit, MMT deficit-spending/money-creation puts money in the pockets of the Oligarchy. The fundamental law of Capitalism is the macroeconomic Profit Law and it says Q=Yd+(I−S)+(G−T)+(X−M) which boils down to Q=(G−T), i.e. profit Q is equal to the government’s deficit spending G>T.
The claim that MMT policy is for the benefit of WeThePeople is provably false. Because MMT gets the foundational concept of profit wrong, the whole theory is scientifically worthless. Politically, MMT is for the benefit of the Oligarchy.#5, #6 In the final analysis, MMTers are just as stupid and corrupt as mainstream economists.#7, #8, #9
The clock runs down not only for Paul Krugman’s New Keynesianism but also for Stephanie Kelton’s MMT.
Egmont Kakarot-Handtke
References
https://axecorg.blogspot.com/2019/03/the-clock-runs-down-on-economics.html
Albert Edwards?
ReplyDelete“The Fed does not have the savings accounts.” ~ A.A.
ReplyDeleteWhen you buy a T-security, where does your purchase money go to?
This comment has been removed by the author.
ReplyDeleteWhen you buy a T-security, where does your purchase money go to?
ReplyDeleteKonrad
Fiat is transferred into the US Treasury's account at the Federal Reserve.
"Fiat is transferred into the US Treasury's account at the Federal Reserve."
ReplyDeleteYes, under the name of whoever bought the T-security.
It's the same as buying a CD at a regular bank. The bank opens an account in your name, and the account stays open until your CD matures. While it is open, you have an account at the bank even if you have no checking account at the bank.
Likewise, when you buy a T-security, you have an account at the Fed even if you have no checking account at the bank.
Therefore your assertion that regular people cannot have an account at the central bank is false.
That said, the important thing is that without bank reform, MMT cannot help us. I suspect that you agree with that.
Likewise, when you buy a T-security, you have an account at the Fed even if you have no checking account at the bank. Konrad
ReplyDeleteNo you don't! The Treasury has an account at the Fed and you have an account with the US Treasury (TreasuryDirect). And you don't get a debit card or checks so you can't USE the fiat therein - like I've said.
Therefore your assertion that regular people cannot have an account at the central bank is false. Konrad
Nope, not even savings accounts much less checking accounts like the banks have.
That said, the important thing is that without bank reform, MMT cannot help us. I suspect that you agree with that. Konrad
You apparently have no idea what genuine bank reform requires - that citizens not have to use private bank deposits but be able to use their own Nation's fiat in account form as the banks do.
Cross-posting
ReplyDeleteHype does not help: MMT is finished
Comment on Bill Mitchell on ‘The conga line of MMT critics ― marching into oblivion’
After 200+ years of failure, economists still present themselves as scientists and experts. Fact is, though, that economics is NOT part of science but an integral part of the political Circus Maximus. Accordingly, by mentioning MMT in the context of her Green New Deal initiative, the representative Alexandria Ocasio-Cortez’s triggered an avalanche of political comments.
As Bill Mitchell observes: “The rising popularity of MMT is bringing out a lot of people from the woodwork who have ignored our work until now but who, for one reason or another, feel they have to have a stake in the game or look stupid.”
It is indeed pretty obvious that a lot of mainstream critique of MMT is just stupid.#1 This is no surprise because, by definition, one must be rather stupid to be a card-carrying mainstreamer, which means still failing to realize that standard economics is proto-scientific garbage. Therefore, Bill Mitchell is right: “And, they mostly end up looking foolish given the quality of their criticisms.”
To win an argument against a mainstreamer is easy but does by no stretch of the imagination imply that MMT itself is scientifically acceptable. What MMT has actually achieved is this: “The whole MMT journey to date has been to caution readers about the actual nature of constraints on government spending rather than the false constraints taught in economics courses around the world and wheeled out continually by self-serving politicians and lobbyists. By showing there are no intrinsic financial constraints on such spending, MMT, in no way, is advocating a carte blanche.”
This, though, is a rather trivial point. MMT has clarified a lot of silly misunderstanding and the unqualified critique of mainstreamers. MMT is clearly superior to mainstream economics because it is macrofounded. However, MMT has not answered to the scientific refutation, i.e. the proof of inconsistency#2 and its far-reaching implication.#3
• MMT’s macroeconomic foundations are unacceptable, i.e. MMT’s foundational sectoral balances equation is mathematically false, more specifically (I−S)+(G−T)+(X−M)=0 is false and (I−S)+(G−T)+(X−M)−(Q−Yd)=0 is true. This is a testable proposition.
• Because the axiomatic foundations are false, one can safely forget the rest. MMT is fake science.
• By not addressing refutation but systematically blocking it, MMTers violate scientific standards.
• On the one hand, Bill Mitchell claims: “MMT is not about political theory or praxis.” On the other hand, MMTers present themselves as Progressives and criticize the genuine left-wing parties and movements as having swallowed Neoliberalism.#4
• As a matter of fact, MMT is political agenda pushing in a scientific bluff package.
• Because of the macroeconomic Profit Law, i.e. Public Deficit = Private Profit, the MMT policy of deficit-spending/money-creation is NOT for the benefit of WeThePeople but of the Oligarchy.#5 MMT is just another political fraud.
In the final analysis, MMTers are either stupid or corrupt ― just like mainstream economists. This turns every discussion between the two political sects into an absurd proto-scientific performance.#6
Egmont Kakarot-Handtke
#1 Paul’s and Stephanie’s economic delirium talk
https://axecorg.blogspot.com/2019/03/pauls-and-stephanies-economic-delirium.html
#2 The final implosion of MMT
https://axecorg.blogspot.com/2016/10/the-final-implosion-of-mmt.html
#3 MMT for beginners
https://axecorg.blogspot.com/2019/02/mmt-for-beginners.html
#4 MMT Progressives: stupid or corrupt or both?
https://axecorg.blogspot.com/2018/08/mmt-progressives-stupid-or-corrupt-or.html
#5 Very busy these days: Wall Street’s agents
https://axecorg.blogspot.com/2018/10/very-busy-these-days-wall-streets-agents.html
#6 The clock runs down on economics
https://axecorg.blogspot.com/2019/03/the-clock-runs-down-on-economics.html