(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...
(Reprinted from Moslereconomics.com with the Express Permission of the Author)
CAUTION: BE SEATED WHEN READING
By N. Gregory Mankiw
March 26 (NYT)
The following is a presidential address to the nation — to be delivered in March 2026.
My fellow Americans, I come to you today with a heavy heart. We have a crisis on our hands. It is one of our own making. And it is one that leaves us with no good choices.
For many years, our nation’s government has lived beyond its means.
A rookie, first year student mistake. Our real means are everything we can produce at full employment domestically plus whatever the rest of the world wants to net send us. The currency is the means for achieving this. Dollars are purely nominal and not the real resources. Read below the fold...
Fairy Tales of the Coming State of the Union: We Need to Cut Government Spending And Make Do with No More Money
In "All Together Now: There Is No Deficit/Debt Problem,” I warned against the message calling for deficit reduction that the President will probably deliver in his State of the Union Address next month. I view the coming narrative as very likely to be composed of a number of fairy tales. Read below the fold...
The Washington Post editorial page has been one of the primary MSM outlets for aggressive deficit terrorism. There is an axis of deficit terrorism in Washington DC today. It runs from Hooverite Republicans such as Judd Gregg and Mike Spence, to Blue Dog Democrats like Evan Bayh and Kent Conrad, to media organizations like CNN, WaPo, and the Peter G. Peterson funded The Fiscal Times, to foundations like The Peter G. Peterson Foundation, and Peterson-funded think tanks like AmericaSpeaks, to the Congressional Budget Office (CBO), to high-level Administration people like OMB Director designate Jack Lew, and judging by his speech and actions, to Barack Obama himself. This axis has been laying down a carpet of continuous propaganda for many months now distracting attention from the immediate problem of getting people back to work, and toward doing something about an assumed long-term problem, that some argue is fictional, and that many others think may, but, will most probably not, occur
Last Saturday, the WaPo added to its place in progressive infamy with an editorial that managed, in a few short paragraphs, to repeat many of the false arguments the deficit terrorists use to scare Americans into thinking that we really have to cut Government spending as soon as we can or we will be facing unbearable suffering in future years. This post will review that editorial in detail. It begins: Read below the fold...
With permission of the author
The G20 has dropped its support for fiscal expansion. The deficit hawks are prevailing. But why is that? We all either know or should know that operationally Federal spending is not constrained by revenues, as Chairman Bernanke stated last year, when asked on '60 Minutes' by Scott Pelley where the funds given to the banks came from:
"...we simply use the computer to mark up the size of the account that they have with the Fed."
We know that when the Fed spends on behalf of the Treasury it simply credits a member bank or foreign government's reserve account at the Fed. Read below the fold...
This is the second in a series of posts based on youtubes from a speech in Milford CT by Warren Mosler. Warren is running for the Senate in CT in the Independent Party primary. Unlike both the Democratic and Republican candidates Warren really understands economics and his forté is explaining it to people. Read below the fold...
Deficit hawks in the United States envision a day when the United States Government will go broke, unless we curb government spending on entitlements. Well, governments can go broke in the sense that they can run out of money they need to pay their debts. But not all governments. Read below the fold...
In my last post I introduced Warren Mosler's notion of “deadly innocent frauds,” (difs) and discussed the idea of fiat monetary systems and its implications for the first dif: “in order to spend money, the Government must first raise it through taxation, or borrow it.” In fiat monetary systems, that idea is false, which is why it is a dif. Read below the fold...