Tuesday, October 29, 2013

Bob Veres — Why Deficits Don't Matter

Stephanie Kelton, Associate Professor of Economics at the University of Missouri/Kansas City, believes that the root of all these problems can be found in a fundamental misunderstanding – shared by Democrats, Republicans and mainstream voters alike – about the government's balance sheet. She argues, plausibly, that the whole idea that we should control the deficit at all is costing our nation trillions of dollars in lost output. The result is lost income, savings, wealth and prosperity.
"As a society, we don't understand government finance," says Kelton. "Most people – including most economists, think that it operates by the familiar rules of household finance. Therefore, we find it plausible when we hear politicians and government watchdogs urging us to balance the budget, control the urge to spend and pay down the debt."
The mantra on the right: the federal government has to stop spending money it doesn't have. The mantra on the left: we need higher taxes on "the rich" in order to balance the budget and pay down the federal deficit. Moderates call for a little bit of each.
"We act like there is some limited amount of money available," says Kelton, "and that government competes for savings with the rest of the economy, and that too much competition for savings drives up interest rates, and higher interest rates crowd out all productive private investment. We act like the federal government is walking a fine line between solvency and insolvency – that if the debt gets too big, our creditors may begin to get nervous, downgrade our debt, our interest rates go up, and suddenly we end up like Greece."
Yes. So? "That picture has no economic meaning whatsoever," says Kelton. "None."

Advisor Perpsectives
Why Deficits Don't Matter
Bob Veres
(h/t Stephanie Kelton on FB)

15 comments:

Unknown said...

Have you read Krugman's MMT paper?

https://webspace.princeton.edu/users/pkrugman/Currency%20regimes.pdf

JK said...

y,

Thanks for the link. I haven't read it yet but I quickly went to the References sections to see which MMT literature he's referencing in this paper and found… what? NONE?

I get the feeling Krugman is doing his best to publicly not give MMTers/UMKC much if any credit… even though i see in his op-eds language that he must have recently picked up via exposure to some MMT.

What gives?

Tom Hickey said...

@ y

Thanks. Promoted to a post.

@ JK

We all said from the get-go this would happen. Tacky.

Unknown said...

It's not really an MMT paper, but it says some important MMT-type things.

JK said...

y,

Right… was Krugman saying any of those MMT type things before being exposed to MMT? If not, if he's incorporated some of their ideas into his understanding, then he should give credit where it's due and cite them in supporting arguments.

But I'm speaking prematurely here since I haven't read the paper.

Greg said...

We know the reason he cant attribute anything to an MMT economist or paper...... he would not be taken seriously by any of his peers or the media that reports their stuff. "Oh wait, this is from those "money printing", "deficits never matter" guys? Fuhgedaboudit!"

I really doen care if he gives proper attribution as much as I care that he starts moving the conversation in the right direction.

Matt Franko said...

y,

A commenter over at NEP wrote this yesterday about Webber (aka Smith) who runs Naked Capitalism:

"The above article has several links to MMT-related blogs, including Susan Webber’s “Naked Capitalism.” I do not consider “Naked Capitalism” to be MMT-related. Ms. Webber occasionally mentions MMT, and once in a while she almost grasps its simple truths, but she quickly back-slides, and once again echoes myths like those in the article above"

So this person sees that Webber sometimes seems to get it, sometimes does not. I would say the same thing about Krugman.... these two are bout in the same boat... two very smart people, tho both seem to struggle with this...

What I think may be going on is that some people (like most if not all of us) receive this knowledge via what amounts to a "rote" learning process... we hear or read it and we just immediately are given to believe it... this does not look like the way it works for the others... they have to learn it thru another process like "reason" or "creative thinking" or something like that...

they are like the ancient Greek "Mathetai" or "learners" that attended the Academies, they have to "figure things out", they just don't "believe it" without some sort of more formal proof...

So it is taking them longer I suppose they actually may never get it completely... that is a possibility...

So these others, although they are indignant at the sight of the economic injustice like us, they are not given to know what to do about it like we are, they have to go thru some sort of more difficult "learning" process with this...

