Krugman: I Would Do Anything For Stimulus, But I Won’t Do That...

[ProSense]

I Would Do Anything For Stimulus, But I Won’t Do That (Wonkish)

It’s really not relevant to current policy debates, but there’s an issue that’s been nagging at me, so I thought I’d write it up.

Right now, the real policy debate is whether we need fiscal austerity even with the economy deeply depressed. Obviously, I’m very much opposed — my view is that running deficits now is entirely appropriate.

But here’s the thing: there’s a school of thought which says that deficits are never a problem, as long as a country can issue its own currency. The most prominent advocate of this view is probably Jamie Galbraith, but he’s not alone.

Now, Jamie and I are, I think, in complete agreement about what we should be doing now. So we’re talking theory, not practice. But I can’t go along with his view that

So long as U.S. banks are required to accept U.S. government checks — which is to say so long as the Republic exists — then the government can and does spend without borrowing, if it chooses to do so … Insolvency, bankruptcy, or even higher real interest rates are not among the actual risks to this system.

OK, I don’t think that’s right. To spend, the government must persuade the private sector to release real resources. It can do this by collecting taxes, borrowing, or collecting seignorage by printing money. And there are limits to all three. Even a country with its own fiat currency can go bankrupt, if it tries hard enough.

more

[girl gone mad]

1. Galbraith is right, in my view.

Deficit doves like Krugman are missing a few very fundamental pieces of the picture of modern money.

To even talk about hyperinflation in an era of double digit unemployment, when we have mountains of underutilized productive capacity, is beyond silly.

"To spend, the government must persuade the private sector to release real resources. It can do this by collecting taxes, borrowing, or collecting seignorage by printing money."

This is inaccurate. Taxes do not fund spending.

[ProSense]

2. "More On Deficit Limits"

Galbraith responds and Krugman counters

<...>

My response: there’s no question that right now there is no problem: if the Fed issues money, it will in fact just sit there. That’s what happens when you’re in a liquidity trap. And there’s also no question that right now, the proposition that the government can “create wealth by printing money”, which some other commenters call absurd, is the simple truth: deficit-financed government spending, paid for with either debt or newly created cash, will put resources that would otherwise be idle to work.

But we won’t always be in this situation — or at least I hope not! Someday the private sector will see enough opportunities to want to invest its savings in plant and equipment, not leave them sitting idle, and the economy will return to more or less full employment without needing deficit spending to keep it there. At that point, money that the government prints won’t just sit there, it will feed inflation, and the government will indeed need to persuade the private sector to make resources available for government use.

And that’s why I don’t accept the idea that deficits are never a problem.

Again, as a practical matter I don’t think we have a disagreement: right now we’re in a world where deficits really, truly don’t matter. And at the rate we’re going, it seems unlikely that we’ll have to worry about policy choices near full employment until, oh, late in Sarah Palin’s second term.

"This is inaccurate. Taxes do not fund spending."

Really? Then why do people complain about their tax dollars funding war?

[girl gone mad]

3. why do people complain about their tax dollars funding war?

I guess they don't understand how fiat currency regimes operate, either.

They do have a valid point that war is a net drain on the economy (not to mention the lives it ruins and wastes) and that our resources would be better spent elsewhere.

ETA: Krugman is building a straw man here. Galbraith and other MMTers have never argued that deficits are never a problem.

[jtuck004]

10. We have lost a lot of the manufacturing jobs we once had, and

what we have left are service jobs, etc.

We could create some maglev train projects and do some infrastructure work, but barring a revolution in
solar (which the Chinese appear to be taking the lead in) or some other technology we can't see yet, it
really doesn't look like we will be producing as much, and we are becoming more service-oriented by the day.


How will that effect the dollar?

[ProgressOnTheMove]

4. This is a debate that we have to take to all neutral ground political pages and groups across the...

as stimulus is the only way forward globally if we don't want the elists to have all the care, bottom line.

[girl gone mad]

5. Here is Edward Harrison's take..

Keep in mind, Harrison is an Austrian, but he has an extremely good grasp of MMT. He's expanded my knowledge of monetary operations greatly over the years. Krugman really should have spent some time learning the basics of MMT before writing his blog post today. A rare oversight on his part. I just don't think Krugman can defend his assertions, because they don't line up with the empirical evidence that we have.

Misunderstanding Modern Monetary Theory
http://www.creditwritedowns.com/2010/07/misunderstanding-modern-monetary-theory.html">Credit Writedowns

Paul Krugman wrote a post today regarding MMT called "I Would Do Anything For Stimulus, But I Won’t Do That (Wonkish)." The gist of Krugman’s post was to refute Modern Monetary Theory’s view on money and deficits. Krugman writes:

Right now, the real policy debate is whether we need fiscal austerity even with the economy deeply depressed. Obviously, I’m very much opposed — my view is that running deficits now is entirely appropriate.

