No, Krugman has not adopted MMT

Who says I never do Paul Krugman a favor.  He gets annoyed when people look for inconsistencies in his posts, particularly when they confuse arguments applicable to a normal situation, with those applicable to a liquidity trap.

Here’s Randall Wray (in a post subtitled “Krugman (finally) adopts MMT”) contrasting two Krugman quotations:

By Jove, Krugman’s got it. Here’s what he wrote today:

Remember, Britain has its own currency, which means that it can’t run out of cash. Furthermore, the short-term interest rate is set by the Bank of England. And the long-term rate, to a first approximation, is a weighted average of expected future short-term rates. Unless markets believe that Britain is going to default “” which it isn’t, and they won’t “” this is more or less an arbitrage condition that ties down the long run rate no matter what happens to confidence. Or to be a bit more precise, it’s hard to see what would drive up long rates except a belief that the BoE will raise short rates; and why would it do that unless it sees economic recovery in prospect?http://krugman.blogs.nytimes.com/2013/05/05/george-osbornes-fear-of-ghosts/?smid=tw-NytimesKrugman&seid=auto

All he has to do is to carry that analysis beyond the current downturn. This can go on forever, of course. Keep short term interest rates low, or keep Treasury out of long maturities.

This is quite a contrast to what Krugman argued two years ago, in a critique of MMT:

And now suppose that for whatever reason, we’re suddenly faced with a strike of bond buyers “” nobody is willing to buy U.S. debt except at exorbitant rates…. So then what? The Fed could directly finance the government by buying debt, or it could launder the process by having banks buy debt and then sell that debt via open-market operations; either way, the government would in effect be financing itself through creation of base money. I could go on, but you get the point: once we’re no longer in a liquidity trap, running large deficits without access to bond markets is a recipe for very high inflation, perhaps even hyperinflation… And no amount of talk about actual financial flows, about who buys what from whom, can make that point disappear: if you’re going to finance deficits by creating monetary base, someone has to be persuaded to hold the additional base… But the idea that deficits can never matter, that our possession of an independent national currency makes the whole issue go away, is something I just don’t understand. (See here:http://krugman.blogs.nytimes.com/2011/03/25/deficits-and-the-printing-press-somewhat-wonkish/; and here http://krugman.blogs.nytimes.com/2011/03/26/a-further-note-on-deficits-and-the-printing-press/.)

Nice try, but the first quotation clearly applies to a severely depressed economy (when central banks can indeed safely hold rates at zero), and the second applies “once we’re no longer in a liquidity trap.”

Some people make a big deal out of the idea that the base is endogenous and central banks control the short term rate.  But (as Nick Rowe keeps pointing out) at a deeper level both the base and short term interest rates are endogenous, set at the level needed to hit the central bank’s broader macroeconomic targets.


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17 Responses to “No, Krugman has not adopted MMT”

  1. Gravatar of Lorenzo from Oz Lorenzo from Oz
    4. June 2013 at 05:42

    MMT makes my head hurt. They appear to go on about being the folk who really “get” history, but ’tis not so.

  2. Gravatar of Bill Woolsey Bill Woolsey
    4. June 2013 at 05:52

    You just don’t get MMT.

    The solution to inflation is price controls.

    The solution to misallocation of resources is central planning.

    There will be shortages of low priority luxuries for the rich, and enough goods and services to provide workers’ needs.

    Interest rates will be near zero so that the capitalists only exploit workers a little.

    Of course, can the government allocate resources for imperialist attacks on the socialist block and at the same time allocate sufficient resources to provide for the workers needs? Of course not. That’s why we shouldn’t do it.

    Bonds, central banks, inflation, interest–all of that is just capitalist claptrap aimed at exploiting the workers.

  3. Gravatar of ssumner ssumner
    4. June 2013 at 05:55

    Lorenzo and Bill, Can I count on you guys to handle the coming onslaught?

