MMT Throwdown Krugman v Roche

Paul Krugman Initial Blog Post: Deficits & the Printing Press

Mr. Krugman starts off his blog with:

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.

With this simple paragraph Paul Krugman starts a war with the Modern Monetary community (okay, a little nerdy, I know).  For a primer on Modern Monetary Theory, see Understanding Modern Monetary Theory over at PragCap Blog.

This elicited an overwhelming response from the MMT Community:

Cullen Roche at PragCap:  Dear Paul Krugman, You Do Not Understand MMT where he says:

This is an absurd misrepresentation of the MMT position and proves that he has not taken the time to fully understand MMT

Then Yves Smith over at Naked Capitalism Blog posted Scott Fullwiler’s piece: The Conscience of a Neo-Liberal where he states:

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).

Then James K. Galbraith responds on PragCap:

What do you mean, exactly, by the phrase, “solvency of the government”?

According to my dictionary (Webster’s Third New International) an entity is “solvent” when it is “able… to pay all legal debts.”

If you will look in your wallet, you will find, on any Federal Reserve Note: “This Note is Legal Tender for All Debts Public and Private.”

Can we agree that the United States government, of which the Federal Reserve is a part, can always produce the Federal Reserve Notes required to pay its public debts?

It follows, without any possibility of misunderstanding or error, that the United States Government is always going to be solvent.

Krugman responds with two more posts to his Conscience of a Liberal Blog:

A Further Note on Deficits and the Printing Press

More on Deficit Limits

Interestingly enough I have yet to see a conservative economist weigh in on this debate.  It seems the economist community continues to be stuck in the Gold Standard era and continue to misunderstand our monetary system.

Scott Dauenhauer, CFP, MSFP, AIF

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