But here’s the thing: there’s a school of thought which says that deficits are never a problem, as long as a country can issue its own currency. The most prominent advocate of this view is probably Jamie Galbraith, but he’s not alone.

Now, Jamie and I are, I think, in complete agreement about what we should be doing now. So we’re talking theory, not practice. But I can’t go along with his view that

So long as U.S. banks are required to accept U.S. government checks — which is to say so long as the Republic exists — then the government can and does spend without borrowing, if it chooses to do so … Insolvency, bankruptcy, or even higher real interest rates are not among the actual risks to this system.

Krugman goes on to use a model with strongly monetarist/neoclassical embedded assumptions to make his points. Jamie Galbraith responded in the comments and I am posting his comments here. But, first, a few words.

I agree that deficits matter. But I take a more Austrian/austerian view in general – so of course I would say that.

However, as I understand MMT, Krugman’s post mischaracterizes both MMT and Galbraith’s statement. There are two separate issues here that should be disaggregated and treated in isolation. The first issue is about money and government’s source of funding. A separate but related issue is deficits.

On the funding side of things, it sounds like Krugman is trapped in a gold standard view of money as he assumes the government must issue bonds to fund itself. He forgets that we live in a fiat world and that taxes don’t fund government spending, requiring government to issue bonds for a shortfall. Remember, a fiat currency is one that is created by government. Government can satisfy any commitment in that currency if it so chooses. It could simply credit accounts electronically to fulfil its commitment – no bonds necessary.

Read more: http://www.creditwritedowns.com/2010/07/misunderstanding-modern-monetary-theory.html#ixzz0tzX5EjwR

[ProSense]

6. Krugman cited specifically what he disagreed with

So long as U.S. banks are required to accept U.S. government checks — which is to say so long as the Republic exists — then the government can and does spend without borrowing, if it chooses to do so … Insolvency, bankruptcy, or even higher real interest rates are not among the actual risks to this system.

OK, I don’t think that’s right. To spend, the government must persuade the private sector to release real resources. It can do this by collecting taxes, borrowing, or collecting seignorage by printing money. And there are limits to all three. Even a country with its own fiat currency can go bankrupt, if it tries hard enough.

link

And this statement from Harrison:

On the funding side of things, it sounds like Krugman is trapped in a gold standard view of money as he assumes the government must issue bonds to fund itself. He forgets that we live in a fiat world and that taxes don’t fund government spending, requiring government to issue bonds for a shortfall. Remember, a fiat currency is one that is created by government. Government can satisfy any commitment in that currency if it so chooses. It could theoretically credit accounts electronically to fulfil its commitment, laws permitting – no bonds necessary.

This is precisely what Krugman addressed in his subsequent response to Galbraith:

My response: there’s no question that right now there is no problem: if the Fed issues money, it will in fact just sit there. That’s what happens when you’re in a liquidity trap. And there’s also no question that right now, the proposition that the government can “create wealth by printing money”, which some other commenters call absurd, is the simple truth: deficit-financed government spending, paid for with either debt or newly created cash, will put resources that would otherwise be idle to work.

But we won’t always be in this situation — or at least I hope not! Someday the private sector will see enough opportunities to want to invest its savings in plant and equipment, not leave them sitting idle, and the economy will return to more or less full employment without needing deficit spending to keep it there. At that point, money that the government prints won’t just sit there, it will feed inflation, and the government will indeed need to persuade the private sector to make resources available for government use.

And that’s why I don’t accept the idea that deficits are never a problem.

[girl gone mad]

8. Again, Galbraith hasn't said deficits are never a problem..

so Krugman is simply arguing against a straw man.

What Krugman also seems to miss is that we have many good tools at our disposal to fight inflation, if and when that becomes an issue, and all MMTers (I'm including Galbraith, though he is not exclusively an MMTer) believe deficits can lead to inflation once full employment and productive capacity are met.

When Krugman writes about hyperinflation and the need to raise taxes, as if these are real concerns right now, that's just a little bit nuts.

Here's an important snippet from Galbraith's response:

In the actual world we live in, government does not have to "persuade the private sector to release real resources." In the actual world, the private sector has already released those resources by the tens of millions of people.

All the government has to do, in the actual world, is mobilize those resources, which it does by issuing checks, preferably to pay people to do useful things.

There is no reason why this should be considered "costly." Done correctly, in economic terms it amounts simply to the reduction of the waste that is associated with unemployment.

Nor is it necessary, when the government issues a check, that it issue a bond to "borrow" the money behind that check. The check creates money in the first place. (Yes, it does this from thin air, by changing numbers in bank accounts.)

From a basic accounting perspective, Galbraith is right.

[jtuck004]

7. k&r

[girl gone mad]

9. Thanks!

:)

[Egnever]

11. Nice thread

A welcome change from the we should primary Obama sort. K&R

[jtuck004]

12. k&r