Friday, August 12, 2011

Krugman is the problem

People like to blame the country's employment woes on Democrats or Republicans or Corporate America. The problem though is the incorrect economic models that hold sway at Harvard University, and are implemented through the Treasury and Fed. Change Harvard, change the world.

While Krugman isn't from Harvard he's close enough, and were he to embrace MMT in the NYTimes you'd see a payroll tax holiday about 14 seconds later. Maybe sooner. But Krugman, even though deeply Progressive, is fundamentally part of the problem:
Regular readers of comments will notice a continual stream of criticism from MMT (modern monetary theory) types, who insist that deficits are never a problem as long as you have your own currency. I really don’t want to get into that fight right now, because for the time being the MMT people and yours truly are on the same side of the policy debate. Right now it really doesn’t matter at all whether the United States issues zero-interest short-term debt or simply prints zero-interest dollar bills, and concern about crowding out is just bad economics.

But we won’t always be in a liquidity trap. Someday private demand will be high enough that the Fed will have good reason to raise interest rates above zero, to limit inflation. And when that happens, deficits — and the perceived willingness of the government to raise enough revenue to cover its spending — will matter
Krugman makes two errors. First, he mentions MMT, giving it respectability. To engage means the thing is worthy of engagement. The second is that fundamentally, Krugman remains trapped in the monetary paradigm. There monetary transmission mechanism, where banks lend out reserves, simply does not exist. So there is no "liquidity trap", there is simply an undercapitalized non-Govt sector which creates idle real resources.

I won't even bring up the strawman that MMT doesn't care about, or recognizes, inflation.

More at Mosler


Blogger Ralph Musgrave said...

I agree with your remarks about Harvard: there seems to be something wrong with the place. Two of the worst exuders of boring rubbish are Kenneth Rogoff and Martin Feldstein – both Harvard professors.

11:03 PM  

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