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…
So one thing I learned from the past few days of discussion is that MMTers believe that budget deficits necessarily increase the money supply. That's an interesting view, where by "interesting" I mean "completely wrong" 1/
— Paul Krugman (@paulkrugman) March 2, 2019
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.