  4. Gravatar of marcus nunes marcus nunes
    4. June 2013 at 06:17

    Scott
    The problem with Krugman is that he ‘makes up’ alternative worlds. An LT world and a non LT world. With that he sows confusion. He´s a master at creating ‘straw worlds’ and ‘straw figures’ to help him convince people of his arguments. Didn´t he paint Hoover as the epitome of the Laissez-faire president?
    http://thefaintofheart.wordpress.com/2013/06/03/poor-hoover/

  5. Gravatar of Becky Hargrove Becky Hargrove
    4. June 2013 at 06:31

    Krugman is going to make MMTers happy, as long as he is happy to accept their accolades! And, given the fact that he is willing to use rhetoric in quite similar ways…

  6. Gravatar of Clark Clark
    4. June 2013 at 06:46

    “He gets annoyed when people look for inconsistencies in his posts, particularly when they confuse arguments applicable to a normal situation, with those applicable to a liquidity trap.”

    Interesting what you just describe is exactly what Paul Krugman does!

    Don’t try to be the good one because Krugman is known for being a clueless economist and like Marcus Nunes said: “He´s a master at creating ‘straw worlds’ and ‘straw figures’ to help him convince people of his arguments.”

  7. Gravatar of Clark Clark
    4. June 2013 at 06:50

    This is you!:

    “Why I don’t believe in liquidity traps”

    https://www.themoneyillusion.com/?p=7960

  8. Gravatar of Scott Freeland Scott Freeland
    4. June 2013 at 07:48

    Scott,

    I can’t imagine why you invited this on yourself today.

    I can’t wait to see the (I-S)+(G-T)+(X-M)= 0 equation thrown around, as if it represents anything like a precise model supporting MMT. I suspect that the economists who push it only use that equation to try to make a point, but some of the less informed cultists treat it like absolute truth and as if non-MMT people can’t possibly get it.

    And we may again see people endlessly mention that sovereign currency issuers can never run out of money, as if this is some kind of breakthrough in economic thinking. Though, granted, many in the media talk as if they don’t understand this simple point.

    Well, maybe I’ll draw a bit of fire, because I think that MMT is not only bizarre, but stupid, though I can’t claim a deep understanding of it. I suspect however, that there’s no such thing as understanding it deeply, since it’s about as deep as an angry teen’s understanding of Ayn Rand or Karl Marx.

  9. Gravatar of UGGG69 UGGG69
    4. June 2013 at 09:48

    MMT has been debunked by several people, even some notable post-keynesians. They remind me of the dogmatic Austrian crowd except this time for the liberals.

    Lavoie: http://www.boeckler.de/pdf/v_2011_10_27_lavoie.pdf

    Palley: http://www.thomaspalley.com/?p=322

    Roche: http://pragcap.com/mmt-critique

  10. Gravatar of Niklas Blanchard Niklas Blanchard
    4. June 2013 at 11:11

    It is odd that Wray would impugn the empirical rigor of any paper given the erroneous assumption of Treasury/Fed consolidation that underpinned the entirety of Wray 1998.

  11. Gravatar of ssumner ssumner
    4. June 2013 at 11:45

    Scott, Do people really claim that that equation supports MMT?

  12. Gravatar of Ashok Rao Ashok Rao
    4. June 2013 at 12:17

    “Scott, Do people really claim that that equation supports MMT?”

    As I understand, MMT arguments derive wholly from accounting identities. They seem to place a devout value on them. At least from the reading I’ve done (which might not be much, who knows).

    But for some exposure to the role acct identies play read:
    http://neweconomicperspectives.org/2011/06/mmp-blog-2-basics-of-macro-accounting.html
    and
    http://neweconomicperspectives.org/2011/06/recent-usa-sectoral-balances-goldilocks.html

    Some of their stuff is very intriguing, though.

  13. Gravatar of Scott Freeland Scott Freeland
    4. June 2013 at 17:56

    Scott,

    My understanding is the same as Ashok’s just above.

  14. Gravatar of OhMy OhMy
    4. June 2013 at 20:20

    As an MMT enthusiast I have to agree with SSumner here: Krugman is not yet there, but indeed getting closer. The operative part: “All he has to do is to carry that analysis beyond the current downturn”. He still has to do it. But he is way beyond: “nobody is willing to buy U.S. debt except at exorbitant rates”. He himself already made a little model where he showed that the exchange rate is what adjusts, because the Fed can always control the rate. Exactly an MMT argument.

