Paul Krugman doesn't get Modern Monetary Theory.

[girl gone mad]

I'm actually really glad that Krugman wrote this blog post today. While Krugman got it wrong on several counts, I think this is absolutely the debate we need to be having right now and Krugman will have done the world a huge favor if he can shine a little bit of the media spotlight onto MMT and let the debate happen between the Austerians and the post-Keynesian modern money school rather than the pointless deficit hawk vs. deficit dove nonsense we've had to date.

Krugman's original piece: http://krugman.blogs.nytimes.com/2010/07/17/i-would-do-anything-for-stimulus-but-i-wont-do-that-wonkish/#more-10606">I Would Do Anything For Stimulus, But I Won’t Do That (Wonkish)

Galbraith responds in the comments.

Edward Harrison weighs in: http://www.creditwritedowns.com/2010/07/misunderstanding-modern-monetary-theory.html">Misunderstanding Modern Monetary Theory


Here's another thread on this topic and I would appreciate it if anyone interested in this subject could rec it:

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=433x377346

[jtuck004]

1. k&r

zero recs - again?

must be deficit math.

[CHIMO]

2. Confusing

Everything. Talk about second derivatives and other esoteric items and everything gets lost.

If people are not working then having some dig holes and others fill them up will result in those people having money. And the people doing it will circulate that money quickly. Result is you have a lot of holes filled in, which the ground squirrels might appreciate.

Now suppose they build a rail line where none existed before. They will still put that money into circulation as fast as if they were digging or filling the holes. Now there is a further benefit. There is a high speed rail line.

So what is the added benefit now?

Whether it is an internal debt or an external debt doesn't matter.

If it is internal, then taxes are raised. If it external then currency is changed or a conquest is made.

If taxes are lowered then currency is changed.

If one doesn't get back to the basics then everyone will keep arguing about e=mcsquared and MMTQRT?

[girl gone mad]

3. You're covering a lot of different issues.

I wish I was a better equipped to address your comments, but I can only try to sum up the basics of the debate from my own perspective.

There are 3 main groups of thinking on the current state of our economic policy.

1. Deficit Hawks/Austerians (not to be confused with "Austrians", though there may be a bit of overlap) who believe that our deficits are definitely going to lead to high interest rates and inflation, possibly even hyperinflation, and that reducing the deficit should be our number one economic focus right now. Austerians favor austerity programs, which will dramatically reduce spending, primarily through cuts to social programs and public sector wages and pensions.

2. Deficit Doves/Keynesians (Krugman is in this camp), who believe that high deficits are a big problem and we should try to reduce them, but that the global economy is currently too fragile to withstand austerity regimes and a sharp reduction in government spending will return us to a deep recession or even depression. Deficit Doves think that governments should continue to stimulate with the hope that the private sector will eventually take up the slack and then we can start to address the deficits.

3. Post-Keynesian/Modern Monetary Theorists (Galbraith is in this camp) who believe that concerns over the deficit are premature and baseless because interest rates remain low and the market is not pricing in any kind of inflationary risk. MMTers posit that high interest rates and inflation require the key elements of full employment and/or productive disruptions and that high deficits alone do not lead to hyperinflation. Some MMTers think that the federal government should primarily be concerned with restoring the country to full employment and not waste time worrying about hypothetical inflation scenarios, which have yet to materialize in Japan, for instance, despite two decades of huge deficits.




Increasingly, I favor the third group. I think they have a deeper understanding of how the global economy actually functions, and their models tend to fit the real world data. Two years ago, I thought more like Krugman, that hyperinflation was a realistic possibility and deficits were a big concern. Gradually, my thinking shifted when predictions didn't pan out and the logic didn't work. The failure of M3 was a big indicator that neo-classical economics is fundamentally wrong, as is the ongoing strength of the yen, but maybe this is all a bit too nerdy.

I think we need to get people back to work and MMTers have some good ideas for making that happen. Once we return to low unemployment and genuine productive constraints, then we can start worrying about inflation. While Austerians will argue that the worst thing we can possibly do is pass debt on to our grandchildren, MMTers will argue that it is infinitely more dangerous to hand them a decaying society with crumbling infrastructure.

[zeemike]

4. I don't know much about economics.

But what I do know is that the wealth of a nation is in the land and it's resources....and that it is the labor that it takes to turn those resources into something of value that creates wealth.
All the rest of that crap about the stock market and derivatives and credit default swaps is just voodoo....it creates nothing of value in reality but does suck up a bunch of wealth that was created by labor and the land.
And as people we are poor because we have no land....it is mostly owned by those that practice the voodoo on us.

