Paul Krugman cites Yours Truly

That is, Krugman cites my critique of Mises’s explanation of the Great Depression here in his New York Times blog:

Paul Krugman, “Soup Kitchens Caused the Great Depression, AFF Edition. That’s AFF for “Austrian Founding Fathers,” Conscience of a Liberal, January 27, 2014.

That was nice of him!

I suppose frenzied Austrian counter-reponses will appear in due course.

Robert Murphy versus Paul Krugman on Government Debt

I see that Robert Murphy was interviewed by Judge Andrew Napolitano, on Paul Krugman’s view of government debt in the video below. While I found it interesting to see Murphy interviewed, I have a low opinion of his notion of government debt.



Some points:

(1) The interviewer’s hysterical reference to the explosion of debt (“50,000 every second” – which I am not sure is correct or not) is misleading: government debt might be rising, but so is GDP, and it is net government debt as a percentage of GDP that is a better measure of its burden.

(2) The notion of present generations “living at the expense of future generations” is utter nonsense. Any future generation cannot send real goods and services back in time, and our wealth today is dependent on the real goods and services produced, owned and consumed today, not in the future. The repayment of future government debt comes from three sources:

(i) Central bank open market operations. This does not even involve taxpayers’ money at all: money used to pay back debt in this way is simply created by central banks.

(ii) The government has the power to roll over much of its debt. As long as people keep purchasing the debt, there’s no problem.

(iii) The government’s repayment might be from current tax revenues. But, with expanding GDP, the government has access to tax receipts which grow over time, which effectively means that the burden of interest servicing and paying back debt falls as the population rises, GDP grows and tax revenues rise. Since the US has a progressive tax system the “individual” burden of government debt repayment differs markedly depending on income anyway.

The future “individual” burden of government debt is simply a redistribution of money at a future time point or period, and, if the money is spent, a redistribution of real goods, services or assets within the society at some future point in time: it cannot be a robbery by present generations of future wealth, because there is no way that future, real goods and services can be magically transported back in time to today.

(3) The only really serious burden associated with government debt is that part of the debt owed to foreigners (as Abba Lerner argued). But even here the US is in a unique position: the US dollar is the world’s reserve currency and US dollars can just as easily be used to buy other nation’s goods and services, rather than just US goods and assets.

(4) Underlying this obsession with government debt is the completely mistaken and fallacious analogy with private debt. In reality, government debt is different from private debt for these reasons:

(i) the government is the monopoly issuer of its own currency; no private individual can print money;

(ii) the government has the power to roll over much of its debt, unlike private individuals;

(iii) the government’s central bank has the power to control interest rates and bond yields, if necessary.

(iv) the government has access to tax receipts which grow over time, which can effectively mean that the cost of interest servicing on government debt falls as the population rises.

(5) If anything, it is the present generation and its incompetent unwillingness to restore strong GDP growth and high employment that robs future generations of a stronger economy and greater wealth, by permanent loss of the higher level of output and real assets we would enjoy if GDP was hitting its potential.

In summary, the tax burden on most individuals from repayment of future US government debt is likely to be small, given that the US has a progressive tax system, and most debt is rolled over. Other debt is bought back by the central bank – which does not even involve taxes at all.

Above all, the burden of taxes for future generations to repay debt or interest on debt would be much reduced if the right macroeconomic policies were restored.

In fact, the truth is that vicious deflationary policies and budget balancing is what will really rob future generations of wealth: it will rob them of the larger economy they would have had in the future from a larger base of GDP and capital stock today.

Above all, destroying present employment, income and leaving millions unemployed will probably prevent potential parents from having children that they might wish to have, because of present poor job prospects, low income, reduced growth and economic stagnation: thus the wages of austerity and budget balancing will prevent some members of future generations from even being born. That is the real crime against future generations.

I have to laugh every time I hear this “robbing future generations” balderdash. The extreme proponents of free market economics would rob potential members of future generations of their very existence.


Note

I highly recommend these classic articles by Abba Lerner on the issue of government debt:

Lerner, A. P. 1943. “Functional Finance and the Federal Debt,” Social Research 10: 38–51.

Lerner, A. P. 1947. “Money as a Creature of the State,” American Economic Review 37.2: 312–317.

Austrians have No Sense of Humour

I note that the usual rogues’ gallery of Austrians seized upon Krugman’s remarks in a debate with Kenneth Rogoff over the economy.

First, the interviewer made a statement that is an outright falsehood: that Keynes seriously advocated stimulus by building pyramids or digging holes in the ground. Kenneth Rogoff makes the same error, falsely accusing Keynes of really advocating employing people by digging holes in the ground. Krugman’s mistake was his failure to correct this rubbish right away (although I get the sense that this interview may be edited, so maybe it got cut out). Keynes, of course, did not seriously advocate this: he said that if you could find nothing else of use to do, then even these acts would still raise income and production, even though it would be of no use in itself. This comment was in fact Keynes’s way of underlining how aggregate/effective demand is what drives output and employment, and he was right. Moreover, any failed private investment is essentially in the same category as the government having people dig holes in the ground, but no one doubts that this private activity raises output and employment while it is in progress. The point is precisely that we want the government to raise output and employment by doing economically and socially productive and useful things.