    If you guys want to take on MMT brush up on the realities of the monetary system. The attempts I saw before always ended in MMers pleading that banks be assumed out of existence, so basically a sandbox economy where commodity chestnut money is shuffled around, unlike what has existed for at least the last 4000 years with debt written ex nihilo as money.

  15. Gravatar of Geoff Geoff
    5. June 2013 at 09:33

    “He gets annoyed when people look for inconsistencies in his posts, particularly when they confuse arguments applicable to a normal situation, with those applicable to a liquidity trap.”

    How about when people are not “confused” about his inconsistencies.

    Such as his answer to those who claim he believes printing green pieces of paper makes us wealthier. His answer to this was that it is a “straw man”, because he doesn’t actually believe it always brings prosperity, only during “certain” situations, such as “demand shortfalls”, “recessions”, etc.

    This answer of course contradicts his position that constant price inflation is required for economic growth. Yet it doesn’t seem to occur to Krugman that constant price inflation requires constant printing of green pieces of paper.

    So Krugman’s answer to those who claim he believes printing green pieces of paper makes us wealthier, contradicts his entire stance towards ongoing monetary policy.

  16. Gravatar of ssumner ssumner
    5. June 2013 at 12:25

    OhMy, I’ll take MMT seriously when they stop publishing posts like the one I linked to.

  17. Gravatar of Is Krugman Turning MMT? Sumner vs. Randall Wray | Last Men and OverMen Is Krugman Turning MMT? Sumner vs. Randall Wray | Last Men and OverMen
    20. March 2017 at 04:10

    […]      “The sticking point has been “crowding out”—the idea that once we get beyond the liquidity trap and return to a more “normal” ISLM world, government deficits will push up interest rates. And that will then reduce private investment, which tends to lower economic growth. Higher interest rates plus lower growth means the government’s deficit and debt ratios grow beyond “sustainable” levels.”     http://www.economonitor.com/lrwray/2013/05/06/by-jove-hes-got-it-krugman-finally-adopts-mmt-and-so-does-summers/      In addition, Wray thinks that Larry Summers is coming around too!! Again, I tend to doubt it. I would say that Krugman has known that there is ‘no magic at 90% debt levels’ for a long time. The recent errors by R-R have validated him on this but he’s been making this pont for 3 years. However, would Krugman agree with this?      “But as I explained last week, the short term rate is completely within the control of the Fed. See here: http://www.economonitor.com/lrwray/2013/05/01/reconciling-the-liquidity-trap-with-mmt-can-delong-and-krugman-do-the-full-monty-with-deficit-owls/. Long term rates depend on the state of liquidity preference plus expectations of future Fed policy. But in any case, the Vigilantes cannot force Treasury to issue long term debt. It can stick to the short end of the maturity structure and then pay whatever rate the Fed targets.”      “The real danger is not that the Vigilantes go all vigilant on Uncle Sam, but rather that the Fed decides to do a Volcker (raise the overnight rate to 20%). Congress can stop that by legislating that the Fed cannot act like a Vigilante. Or, alternatively, Treasury can stay on the short end. Both of these are policy choices, completely outside the influence of Vigilantes.”      Now I’ll be honest and say I’m not entirely sure who’s right here though what I like is that in Wray’s model, we don’t have a Volcker disinflation. To be sure, even if Wray’s right, it would take some radical changes in Congress and the Fed to bring us to conducting Fed policy this way.       Still, I’d be shocked if Krugman now believes this. What it amounts to is that Krugman, Delong, Summers and New Keynesians in general believe that fiscal policy ought to be countercylical. We should have high deficits and higher debt levels right now however, when we’re in the boom part of the business cycle we should make sure deficits come down then.       Here is Sumner’s post. I think he’s right about this one. Krugman only approves of deficits during a bad downturn.       https://www.themoneyillusion.com/?p=21550 […]

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