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View Diary: Krugman smacks deficit hawks & points out deceit (81 comments)

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  •  He's The Only Economist I Read (8+ / 0-)

    and about the only one I trust.

    The old Cherokee simply replied, "The one you feed."

    by teacherjon on Mon Dec 31, 2012 at 07:12:34 AM PST

    [ Parent ]

    •  Suggest you check out (7+ / 0-)

      New Economic Perspectives This is the ModernMonetaryTheory blog from University of Missouri Kansas City Econ Chair Dr. Stephanie Kelton and many of the major contributors to MMT in the US.

      •  Chartalism (MMT) is bunk (3+ / 0-)
        Recommended by:
        Sparhawk, David PA, Rick B

        Even Krugman thinks so. The theory fatally misunderstands the connection between capital markets and real markets. Economics isn't accounting, and you can't fill the world with ponies and candy via monetary policy.

        •  What misunderstanding? (1+ / 0-)
          Recommended by:
          Old Surgeon

          Please explain.  MMT is based on simple facts that I have not been able to find a flaw in, and I am not going to list.

          But, here is the full primer.

          This one seems to be about your point...

          Yes, one of the conclusions is that affordability (aka taxes and borrowing) is not the limit on what the government can purchase in its own currency.  But, that is not saying that there are no limits (ie "fill the world with ponies and candy").  First, some things might not be available for purchase in the government issued currency.  Second, bad things can happen if the government purchases push past the available productive capacity of its citizens causing inflation, which could lead to the first limit as people don't want to sell for a currency that is not holding its value.  Third, the government has to make budgeting decision about what and how much to spend and how much money to remove via taxes, and how many bonds to create.

          As far as the fiscal suicide pact is concerned Krugman and MMT come to the same conclusion.  In the absence of inflation, worrying about the deficit is simply inflicting suffering on the populace for no reason.  Those who are debating austerity vs more austerity are either deliberately cruel, ignorant, or both.  There can be no other conclusion.

          •  Lets just do a quick example (0+ / 0-)

            Given the current economic situation, what would a MMT theorist say should be done to improve the economy?

            •  That is an easy one (0+ / 0-)

              Government spending to put people to work, same as any Keynesian including Krugman.

              •  But where do you get the money (0+ / 0-)

                for that spending without causing inflation?

                Fundamentally, money is a proxy for assets (goods). You can't just inject money to get a net asset gain.

                •  Please explain inflation due to monetary expansion (0+ / 0-)

                  Or are you are arguing Quantity Theory of Money? If so, how quaintly you fail - not really worth the effort to argue. So, without relying on QTM, please explain how net federal deficit spending with or without concomitant debt issuance is inflationary in the face of high involuntary unemployment and high output gap.

                  Money as a "proxy for assets" is an opinion, not a definition. That was once functionally true for US money when it was guaranteed convertible to gold. But not for the last 4 decades. Fiat money is a unit of exchange and a credit against liabilities to the government.  

                  Your last sentence is sooo odd. It is ONLY from the injection of net money from the public sector into the private sector that net financial assets can accumulate.

                  •  How quaintly I fail... (0+ / 0-)

                    QTM is the foundation of how money works. Read up on Wikipedia. The criticism section only contains some caveats about special case stuff. Maybe you can improve it?

                    If you don't think the supply of money is at the foundation of what things cost, I don't think there's enough common knowledge from which to debate. Money being a proxy for assets isn't an opinion. Money is a medium for exchange. You and MMT more broadly miss this fundamental fact, and consequentially you miss the link between capital and real markets and, in general, the whole purpose of money.

                    Which is why only very few and obscure academics outside the top tier academic institutions agree with this. It is bunk, and hopefully readers here value science and will understand this.

                    I have to go eat that free lunch you're trying to give me. :-)

                    •  Really? (0+ / 0-)

                      You say

                      Money is a medium for exchange. You and MMT more broadly miss this fundamental fact,
                      in response to my having said
                      Fiat money is a unit of exchange and a credit against liabilities to the government.  
                      From your statement you are pretty naive about the tenets of MMT.