In the course of the debate, Krugman made what is obviously a facetious remark, a piece of levity, invoking aliens: that, if massive government spending programs were instituted on the scale of World War II to fight off some serious threat to America, say, like an alien invasion, then this would drive the economy to full employment. Note that Krugman was at pains to point out that this kind of military spending involves negative social product spending. Note that he did not seriously advocate any such military spending. Krugman’s point, illustrated in a rather silly way, is the same as that of Keynes: merely that effective demand drives output and employment in modern capitalist economies, and that spending and employment programs on the scale of World War Two would eliminate the sluggish growth and high unemployment the US is currently experiencing.

However, as everyone else who is not an Austrian cultist knows, Krugman favours public works and social spending, not military spending.

This is very clear in the full video of the debate, which you can see below.



It is fairly amusing to see assorted libertarians and Austrians reduced to blathering idiocy as they distort Krugman’s remarks, and falsely say that he really and seriously urged government military spending to fend off an alien invasion. I guess cultist, loser ideologues also tend to have no sense of humour either.*

The haplessness of Austrians was doubly emphasised when the same hacks seized upon the following false message that someone just made up by pretending to be Krugman:

“People on twitter might be joking, but in all seriousness, we would see a bigger boost in spending and hence economic growth if the earthquake had done more damage.”

Some links on this whole business:

Daniel Kuehn, “The Fake Krugman on Keynesian Economics” August 24, 2011.

Daniel Kuehn, “One More Quick Thought,” August 24, 2011.

* P.S. the title of this post and the latter comment are also facetious, before I get inane comments below.

Skidelsky on “The Relevance of Keynes”

Robert Skidelsky has a very good essay on Keynes’s thought and how it applies to the financial crisis of 2008 and the state we find ourselves in today:

Robert Skidelsky, “The Relevance of Keynes,” January 17, 2011, www.skidelskyr.com.

This has also been published as an article:

Robert Skidelsky, “The Relevance of Keynes,” Cambridge Journal of Economics 35.1 (2011): 1–13.

Skidelsky is Keynes’s biographer and his interpretation of Keynes is in fact very close to that of the Post Keynesian school, which is why his work is important. The interested reader looking for something more substantial can also read Skidelsky’s new book Keynes: The Return of the Master (Allen Lane, 2009). A reasonably good summary can be found here:

Keynes: The Return of the Master, Wikipedia.org.

The reaction to this book shows us the schism that runs through modern New Keynesian macroeconomics. First, we have quite positive reviews of Skidelsky’s book by the liberal New Keynesians Krugman and Stiglitz:

Paul Krugman, “Keynes: The Return of the Master by Robert Skidelsky,” Guardian, 30 August 2009.

Joseph Stiglitz, “The Non-Existent Hand,” London Review of Books 32.8, 22 April 2010.
(this also has a letter by the Post Keynesian Paul Davidson clarifying Keynes’s views on uncertainty).

In contrast, we have the conservative New Keynesian N. Gregory Mankiw in a remarkably cold review in the Wall Street Journal:

N. Gregory Mankiw, “Back In Demand,” Wall Street Journal, September 21, 2009.

Mankiw asserts that Keynesianism “is based in part on the premise that wages and prices do not adjust to levels that ensure full employment.” In fact, Keynes also showed that even if wages and prices were flexible, there would still be involuntary unemployment and failures of aggregate demand. The so-called New Keynesian tradition developed by Mankiw and others (which is rather different from the New Keynesianism of Krugman and Stiglitz) is actually a travesty of Keynes’ thought, and part of the problem plaguing modern economics.

Galbraith versus Krugman on Deficit Spending

In a recent post, Paul Krugman has criticised James K. Galbraith’s view of deficit spending. The latter is obviously influenced by Modern Monetary Theory. For the relevant documents, see here:

Paul Krugman, “I Would Do Anything For Stimulus, But I Won’t Do That,” July 17, 2010.

James K. Galbraith, Statement to the Commission on Deficit Reduction, June 30, 2010.

Krugman’s complaint is as follows:

there’s a school of thought which says that deficits are never a problem, as long as a country can issue its own currency. The most prominent advocate of this view is probably Jamie Galbraith, but he’s not alone.

Krugman is undoubtedly referring to Modern Monetary Theory (MMT)/neo-Chartalism. However, he is wrong to accuse neo-Chartalists of thinking that “deficits are never a problem.” In fact, Modern Monetary Theory says that, even though deficits are not “financially” constrained, they face real constraints in available resources, capacity utilization, the unemployment level, the exchange rate, the external balance, and inflation rate.

