You might have been hearing/reading about MMT recently. Today’s set of links is really one place to read a lot of back and forth between two economists about what MMT means in practice – plus an additional bonus link, and a Twitter thread.
You absolutely should read each of these links if you are a student of macro. You probably should read these links if you are interested in the economy – but in this case, feel free to skip some of them. I leave it to your judgment.
- “OK, Lerner: His argument was that countries that (a) rely on fiat money they control and (b) don’t borrow in someone else’s currency don’t face any debt constraints, because they can always print money to service their debt. What they face, instead, is an inflation constraint: too much fiscal stimulus will cause an overheating economy. So their budget policies should be entirely focused on getting the level of aggregate demand right: the budget deficit should be big enough to produce full employment, but no so big as to produce inflationary overheating.”
Paul Krugman gets the ball rolling by explaining what Abba Lerner’s work was all about, why it made sense then, and perhaps doesn’t now.
- “Outside of the so-called liquidity trap, Krugman adopts the standard line that budget deficits crowd out private investment because deficits compete with private borrowing for a limited supply of savings.The MMT framework rejects this, since government deficits are shown to be a source (not a use!) of private savings. Some careful studies show that crowding-out can occur, but that it tends to happen in countries where the government is not a currency issuer with its own central bank.”
Stephanie Kelton responds by pointing out what she sees as the flaws in Krugman’s argument. I have had difficulty in understanding this part myself, which is why I have highlighted it.
- “So let’s be clear here: Are MMTers claiming, as Kelton seems to, that there is only one deficit level consistent with full employment, that there is no ability to substitute monetary for fiscal policy? Are they claiming that expansionary fiscal policy actually reduces interest rates? Yes or no answers, please, with explanations of how you got these answers and why the straightforward framework I laid out above is wrong. No more Calvinball.”
Of the questions that Krugman raises by way of response, it is the second one that strikes me as being at the heart of the issue. Expansionary fiscal policy reducing interest rates boggles the mind – well, my mind, at any rate.
- “#3: Does expansionary fiscal policy reduce interest rates? Answer: Yes. Pumping money into the economy increases bank reserves and reduces banks’ bids for federal funds. Any banker will tell you this.”
I have read Stephanie Kelton’s response, and re-read it, and I find myself confused even then. Expansionary fiscal policy, she says, does reduce the federal funds rate. I found this confusing…
- Until I read this twitter thread by Paul Krugman…
As it turns out, the route taken by the government to conduct expansionary fiscal policy matters. You learn a little more macro every time you read about it.
This will be an intertwined, five part series, born out of a rabbit hole I fell into, and spent an evening over.
- “As we try to understand the world of the next three decades, we will desperately need economics but also political science, sociology, psychology, and perhaps even literature and philosophy. Students of each should retain some element of humility. As Immanuel Kant said, “Out of the crooked timber of humanity, no straight thing was ever made.””
Fareed Zakaria isn’t too impressed with the state of economics today, and says that a more holistic approach is needed. Holistic is a fancy-schmancy word that is far too over-used – but essentially, his point is we need to read wider (ahem), and be rather more aware of the fact that math is way overrated.
- “Managing globalization, supporting a healthy middle class in an era of artificial intelligence, and incentivizing the preservation of the planet must be among the central challenges, if not the central challenges, of our era. If not from economic analysis, it is hard to see where resolutions will come from. Everyone, whether they like economics and economists, or whether they resent and distrust current economics, has a stake in the discipline being relevant and successful going forward.”
Yes, but what about the opportunity cost of abandoning economic theory? That in effect, is what Larry Summers says in this essay, penned in response to the original. Sure, economics has its flaws, and sure, it has had to evolve over time, but surely that is a good thing?
- “The problem, however, is that there is also the unprofessional How Tax Reform Will Lift the Economy: We believe the Republican bills could boost GDP 3% to 4% long term by reducing the cost of capital. It seems that every Yellen is offset by Holtz-Eakin, every Rajan by a Taylor, every Shiller by a Barro, every Krugman by a Boskin, and so on. And how is a Fareed Zakaria or a Binyamin Appelbaum supposed to disinguish those who have knowledge from those who have only ideology, or indeed from those who can and do switch their approval and disapproval of policies on and off upon changing demands from changing political masters?”
Well, yeah, maybe, says Brad DeLong, in response to the question posed by Larry Summers above, but Fareed may have a point, still. Economists are nowhere near as consistent as they ought to be, and that ought to count against us.
- “Rather than suggesting coherent policies, Moore and Laffer seem to hope that a much more rapidly growing economy will provide the resources to address all these problems, and they seem to believe that this growth will follow ineluctably from the lower taxes and deregulation that lie at the heart of Trump’s agenda. It would be wonderful if that were possible. Maybe rah-rah partisans really believe it is. But more likely, it is just wishful thinking. ”
N. Gregory Mankiw highlights some of the problems that Brad DeLong gets so upset about in a wonderfully provocative article.
- “On the other hand, economists do turn out to know quite a lot: they do have some extremely useful models, usually pretty simple ones, that have stood up well in the face of evidence and events.”
Paul Krugman, who writes as well as anybody else, ever, in the field of economics – if not better – makes the point that simple economic models are surprisingly easy to understand and teach, and they work.