Paul Doubles Down On Ignorance, Misconstrual, and Vague Scenarios
After the scorching he received in many of the comments on his printing press post Paul Krugman decided to dig his MMT blogging hole even deeper.
“. . . I think one way to clarify my difference with, say, Jamie Galbraith is this: imagine that at some future date, say in 2017, we’re more or less at full employment and have a federal deficit equal to 6 percent of GDP. Does it matter whether the United States can still sell bonds on international markets?
The most important thing to note about this scenario illustrates Paul's penchant for simplistic examples that mean nothing without further context. There are many ways in which Paul's scenario can be fulfilled, and they would make a big difference in the reactions of the bond markets, even if the Government chose not to manage bond interest rates to drive them down to zero. For example, let's say that the world still desires to send the United States more goods and services than it receives from us, about 3% of US GDP more, and let's also say that the US private sector wants to run a surplus of 3% of GDP; then the Government will be running a deficit of 6% because its deficit must equal the sum of the absolute value of the negative current account balance, and the private sector savings surplus. In that realization of Paul's scenario, would the US have any trouble selling bonds? It's very doubtful, since what would those who exported to us do with USD they received in payment for their goods and services, except to buy our bonds?
What would the context of the 6% deficit in 2017 have to be for the bond markets to refuse to buy bonds? I don't know, but if Paul is claiming that such a scenario can happen, I think he needs to fill in the blanks. Blanks like: what is the current account balance in 2017? What is private sector savings as a percent of GDP in 2017? To what extent is the full employment he cites attributable to Government jobs? How can we know if the 6% deficit is inflationary or not, unless we know these things.
Even if we did know them, however, and even if the bond markets would rather see their USD sit in their reserve accounts at the Fed; rather than in their security accounts at the Fed, then what what does Paul mean by asking whether it would matter? Of course it would matter in the sense that it would change how we deficit spend; but unless the Congress voluntarily defaults on US obligations, then it would not matter for solvency, because Congress could authorize any of the following: 1) allow the Treasury to run a negative balance at the Fed; 2) place the Fed under the Treasury, so that Treasury can freely spend/create money to implement Congressional appropriations without issuing debt; 3) allow the Treasury to print notes of unlimited value; or 4) encourage the Treasury to use the US mint's current coin seigniorage authority to issue jumbo coins to supply whatever amounts of currency are needed to cover the gap between tax revenues and Government spending.
Would any of this matter for inflation? It depends on whether Federal spending went beyond what was necessary to create full employment. If it did, then yes, that would create inflation. MMT advocates that inflation can be controlled by increasing taxes. Given the distribution of wealth in the United States, inimical to the sustainability of democracy as it is, restoring truly progressive taxation would not only control inflation, but would begin to reduce the inequality which has grown to unacceptable levels since the early 1970s.
As I understand the MMT position, it is that the only thing we need to consider is whether the deficit creates excess demand to such an extent to be inflationary. The perceived future solvency of the government is not an issue.
There Paul goes again. Is he really incapable of reading with any semblance of accuracy? MMT people don't say that perceptions about future solvency of the Government are not an issue; only that their perceptions are not dictated by the economic and accounting facts. In fact, people who use the MMT approach are constantly trying to explain to others that their perceptions that a default is possible are misplaced, and that as a matter of accounting, there is no possibility of default. We do that because we recognize that the possibility of politically determined default due to false perceptions exists, and we want to explain to people that default, if it occurs, won't be due to economic and accounting necessities, but only to political decision making by people who want to cause default for reasons of their own, or who don't understand that a Government sovereign in its own currency like the US can never be forced into default by accumulated public debts, because these don't affect its constitutional capability to create additional currency.
I disagree. A 6 percent deficit would, under normal conditions, be very expansionary; but it could be offset with tight monetary policy, so that it need not be inflationary. But if the U.S. government has lost access to the bond market, the Fed can’t pursue a tight-money policy — on the contrary, it has to increase the monetary base fast enough to finance the revenue hole. And so a deficit that would be manageable with capital-market access becomes disastrous without.
I think Paul needs to tell us what “normal conditions” are. We now have a negative current account balance equal to at least 3% of GDP, and we know that the private sector wants to save right now probably at a rate much greater than 3%, perhaps even as high as 7% of GDP. This means that a full employment deficit, other things being equal, is about 10% of GDP, not 6% as Paul posits. Given the state of private sector balance sheets and the austerity program about to be implemented, this 10% leakage of aggregate demand from the private sector may well be the new normal for awhile. So, rather than being inflationary, a 6% deficit may be deflationary.
As far as tight money policy is concerned, you'd have to be an idiot to pursue that with an output gap of 4% which might still exist under Paul's 2017 6% deficit scenario. Again, it's not realistic to say that the US will lose access to the bond market with a current account balance of 3% or more. But if the nearly impossible were to happen, then the US could adopt any of the expedients I listed earlier, and this would not cause demand pull inflation.
Finally, throughout this debate with the MMT economists, Paul Krugman has posited scenarios that are highly ad hoc and either inconsistent with macroeconomic theory, or contrary to common sense in order to conjure up first the possibility of insolvency, and as the debate has worn on, the possibility or serious or hyper-inflation. This is not serious debate if one's purpose is to honestly criticize MMT-based economics. If he wants to pose an effective criticism he needs to make sure that it is detailed, contextual, and that its various parts hang together consistently. For example, it is not realistic to posit a case where the private sector is providing full employment and the Government is still deficit spending to the tune of 6% of GDP unless there is considerable leakage of demand to private savings and international trade. To do that not to point to a case where MMT doesn't work; it is to point to a case in which policy makers are acting against the advice that MMT economists would certainly be giving them.
So, Paul, if you want to take down MMT, by all means have at it, but do a little reading first and don't distort the MMT position on things. Karl Popper, one of my favorite philosophers used to say that when criticizing someone else, the first thing one should do is to state their case as strongly as one could, even if this meant strengthening the case they made beyond what what they were able to accomplish. Then, if you can still effectively criticize their position you will know that you have refuted the strongest version of it that you and they were capable of formulating. It's easy to attack and destroy a strawman. It also proves nothing. But if you can show that the real MMT is baseless, then you will have accomplished something. Paul, I'm afraid you haven't done that yet.