[AdHocSolver]

5. Actually, you summarized economics quite accurately.

Most of what passes for economics is merely propaganda to hoodwink the suckers who are being scammed.

Interest rates are set by the corporate cartel of banks known as the Federal Reserve. They have been artificially keeping interest rates extremely low (below the "true" interest rate) to sucker people with savings to take their money out of savings accounts and CD's and put it into the stock market. Throwing money at the stock market pushes up stock prices at the peak of which the insiders sell their huge blocks of stock. These large sales then cause the stock prices to drop after which the "insiders" then buy back the stock that they just sold "high" at the new lower price. The technical term for this practice is called a Ponzi scheme.

The artificially low interest rates encourage people to buy homes that are priced beyond what they can afford to pay by taking out a "balloon" mortgage (Adjustable Rate Mortgage or ARM). The buyers are told that with rising real estate prices, the purchaser can always "flip" the house (sell at a higher price) before the higher interest rates and mortgage payments kick in, and lose nothing.

The catch is that the rapidly rising real estate prices are caused by people paying higher prices on the houses than they are "worth". Excess demand drives up the prices as more money is thrown at a commodity. When the market runs out of buyers willing to spend increasingly more money than a commodity is "worth", you wind up with excess sellers and not enough buyers to "clear" the market, so the prices drop quickly. This constitutes the boom and bust of the bubble economy.

True wealth is developed from producing products to sell. The reason we have so much debt is because almost all of the everyday products that we buy such as clothing, shoes, electronics, appliances, and others are imported. Instead of paying other Americans to make the goods that we buy, the money spent flies out of this country to pay someone in Asia. An economy requires a circulation of money within a country. A constant outflow of money creates debt and unemployment and cannot continue indefinitely.

The idea that the U.S. can merely increase exports to offset imports is sheer nonsense. There is nothing that Asia cannot produce more cheaply than they could buy from the U.S. For the same reason that housing prices cannot rise indefinitely when you run out of buyers, you cannot increase exports if the only countries able to afford your products (because of a huge trade surplus) can make the products themselves at less cost.

Monetary policy is all voodoo economics. Monetary policy is rigged by the Federal Reserve to make huge profits for the banks and Wall Street and preventing the suckers from understanding how they are being scammed. This is as true today as it was over 40 years ago when I earned my degree in economics.

[jtuck004]

6. +1

Wish I could rec your post for this statement

>The idea that the U.S. can merely increase exports to offset imports is sheer nonsense<

[zeemike]

11. That is always what I suspected to be true.

And this came to me as I was studding the history of my ansestors...I ran across a book that told the history of central Illinois during the 1840s.
The book told that that time no one had money because the US did not have much of a monetary policy, But if you were a farmer you could grow grain and take it down to the Mississippi river and sell it for Spanish silver....so the farmer was the only one who had money to spend and soon the merchant showed up with goods that the farmer needed to exchange for the silver that they had.
And so the labor that produced a product from the land was rewarded and that explains for me why all these old farm houses that my ancestors lived in were so large and why they looked so prosprouse....because they were.
What I think is happening is that we are entering a new era of feudalism where the land itself and it's resources are owned by corporate interests and the vast majority of people become the feudal serfs.
We are poor because we have no land.

[Hawkowl]

16. Yes! NeoFeudalism!

I do have a lot of formal training in economics, and you have hit the nail on the head with that one!

Monetarism is simply Economics answer to the perpetual motion machine of Physics.

[Name removed]

18. Deleted message

Message removed by moderator. Click here to review the message board rules.

[AdHocSolver]

7. Monetary theory is a meaningless distraction.

This country is experiencing some serious "hidden" inflation, even with low interest rates. The interest rates are kept low by the Federal Reserve which is controlled by the banks. The "Austerians" favor cutting social programs, not to reduce deficits, but to free up more "middle class" money that they can steal.

Deficit doves promote stimulus packages which will help in the short term, but do nothing to help the economy in the long term so long as a large part of the stimulus money flees this country to pay for imports.

The only deficit that this country has to worry about is the trade deficit. This country has to reduce imports by making it profitable to manufacture everyday goods that we buy right here in the U.S. with American labor. Ideally, this would be done by eliminating NAFTA, the WTO, the IMF, the World Bank and similar ilk and replacing them with import quotas and import duties on goods from low-wage countries to level the playing field for American companies who want to produce goods in the U.S.

