More MMT follies (Sympathy for Krugman)
By Scott Sumner
Paul Krugman must be pulling his hair out about now. He recently complained that it was almost impossible to figure out what MMTers were advocating, and then tried to pin them down with some very specific questions:
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.
Today, Stephanie Kelton responded as follows:
Quick responses first, followed by explanations behind my thinking.
#1: Is there only one right deficit level? Answer: No. The right deficit depends on private behavior, which changes. MMT would set public spending always to the level required to achieve full employment, and then accept whatever deficit may result.
#2: Is there no ability to substitute monetary for fiscal policy? Answer: Little to none. In a slump, cutting interest rates is weak tea against depressed expectations of profits. In a boom, raising interest rates does little to quell new activity, and higher rates could even support the expansion via the interest income channel.
#3: 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.
#4: Does MMT accept Krugman’s “straightforward framework”? No. We can come back to this at the end.
I can’t even imagine Krugman’s reaction to all this. First of all, although she says “no” in answer to question #1, her explanation makes it quite clear that she is actually answering “yes”, especially when you combine the answers to questions #1 and #2. Krugman is asking whether, assuming a given macroeconomic situation (including a given level of private spending), there is only one budget deficit consistent with full employment. She clearly thinks the answer is yes. So why does she answer “no”. I suspect she doesn’t understand Krugman’s question (which is pretty straightforward.)
Answer #2 is completely wrong, as she seems to ignore the hot potato effect from adding high-powered money when interest rates are positive. She also answers question #2 as if it is a separate question from #1, whereas it’s obviously just a clarification of question #1.
The third response is a complete non sequitur. Krugman asks if expansionary fiscal policy reduces interest rates and she responds that expanding the money supply reduces interest rates. Huh?
And people wonder why Krugman gets frustrated.