Paul Krugman is out with another misrepresentation of MMT. For some reason, he has come to the false conclusion that MMTers believe deficits don’t matter. He says:
“Right now, deficits don’t matter — a point borne out by all the evidence. But there’s a school of thought — the modern monetary theory people — who say that deficits never matter, as long as you have your own currency.
I wish I could agree with that view — and it’s not a fight I especially want, since the clear and present policy danger is from the deficit peacocks of the right. But for the record, it’s just not right.”
This is an absurd misrepresentation of the MMT position and proves that he has not taken the time to fully understand MMT. In my treatise on the subject I specifically say this is not the case:
“Some people claim that MMTers say deficits don’t matter. That is a vast misrepresentation of MMT. No MMTer would ever say such a thing. Deficits most certainly do matter. Maintaining the correct level of deficit spending is, in many ways, a balancing act performed by the government. It is best to think of the government’s maintenance of the deficit like a thermostat for the economy. When the economy is running cold the deficit can afford to be higher. When it is hot the deficit should be lower. Because there is no solvency concern in the USA (as there is in the revenue constrained European nations) the only concern is inflation and with record low inflation rates there is no fear of the deficit resulting in hyperinflation which would be a pseudo form of default.”
I have maintained that the size of the deficit matters greatly in the current environment because of the uniqueness of this recession. It matters because we are in a balance sheet recession (a description that Mr. Krugman has himself written about). Because the United States is running a current account deficit and the private sector is paying down debt (as opposed to borrowing and spending as they might do in a healthy economic environment) the government sector MUST maintain a higher than normal deficit. This is best understood by visualizing the sectoral balances approach. Currently, the Federal government is running a 10% budget deficit so the private sector is able to save in excess of 7% of GDP (we are running a -3% Current Account (CA) deficit so the math can be no other way).
As time goes on and labor markets improve and the US economy reaches something resembling full employment we will require a much smaller deficit and in fact the automatic stabilizers will do much in resolving this on their own. So, my position on the current environment is really no different than Mr. Krugman’s prescription although he appears intent on misrepresenting this position. Deficits most certainly do matter. I don’t know if I can make that much clearer.
As for the whole “funding” idea, well, perhaps Mr. Krugman would like to explain how a sovereign issuer of currency just “runs out” of money. There is simply no such thing as the USA not being able to “fund” itself in the currency that it alone can create. He appears to be stuck in his gold standard world where currency issuers are always constrained in their ability to spend. Funding is never an issue for the USA, which is the monopoly supplier of currency in a floating exchange rate system. The issue is maintaining a level of inflation that does not devolve into a hyperinflationary environment and thus maintaining the right size deficit given the economic environment is vital to ensuring that demand for the sovereign currency does not collapse. Mr. Krugman appears to agree with much of this, but has clearly not taken the time to appreciate even the most basic premise of MMT.
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