Tuesday, February 26, 2019

Krugman Slams Stephanie Kelton...

 Stephanie Kelton
and I don't mean in the biblical sense, rather in the Keynesian sense.

Paul Krugman, being a Keynesian, is all about aggregate demand. It is not a very useful concept. If you accept aggregate demand, and lack thereof, as the core of economics, you end up going in some very strange directions. And Krugman goes in these odd directions regularly in his New York Times column.

But at least it is a foundational underpinning, though its usefulness is very questionable.

Modern Monetary Theory is even worse. It doesn't have a foundation that is placed in concrete. It jumps around and sometimes adopts a Keynesian aggregate demand perspective, though not completely and this where Krugman is useful in pointing out just how bad the reasoning is of MMT proponents, including Stephanie Kelton.

Here's Krugman doing a nice smash job:
Now, arguing with the MMTers generally feels like playing Calvinball, with the rules constantly changing: every time you think you’ve pinned them down on some proposition, they insist that you haven’t grasped their meaning. So I was glad to see Stephanie Kelton responding to my attempt to clarify my problems with the doctrine in a way that seems to make at least some key differences in view clear.

The problem is that I don’t understand her arguments at all. If she’s saying what I think she’s saying, it seems just obviously indefensible. If I try to explain that, will I be told again that I just don’t get it? Are we still playing Calvinball after all?...

First, she suggests that the neutral or natural interest rate – which is defined as the interest rate consistent with full employment given everything else – does not exist. What does she mean by that? I think she means that it’s hard to determine, or maybe that it’s unstable, which are defensible claims. But the analysis I’ve just given doesn’t depend on the natural rate being either easily estimated or stable over time. In fact, I never mentioned the natural rate in the previous post. All we need is that the central bank be able to move rates, and that these rates affect overall spending.

So what purpose does claiming that the natural rate is a meaningless concept serve? It looks to me like sophistry – word games intended to confuse what should be a simple issue. Maybe that’s uncharitable, but I truly don’t see the point otherwise.

Second, and more important, Kelton seems to claim that expansionary fiscal policy...will lead to lower, not higher interest rates. Why?

It seems as if she’s saying that deficits necessarily lead to an increase in the monetary base, that expansionary fiscal policy is automatically expansionary monetary policy. But that is so obviously untrue – think of the loose fiscal/tight money combination in the 1980s – that I hope she means something different. Yet I can’t figure out what that different thing might be.

Now, the fiscal-monetary tradeoff isn’t the only place where I have problems with MMT. But it’s a place where Kelton has laid down a very clear marker, saying something that I think I understand – and which also seems to be quite wrong.

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.
Now, of course, Keynesian economics and MMT are both bad economics but for Krugman to be able to destroy MMT so easily, it shows you just how weak MMT is.



  1. After trying to pin down these weasels since 2011, I've determined that their basic sales presentation comes down to overwhelming you with a detailed mechanical analysis of the convoluted U.S. monetary and fiscal operations system which, after all is said and done, remains nothing more than a system of funny money creation. Their key point is to claim that no one else has noticed the government's ability to create unlimited amounts of funny money. Then they casually jump into their wacky economic analysis which they insist obviously follows simply because the government can create unlimited amounts of fiat funny money. Basically, they are proposing nothing more or less than a giant Cantillon Effect which is where the free stuff comes from, hoping no one will notice.

  2. One thing I have noticed is that when other Keynesians and market monetarists attack MMT, the arguments go off into the weeds of the detailed world of wacky Keynesianism. Which is all a hoax anyway and which average people cannot follow. This Facebook post is being promoted by the loony Mike Norman blog:

    It is great that Paul Krugman is spending so much time trying to understand MMT, but I don't think he has escaped from his old ideas sufficiently yet to grapple with these new ones.

    Professor Krugman assumes an inverse relationship between aggregate demand and interest rates which is stable enough to be useful. In other words, he assumes a reasonably stable and downward sloping IS curve.

    No such relationship can be assumed.

    Fiscal policy is effective because it adds to or subtracts from the net financial assets of the private sector, in a way that monetary policy does not. Surely, by now, people should be aware of the limitations on the ability of central banks to use interest rates to manage demand. Right now, many central bankers no longer believe interest rate cuts work; they have no faith in quantitative easing; and they are terrified of raising interest rates, due to the well-founded fear that significant increases might undermine asset prices and trigger defaults.

    Mainstream economists have tended to argue that fiscal policy will be ineffective because a higher fiscal deficit necessarily leads to higher interest rates and crowding out of private spending (which is nonsense); or because a deficit today leads to government debt which must be repaid in the future, implying higher taxes in the future, causing people to spend less today (which is an even bigger pile of nonsense).

    So yes, mainstream economics is wrong.

    In mainstream economics, monetary policy is a more effective demand management tool than fiscal policy, nearly all the time.

    In reality, fiscal policy is an effective demand management tool and monetary policy isn't.

    Use fiscal policy to manage total spending.

    Leave risk-free interest rates at zero, or close to zero.

    Use financial regulation to limit and influence the direction of credit creation.

    Balance the economy - not the budget.

    And stop drawing IS curves. They don't help.


    There's no need for the government to "manage" anything. These monsters don't want to hear that and they certainly cannot intellectual OR emotionally process it.