Spreading the word about Modern Monetary Theory(MMT) is hard enough without others misrepresenting your ideas. On Friday, Paul Krugman did an article on Modern Monetary Theory on his blog. It was very similar to his last article on the subject. It seriously misrepresents MMT. It sets up the same strawman argument that almost every MMT critic sets up. Anti-MMT arguments almost always goe something like this: "but what about in times of rapid economic expansion and the government still has trillion dollar deficits? That'll cause inflation!!! And then it'll be like Weimar and Zimbabwa. That's why MMT is stupid."
The problem is that every MMT economist will be the first to admit that when you have "demand-pull" inflation, then government should increase taxes and/or cut spending. That's the second thing MMT teaches(the first is that the federal government isn't revenue constrained).
What's sad is that Krugman and those with an MMT view agree on so many things. In fact most of the economic arguments he uses to try and discredit MMT are things that MMT economists would agree wtih. The part where he is so wrong is in his understanding of MMT - not in economics! Let's take a closer look at what he actually said and why he's wrong.
Let's take a look at Krugman's offending argument:
So suppose that we eventually go back to a situation in which interest rates are positive, so that monetary base and T-bills are once again imperfect substitutes; also, we’re close enough to full employment that rapid economic expansion will once again lead to inflation. The last time we were in that situation, the monetary base was around $800 billion.
Suppose, now, that we were to find ourselves back in that situation with the government still running deficits of more than $1 trillion a year, say around $100 billion a month. 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.
This is where he, very sneakily(I don't know if it's intentional or not), sets up the strawman argument. He is proposing a situation where we are "close" to full employment and rapid economic expansion is already leading to inflation. This is the time that MMT people say that you need to cut spending and/or increase taxes regardless of the budget is in surplus or deficit. However, Krugman pretends that we are still running trillion dollar deficits.
MMT does not advocate ALWAYS running deficits as his argument implies. We argue that the budget numbers are not something that needs to be in perfect balance. If inflation is high, spending needs to be cut(or taxes increased) - even if we have budget surpluses. If inflation is low or negative, spending needs to increase(or taxes reduced) - even if we already have a budget deficit. Of course, Krugman doesn't have to take my word for it. Here is a list of several prominent MMT advocates saying the same thing. Inflation is the constraint.
Here is a passage from page 13 of Warren Mosler's book:
This is not to say that excess government spending
won’t possibly cause prices to go up (which is inflation).
But it is to say that the government can’t go broke and can’t be
bankrupt. There is simply no such thing.
Here is a passage by Cullen Roche from progressive capitalism on his complete essay of MMT:
The bogey here is inflation which is constantly moving up and down with the amount of money in the system based on my tax rate, spending, borrowing, etc. Thus, government cannot just spend and spend and spend or the extra dollars in the system will chase too few goods and drive up prices. It’s important to understand that government cannot just spend recklessly. This is important so I’ll say it again. This does not give the government the ability to spend and spend and spend. If they spend too much and tax too little they can create mal-investment and inflation.
(emphasis was in the original text)
Stephanie Kelton at the MMT "Fiscal sustainability conference" last year. Here is a passage from her Presentation:
So, taxes maintain a demand for the government’s currency – that’s important – and the other thing they do, is they allow the government to regulate aggregate demand. Too much spending power can be inflationary, too little causes unemployment and recessions.
There is no revenue constraint for governments that control the money that sits at the top of the hierarchy. Does that mean that we should spend without limit? No. No. Emphatically no. As the economy recovers, spending will need to be regulated to prevent inflation. But I would argue, and I think what we’re all here to argue today is that it’s time to stop allowing the monetary system to limit our range of policy options.
Bill Mitchel wrote a long two-part post on inflation on his blog.
It regularly comes up in the comments section that Modern Monetary Theory (MMT) lacks a concern for inflation. That somehow we ignore the inflation risk. One of the surprising aspects of the public debate as the current economic crisis unfolded was the repetitive concern that people had about inflation. There concerns echoed at the same time as the real economy in almost every nation collapsed, capacity utilisation rates were going down below 70 per cent and more in most nations and unemployment was sky-rocketing. But still the inflation anxiety was regularly being voiced. These commentators could not believe that rising budget deficits or a significant build-up of bank reserves do not inevitably cause inflation. The fact is that in voicing those concerns just tells me they never really understand how the monetary system operates. Further in suggesting the MMT lacks a concern for inflation those making these statements belie their own lack of research. Full employment and price stability is at the heart of MMT. The body of theory and policy applications that stem from that theory integrate the notion of a nominal anchor as a core element
L. Randall Wray writing about real constraints on his blog:
Yes, government must be constrained. That is what elections and budgeting and accounting and accountability are all about. We need more democracy, more understanding, and more transparency. Politicians need to listen to Main Street—not just Wall Street—before deciding where and how much to spend. They need to be controlled by a budgeting process—whose purpose is not to balance the budget, ensuring tax revenues match spending outgo, but rather to give us some idea of the size of the programs (hence, what percent of our nation's resources will be devoted to their projects) and, equally important, to hold our leaders and project managers accountable. When managers run over budget, it does not threaten our government's solvency but it should threaten its credibility. Fraud and over-reach are always a threat where government's spending is unconstrained. And, yes, too much government spending generates competition over resources, bottle-necks, and even excessive aggregate demand, all of which can generate inflation.
I hope that's enough to convince any critic that MMT doesn't care about inflation or embracing our view would cause huge amounts of inflation.
There is something that gives me hope that one day Krugman may one day respect - even embrace MMT. Before setting up his strawman argument against MMT, he wrote this:
The key thing to remember is that current conditions — lots of excess capacity in the economy, and a liquidity trap in which short-term government debt carries a roughly zero interest rate — won’t always prevail. As long as those conditions DO prevail, it doesn’t matter how much the Fed increases the monetary base, and it therefore doesn’t matter how much of the deficit is monetized. But this too shall pass, and when it does, things will be very different.
There is nothing in this paragraph that I can disagree with. Right now the federal government has a lot of room to spend and reduce taxes, but that won't always be the case. In the future, we'll have to adjust spending and taxes accordingly. An MMT view would add that no amount of federal spending now is going to hurt our prosperity in the future.
I think the only economic related statement of Krugman's that I actually disagree with is his portrayal that bond rates could go up and hurt us. This is a myth and something that several MMT writers have written about, including our own Letsgetitdone. See his posts about it here and here.
So don't let critics mislead you. Controlling inflation is at the heart of MMT. I'll admit that sometimes MMT writers, such as myself, get lazy and say, "Budget deficits don't matter" without adding "as long as inflation is low or non-existent", but that doesn't mean we aren't worried about inflation.
Please see Letsgetitdone's diary on the same Krugman piece. He goes into more detail about the last Krugman hit piece as well as a breakdown on the so-called "quantity theory of money" that Krugman user(or misuses as the case may be).