Thursday, May 30, 2019

Stephanie Kelton — Modern Monetary Theory Is Not a Recipe for Doom

In this post, Stephanie Kelton takes on Paul Krugman. She appears to agree with Paul Krugman's assumption that monetary policy that is built on raising interest rates to address inflation is not backwards. Actually, central bank interest rate setting is a form of price setting, the policy rate being a variable that sets the cost of borrowing (price of money). Higher interest rates are also inflationary to the degree that increase the income of holders of securities, as Warren Mosler has observed.

Instead she addresses the interest rate simply as a policy variable under central bank control, so the central bank can always insure that "r" is less than "g" to prevent interest on government debt from growing faster than the economy. While that is true, wouldn't it be preferable to show how Krugman's assumption about monetary is more fundamentally mistaken.  This is especially germane since it is not just Krugman's mistake. It is the most commonly held assumption.

Note that Stephanie Kelton does mentions the expansionary impact of higher interest rates directly to Krugman in Paul Krugman Asked Me About Modern Monetary Theory. Here Are 4 Answers. However, it is mentioned in passing rather than being elaborated, as it really need to be in order to finally bury monetarism in any form, strong or weak.

Stephanie Kelton finally addresses this point in another response to Krugman, The Clock Runs Down on Mainstream Keynesianism.

My suggestion is for the MMT economists to put together an elevator speech on this, along with a more complete explanation that is accessible to non-economists and a tightly argued paper for economist and financial types. It's all there in the MMT literature but it needs to be more tightly co-ordinated.
Stephanie Kelton | Professor of Public Policy and Economics at Stony Brook University, formerly Democrats' chief economist on the staff of the U.S. Senate Budget Committee, and an economic adviser to the 2016 presidential campaign of Senator Bernie Sanders


Ralph Musgrave said...

Contrary to Kelton & Krugman’s claims, artificial interest rate adjustments are actually “backward” in that the GDP maximising rate of interest is presumably the free market rate.

Next: “Higher interest rates are also inflationary to the degree that increase the income of holders of securities, as Warren Mosler has observed.” That depends on how that interest is funded: if it is funded via tax, then interest on govt debt has no effect on the deficit (aka the change in private sector paper assets). But if it’s funded via new money created by the Fed, then obviously higher interest rates mean increased income for the private sector all else equal.

Next, re r and g, I agree with the claim by Mosler and Mitchell that there is no good reason for government borrowing at all. Milton Friedman said likewise. But if we are to have govt borrowing, while it’s obvious r cannot exceed g till the end of time, I can’t see why r shouldn’t exceed g for a good five years or so.

And finally, re Tom’s call for “tighter coordination”, that would certainly seem to be necessary in view of the above discrepancy between Kelton’s views and those of Mosler and Mitchell.

Mike Norman said...

Higher rates are not just about increasing income (which by itself is not necessarily inflationary), but they set the general level of prices higher as the cost of credit is reflected in the cost of all goods and services.

AXEC / E.K-H said...

MMT: doom or survival?
Comment on Stephanie Kelton on ‘Modern Monetary Theory Is Not a Recipe for Doom’*

Stephanie Kelton introduces her rebuttal of Paul Krugman thusly: “Although he’s had almost a decade to come to terms with the approach, he is still getting some of the basic ideas wrong. This matters for two reasons: one, because people listen to Paul Krugman, who won the Nobel economics prize in 2008, and, two, because the approach he is discussing is at the heart of how to design economic policies that affect millions of Americans. I’d like to try to move the conversation forward by addressing his concerns.”

The conversation is pointless for the simple reason that both Paul Krugman and Stephanie Kelton are failed/fake scientists. Paul Krugman never understood how the economy works,#1 he is an agenda-pushing journalist on a large fake-news platform, and the economics “Nobel” signifies nothing because economics is a failed science.#2 Stephanie Kelton, on the other hand, promotes the profit-boosting MMT policy of deficit-spending/money-creation in a social/environmental bluff package.#3, #4, #5, #6

Stephanie Kelton’s critique of Paul Krugman’s policy blather hits the point: mainstream economics is a scientific Zombie ― dead but not buried. But Paul Krugman’s critique of MMT is entirely beside the point. The lethal effect of MMT policy is NOT on inflation or crowding out or on the monetary-fiscal tradeoff but on distribution.

The macroeconomic Profit Law entails Public Deficit = Private Profit which means that the Oligarchy’s financial wealth and public debt (currently $22 trillion) grow in lockstep. Hence the MMTers’ arguments for permanent deficit-spending/money-creation have a tangible use-value for the Oligarchy. The so-called free market economy hangs already for a long time on the full life-support of the State, i.e. on a smoothly growing public debt.

On closer inspection, both Stephanie Kelton and Paul Krugman are in the same business, i.e. of helping the Oligarchy to survive for another day by brain-washing WeThePeople with academic snake oil.#8

Egmont Kakarot-Handtke

* BloombergOpinion

#1 Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It

#2 Krugman and the scientific implosion of economics

#3 The Kelton-Fraud

#4 Stephanie Kelton’s legendary Plain-Sight-Ink-Trick

#5 Down with idiocy!

#6 No MMT illusions! YOU are going to pay for it

#7 MMT and the canonical macroeconomic model

#8 Just one more day: How MMT delays the breakdown of Capitalism