Wednesday, September 15, 2010

Krugman is part of the problem

MMTers like to claim Krugman as one of their own, and why not? A Noble Prize, a Princeton tenureship, and a column in the NYTimes make him quite a catch. But fundamentally he is not MMT, he is a mainstream macroeconomist, and therefore part of the problem:
It comes down to the dual fiscal problem the U.S. economy faces: short-term, the government needs to do all it can to prop up spending; long-term, it needs to reduce the deficit. The latter concern means that it would be a terrible idea to make the high-end tax cuts permanent; that would be a huge drain on the public finances, serving no good purpose. But why not a temporary extension? Because it would do very little to promote spending.
The only reason to reduce the Federal deficit, long term or short term, is to control aggregate demand if there is too much inflation. That does not exist now, and given how overleveraged and underutilized the non-Govt sector is, I don't see it appearing too much in the future either. Our recovery is L-shaped, and the US is turning Japanese (although with better equity performance, I believe).


Blogger Larry Staton Jr. said...

I always thought MMTers knew Krugman wasn't one of their own, but that they thought they could persuade him and, given his NYT platform, he could promote their views.

9:47 AM  
Blogger Tom Hickey said...

Huh? What MMT economist ever said that about Krugman? I have been under the opposite impression. In fact, when Krugman weighed in against Jami Galbraith, the MMT'ers piled on against him in favor of Galbraith.

But maybe you know something I don't.

12:15 PM  
Blogger sparc5 said...

Krugman's crosses threw us off:

And then there was the recent post he had linking inflation to output. And how that contradicted in Tom Hicky's links where he links quantity of money and inflation (with a constant velocity i might add). Then at the end he says there is no disagreement, and was unable to disprove a single thing Galbraith said.

Then there is Paranteau who literally put MMT literature in his hands.

So MMT folk think he might know MMT but hides it or maybe his head is full of conflicting ideas he can't reconcile.

But I thought of two reasons why people might want to limit the size of the deficit other than to control inflation. These ideas are my own, so feel free to shoot them down.

A) It is clear the main beneficiaries of the private savings the deficit allow are the very rich. The deficit therefore is exacerbating income inequality and the host of social ills that come with it. It also increases the risk of tax hikes or inflation in the future if savings desires drop. So there may be an argument for a smaller deficit and full employment by spending stimulus on items with the highest multipliers.

B) There is a giant pool of savings abroad. The larger that pool, the greater the flood will be if there is panic. There could be massive dumping of the dollar on exchange markets or perhaps they will flood into the country in the form of purchases giving us rapidly shift in terms of trade, possibly inflation and emergency barriers to trade as a response. All that could be avoided just by balancing trade.

10:41 PM  
Blogger Ralph Musgrave said...

At the end of the second article or “URL” cited by Tom above, Krugman does basically accept MMT, though he is concerned about the inflationary effect of money pumped into the economy during a recession come the next boom.

But to deduce from that that Krugman has fully and permanently accepted MMT is a dangerous conclusion because he contradicts himself so often.

2:17 AM  
Blogger JKH said...

Yeah - both Mosler and Mitchell are very specific on this issue, and on their view that Krugman is part of the problem. They are quite consistent and adamant about it.

I used to question this, thinking that Krugman was quite close to the critical MMT fiscal ideas.

But anybody who doesn't understand the errors of reserve multiplier thinking is lost at the outset and banished from the realm :)

Quite understandably - you need to get the accounting right across the board, or you're done in terms of arguing the right things in the right way.

So you've joined Mosler in being bullish on equities. What makes you so?

2:50 AM  
Blogger winterspeak said...

I'm bullish on equities because 1) I think earnings will continue to improve, 2) I don't think multiples will compress much, and 3) I don't expect there to be any serious deficit reduction. I'm most uncertain about 2. And don't take anything on this blog as investment advice!

I will add that Mosler called the Obamaboom. Don't know anyone else who did.

8:16 AM  
Blogger LK said...

On the issue of what type of economist Krugman is, see my post here:

As of October 2009, Krugman still declared himself an economist basically using New Keynesian macroeconomic foundations:

I … quarrel with designating me a “radical Keynesian.” I’m just a Keynesian, willing to follow the logic of my analysis. A perfectly standard New Keynesian model, with intertemporal optimization and all that — the kind of model that is standard in freshwater courses — says that under current conditions fiscal stimulus should be very strong, much stronger than what we’re actually doing.

Paul Krugman, “Samuel Brittan’s recipe for recovery,” October 16, 2009,

1:10 AM  

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