(Reprinted with the Permission of the Author)
(Editor's Note: This is a long and difficult piece, originally published at Yves Smith's Naked Capitalism site, and has an academic style. But, nevertheless, if you want to understand more about what the Modern Monetary Theory (MMT) school of economics has to offer, it is well worth your investment of time. It is the definitive critique of Paul Krugman's two recent blog posts on MMT, in my view.
In addition, in the process of criticizing Paul's views, Scott Fullwiler illuminates a lot of the deep thinking and knowledge developed by those following the MMT approach over many years, now. If you read this, you can see just how far off-base Paul Krugman is in his attempt to de-construct MMT, and you can also see how much work Paul has to do to really understand what his colleague economists using the MMT approach have developed.)
The old saying that bad press is better than no press is definitely true in this case. Without the advent of the blogosphere, our work would likely never even be noticed by the likes of Paul Krugman, so the fact that he’s writing about us (here and here) this weekend at least means we’re doing better than that, even if his assessment of us is far less than glowing. At the same time, and particularly given that Krugman is so widely read, it’s imperative to at the very least set the record straight on where MMT and Krugman differ. I should note before I start that others have done very good critiques already that overlap mine in several places (see here, here, here, and here).
Krugman makes three incorrect assumptions about what MMT policy proposals actually are while also demonstrating a lack of understanding of our modern monetary system (as is generally verified by volumes of empirical research on the monetary system by both MMT’ers and non-MMTer’s). These are the following:
Assumption A: The size of the monetary base directly (or indirectly, for that matter) affects inflation if we’re not in a “liquidity trap”
Assumption B: MMT’s preferred fiscal policy approach or strategy—Abba Lerner’s functional finance—is Non-Ricardian
Assumption C: Bond markets alone set interest rates on the national debt of a sovereign currency issuer operating under flexible exchange rates
Assumptions A and C are central to the Neo-Liberal macroeconomic model. Assumption B is a common misconception about MMT and a common perception of Neo-Liberals about the nature and macroeconomic effects of fiscal policy (i.e., Neo-Liberals often believe that activist fiscal policy is Non-Ricardian). Read below the fold...