                      As for QTM - it is a fine but useless identity since to use it as you do you MUST make assumptions that are demonstrably wrong. QTM aficionados don't usually bother mentioning that their model presupposes a full employment, full capacity economy with constant monetary velocity. These three factors place QTM fundamentally at odds with reality. Just look at all of the quantitative easing by the fed. What was all that? The fed retired treasuries converting them to reserves. They have been doing it for 3 years - trillions of dollars - and no inflation. QTM as applied by the inflation police (Austrians, austerians and others) is 200 proof bullcrap.  

                •  Ahh... (0+ / 0-)

                  Right but the country's ability to provide real goods and services is well below capacity right now.  It is not really a zero sum game in the US right now.

                  Inflation will occur if we are at maximum productive capacity and the government attempts to purchase more goods and services beyond that capacity.  We are currently nowhere close to full productive capacity, 25 million unemployed and underemployed demonstrate that.  But, that does tell us that you probably can't just suddenly fully employ 25 million people with living wage government jobs without inflation as additional production cannot be brought online that fast.

                  So, what would I do.

                  I would probably start with something fairly simple.  Rehire all laid off federal workers, and remove the current hiring and wage freeze.  Also, provide funding to states and localities to rehire teachers, fire fighters, police, librarians, and other public sector employees.  Those jobs did not cause inflation before the recession and would be unlikely to now.  Although it would be good to do it with some counter cyclical controls, so as tax revenue comes back for the state, it takes up paying for its own services instead of cutting taxes for the wealthy.

                  Then, pass a 5 year transportation bill that actually increases transportation spending, and puts people to work building things we need. We have been short changing transportation investment for decades, so that won't likely drive inflation.

                  I think grants to municipalities for water and sewer system modernization would also be a good idea because many sewage systems especially in smaller towns were built 80 years ago by the New Deal and are near or well past end of life.

                  I also like renewable energy subsidies.  They will add jobs and invest in infrastructure that will provide energy for decades to come and as a result should provide productive capacity with less environmental impact.

                  I also agree with Neil DeGrasse Tyson.  Let's double NASA's budget.  But, that does not have much to do with unemployment, the economy or deficits other than the fact that we can afford to send robotic probes around the solar system, new space telescopes, and start developing the ability to delay our own extinction until at least the heat death of the Universe.

                  One key is that that government deficits need to be counter cyclical. So, let's say the stimulus described above increases demand and businesses and the wealthy start drawing down their retained profits and savings in order to make investments.  Then, the government can reduce spending and deficits.  Although in many ways those changes are automatic. Tax receipts go up as the economy grows.  Unemployment spending and food stamps and other safety net spending will go down.

                  Consider these points of functional finance. From

                  The central idea is that government fiscal policy, its spending and taxing, its borrowing and repayment of loans, its issue of new money and withdrawal of money, shall be undertaken with an eye only to the results of these actions on the economy and not to any established traditional doctrine what is sound and what is unsound.

                  Lerner then articulated two “laws of functional finance”, which I think still very well capture the spirit of the MMT approach to economic policy.  The two laws are given as follows:

                  The first financial responsibility of the government (since nobody else can undertake that responsibility) is to keep the total rate of spending in the country on goods and services neither greater nor less than that rate which at the current prices would buy all the goods that it is possible to produce.

                  The second law of functional finance is that the government should borrow money only if it is desirable that the public should have less money and more government bonds, for these are the effects of government borrowing.

                  Stealing from the same article the first does not account for leisure, so all possible goods in probably excessive since we may want a more leisurely lifestyle than the one where all possible goods are produced.
      •  Thank you for the link. Bookmarked. nt (1+ / 0-)
        Recommended by:
        David PA

        Life is a school, love is the lesson.

        by means are the ends on Mon Dec 31, 2012 at 09:49:54 AM PST

        [ Parent ]

    •  Naked Capitalism (1+ / 0-)
      Recommended by:
      lostinamerica  A great source of financial writing.  Yves hosts a variety of economists.  A recent one from Bill Black:
      Deprogramming Progressives Indoctrinated into Supporting Austerity

      We have to change the state legislatures before all of our states become subsidiaries of Koch Industries.

      by 2laneIA on Mon Dec 31, 2012 at 10:14:55 AM PST

      [ Parent ]

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