Since it will be a cold day in hell before that happens, this country needs a good "Buy American" program to do the job. However, there is not a whole lot of optimism that a large number of Americans will rise to the occasion, until a large part of the middle class feels some pain in their wallets.

Reducing imports and putting Americans back to work will solve the government deficits as working Americans pay taxes. This country also has to rewrite the tax code to prevent corporations from avoiding taxes by offshoring jobs.

[jtuck004]

9. That prompts me to ask a question...

MMT says the deficit is not the most important thing, that we do not need to "borrow" 'cause we have the monopoly on the dollar.

NeoLiberal says it will drive us into bankruptcy (As you noted they use this argument so they can steal more money from hardworking people)

If more people understood that they are operating with fiat money, that it is created and not a product of how much we can sell or borrow (leaving aside the other issues such as interest, inflation, etc)...

Would MMT not be a meaningless distraction if it helped people understand how the wealthy and connected are manipulating them?

[girl gone mad]

12. I understand what you mean..

and everything you've said is accurate, but try to look at it from another perspective, too.

For at least the past decade, businesses have been saving rather than spending. The focus has been on short term profits, achieved in large part by shifting production to cheap labor markets and halting or reversing growth in domestic wages. Recent reports show that corporations have stockpiled almost 2 trillion in profits, but most of the gains that resulted from shrinking labor and production costs have gone to executives and shareholders. We recently witnessed what happened when too much money was allocated to the people at the top. They chased higher returns through increasingly ridiculous financial schemes. They also engaged in heavy speculation, which caused some of the inflation you mentioned.

If we want our GDP to remain healthy, the government and the private sector can't both be net savers. The government has to spend to make up for the lost output which has resulted from the corporations' protracted war against the American worker. This is why monetary theory is relevant. It tells us why supply-side economics has failed and outlines how economic policy can restore balance.

Right now we have millions of healthy people who are unemployed or underemployed. We have factories and equipment sitting idle. The government can put these people to work without risking real inflation, and until business decides to reinvest in American production, it should. That is, if we still have a government that exists for the life, liberty and pursuit of happiness of its citizens, and not merely to protect the interests of a small group of wealthy individuals.

[CHIMO]

14. There Are

A lot of issues to cover.

The experts are talking about theories. Probably all of which are correct within their own context.

When internal debt and external debt are covered or inflation is entered into the equation things are still missing.

When the debt/deficit about Greece comes up it is bound by certain simple constraints. (In - out) should be greater the zero or decreasing.

When US debt/deficit comes up the same rules are applied. Well the 2007/2008 fiasco didn't only affect the US. It affected the world.

So why the difference.

Is it that the US dollar is the world's currency? Is it because of military strength?

Why has the G20 adopted a deflationary approach when the US has not?

There are other questions in the equation of which no one wishes to look at as an integral part of the overall system.

An an example. Corporate tax deductions will increase the economy. Well, corporations are sitting on huge amounts af cash and not spending. To me that says that the theory is wrong.

What does GNP have to do with a countrys' well being?

[Art_from_Ark]

17. A big difference between Japan's deficits and America's deficits

is that Japan's deficits are mostly financed by Japanese investors, so there's no concern that another country will start dumping Japanese government bonds. Other factors propping up the value of the yen include the yen's role in "carry trades" and the fact that Japanese banks stayed out of the derivatives mess.

[westerebus]

8. GGM, both are rec'd.

We have a printing press and nuclear weapons. We don't need no stinkin' MMT. :P

[jtuck004]

10. k&r

[Po_d Mainiac]

13. The 800lb hairy thing that just won't go away

If OPEC decides our currency isn't the means in which they receive compensation, we will have runaway inflation. What's even more damaging is that conventional methods of controlling inflation will be ineffectual.

We have been insane to have developed our society around a commodity which we have little control over.

K&R

Excellent topic and comments!

[bemildred]

15. IMHO, arguing about which of the competing dogmas is correct won't get you far.

It is quite correct that modern money is fungible, to use Dumbsfeld's term, and the government clearly knows this, the deficit argument is trotted out exclusively when the subject is something they don't want to print more money for, i.e. things that the banksters don't see as being to their benefit. Nobody on the inside ever brings up the deficit when the subject is some stupid war or bailing out some large banking corporation that was just bankrupted (again) by its venal CEO.