MMTer Once Again Reveals Her Confusion About Basic Economic Principles

Stephanie Kelton

By Robert Wenzel

Modern Monetary Theory economist  Stephanie Kelton has responded to some criticisms hurled her way by the Keynesian economist Paul Krugman.

Kelton's essay is stunning from start to finish in its ability to flip reality on its head.

She begins:

There is a doctrine among mainstream economists holding that: (1) government deficits push interest rates higher and (2) rising interest rates crowd out private investment. The government can take more of the economy’s financial resources, but only at the expense of lost private investment. This means that running budget deficits has at least some downside.

Paul Krugman is a believer in this doctrine. I’m not...

I find it remarkable that anyone would think government deficit spending doesn't push interest rates higher or that government deficit spending doesn't crowd out private sector investment.

If the government is in the market offering more debt, it is most certainly offering a higher interest rate (and crowding out the private sector that can't afford to pay the higher interest rate), this is basic supply and demand economics.

Then she makes this Keynesian-type argument:

MMT would set public spending always to the level required to achieve full employment, and then accept whatever deficit may result.

In other words, she reveals once again that she does not believe in basic supply and demand economics. Markets clear, including labor markets. By making the above statement, she denies this.

And then there is this:

Does expansionary fiscal policy reduce interest rates? Answer: Yes. Pumping money into the economy increases bank reserves and reduces banks' bids for federal funds. Any banker will tell you this.

She is really talking about two different things here. Expansionary fiscal policy, itself, does nothing but put upward pressure on interest rates. IF government borrowing is monetized, it will put downward pressure on interest rates in the short-term, but the new flood of money would put upward pressure on prices and likely result in even higher interest rates.

So her comment fails in two ways. It fails to distinguish between fiscal policy itself and monetization of new debt and it fails to recognize that there are multiple different pressures on interest rates over time because of an expansionary fiscal policy that is monetized.

In other words, her model is very shallow not taking all factors into account and even failing to differentiate factors. And it seemingly ignores or denies the most dangerous outcomes that would result from her policy implementation, crowding out of the private sector investment, market distortions and accelerating price inflation. What a mess.

The remainder of her essay does nothing but restate in different ways her confused points indicated above.

It is a consistent display of an inability to start from basic concepts such as supply and demand. It is about jumping in the middle of economic events and confusing true cause and effect relationships. It is very bad Keynesianism at a three-dimensional level.


Robert Wenzel is Editor & Publisher of EconomicPolicyJournal.com and Target Liberty. He also writes EPJ Daily Alert and is author of The Fed Flunks: My Speech at the New York Federal Reserve Bank and most recently Foundations of Private Property Society Theory: Anarchism for the Civilized Person Follow him on twitter:@wenzeleconomics and on LinkedIn. His youtube series is here: Robert Wenzel Talks Economics. More about Wenzel here.