WE are given to KNOW it, THEY have to LEARN it...

I submit NONE of us had to go thru a 'learning process' to be able to receive this knowledge... it was simply just given to us...

There are very few of us.

rsp,

paul meli said...

"we hear or read it and we just immediately are given to believe it... "

"It is the mark of an educated mind to be able to entertain a thought without accepting it." - Aristotle

Tom Hickey said...

"It is the mark of an educated mind to be able to entertain a thought without accepting it." - Aristotle

This is the value of a liberal education, which used to include the study of philosophy, which is the foundation for critical thinking. There are different ways of seeing the same "reality" based on the assumptions that one adopts. It's not possible to prove these assumptions since they are fundamental to the system and there is no meta system in terms of which to access competing systems. Each philosophy claims that it is the meta-system that provides the universally ultimate criteria.

This has the value of being able to weigh different viewpoints by comparing and contrasting them. It develops appreciation and tolerance of other points of view. And it induces a bit of humility regarding one's own position. This liberality is a sine qua non in a pluralistic society.

Similarly, literature allows us to stand in other people's shoes and history gives us a broad perspective on where we came from and the challenges that had to be met to get here. These are also indispensable in critical and creative thinking.

Tom Hickey said...

was Krugman saying any of those MMT type things before being exposed to MMT?

Krugman recently admitted that he had not properly understood the implications of different currency regimes — after he encountered MMT. Still no attribution. Lame.

David said...

they are like the ancient Greek "Mathetai" or "learners" that attended the Academies, they have to "figure things out", they just don't "believe it" without some sort of more formal proof...

"The first will be last and the last will be first." How many ways is this principle reiterated in the Bible? Why are the "young ones" always favored? It is because Good comes before Truth in reality although it is the other way around apparently. They say that you have to have a foundation before you build a house but the idea of the good of having a house precedes the "truth" of the foundation building. In ordinary consciousness the "old" will kill the "young" or sell it "down to Egypt;" new ideas will be judged according to the old ideas unless space is created for the new. Thus is the critical idea of "the fathers" favoring the "young ones." I found monetary reform/MMT because I was interested in the social good that I felt in my bones was possible but wasn't being offered by the conventional political choices. So I found "truth" via "the good." It is possible to find good via truth, but it is a lot less likely, paradoxical though it seems...

JK said...

Tom, do you have a citation to Krugman admitting that?

Jose Guilherme said...

@Matt,

Yves Smith is much closer - and openly so - to MMT than Krugman.

Krugman has already let slip on previous occasions that he thinks the economist who first understood the key importance of currency sovereignty - especially in what concerns the analysis of the sovereign debt crisis in the eurozone - was his (mainstream) colleague De Grauwe.

Krugman has added that said factor hadn´t been "adequately grasped" - or something like that - by mainstream economics before the writings of De Grauwe.

This is of course a gross distortion of reality, since MMT economists had pointed out all this a long time before De Grauwe.

The reason for this is provided by Greg: if Krugman had quoted MMT economists in his paper he wouldn't be taken seriously by his mainstream peers, the media, etc.

Anyway, I guess we should welcome him to the camp of serious analysis. Sooner or later he'll have to give MMT his due.

Jose Guilherme said...

@ Tom,JK

do you have a citation to Krugman admitting that?

See his blog on July, 6, 2013, under the title "Rationality and the euro".

He writes about "De Grauwe's point, which was imperfectly grasped in 2003 - the crucial importance of having your own central bank as lender of last resort for sovereign borrowing".

As for de Grauwe, he had made his point on 10 May, 2011, under the heading "Managing a fragile eurozone". There he writes that "...the reason (for the difference in sovereign spreads among euro countries) lies in the Eurozone´s fragility. Its members lose their ability to issue debt in a currency over which they have full control".

So Krugman and De Grauwe are now full fledged MMTers - even if not admitting it.

Tom Hickey said...

Yves Smith is much closer - and openly so - to MMT than Krugman.

My take is that Yves is on board with the MMT analysis but not all the policy proposals.