This is quite different from saying that “deficits are never a problem.” Clearly deficits can be, if they cause excessive inflation and push the current account deficit to an unsustainable level. Investor confidence is also a factor influencing the exchange rate, but, since behaviour in these financial markets is fundamentally irrational and subject to panics, one cannot predict what they will do, and the government should not be held hostage by them.

Krugman has misunderstood Galbraith. If we look at what Galbraith actually says, it is very clear:

[sc there is a] common belief that the government must borrow in order to spend, and thus that the government faces “funding risks” in private markets. Such risks exist … for private individuals, for companies, for state and local governments, and for national governments such as Greece that have ceded monetary sovereignty to a central bank. But the situation of the United States government is quite different. The U.S. government spends (and the Federal Reserve lends) in a very simple way. It does so by writing checks – in fact simply by marking up numbers in a computer. Those numbers then appear in the bank accounts of the payees, who may be government employees, private contractors, or the recipients of federal transfer programs. The effect of government check-writing is to create a deposit in the banking system. This is a “free reserve.” Banks of course prefer to earn interest on their reserves. Thus they demand a US Treasury bond, which pays more interest without incurring any form of credit or default risk … The Treasury can meet that demand, or not, at its option – it can permit, or not permit, the stock of US Treasury bonds in circulation to increase. So long as U.S. banks are required to accept U.S. government checks – which is to say so long as the Republic exists – then the government can and does spend without borrowing, if it chooses to do so. And, if it chooses to issue Treasuries to meet the demand, it can do that as well. There is never a shortfall of demand for Treasury bonds; Treasury auctions do not fail …. Insolvency, bankruptcy, or even higher real interest rates are not among the actual risks to this system. The actual risks in this system are (to a minor degree) inflation, and to a larger degree, depreciation of the dollar.

http://www.angrybearblog.com/2010/07/professor-jamie-galbraiths-testimony-to.html

Galbraith is entirely right, and Krugman omits the words in bold, and from these words it is quite clear that Galbraith understands that there are real constraints on deficit spending, not phantom “financial” ones. Moreover, it is perfectly clear that Galbraith is talking about deficit spending during a period of high unemployment and low capacity utilization, and perhaps even in the face of a double dip recession.

In his response to Galbraith, Krugman adopts the flawed quantity theory of money and attempts to prove mathematically what is perfectly obvious: that hyperinflation can result from continuous budget deficits that are monetized by the central bank. But, since Modern Monetary Theory already acknowledges that inflation is a real constraint on deficit spending, Krugman’s analysis seems rather pointless.

Consequently, James K. Galbraith is correct.

UPDATE

Galbraith has responded to Krugman:

http://krugman.blogs.nytimes.com/2010/07/17/more-on-deficit-limits/

It is clear Krugman has misrepresented Galbraith. Modern Monetary Theory has always said that there are real limits to deficit spending, and inflation is one of them.

What Type of Keynesian is Paul Krugman?

In a recent post I reviewed the three varieties of Keynesian economics (see Neoclassical Synthesis Keynesianism, New Keynesianism and Post Keynesianism: A Review). A question raised by this post is this: what kind of Keynesian is Paul Krugman?

Paul Krugman is an outstanding liberal economist and won the Nobel Memorial Prize in Economics in 2008. I admire Krugman's work very much. Krugman began his career as a New Keynesian, but he is sometimes regarded as an “Old Keynesian” (i.e., more like a post-WWII neoclassical synthesis Keynesian such as James Tobin). However, calling Krugman an “Old Keynesian” is probably misleading. Krugman in early 2009 made this comment on his blog after reading Hyman Minsky:

I really am gravitating toward a Keynes-Fisher-Minsky view of macro, although of the three I’d much rather read Keynes.

Paul Krugman, “Actually existing Minsky,” May 19, 2009, http://krugman.blogs.nytimes.com/2009/05/19/actually-existing-minsky/

However, as of October 2009, Krugman still declared himself an economist basically using New Keynesian macroeconomic foundations:

I … quarrel with designating me a “radical Keynesian.” I’m just a Keynesian, willing to follow the logic of my analysis. A perfectly standard New Keynesian model, with intertemporal optimization and all that — the kind of model that is standard in freshwater courses — says that under current conditions fiscal stimulus should be very strong, much stronger than what we’re actually doing.

Paul Krugman, “Samuel Brittan’s recipe for recovery,” October 16, 2009,
http://krugman.blogs.nytimes.com/2009/10/16/samuel-brittans-recipe-for-recovery/

Krugman rejects the idea that he is a “radical” Keynesian, and his use of a New Keynesian model supports this.

Nevertheless, Post Keynesian economists have pointed out that Krugman seems to share similarities with their macroeconomics: he apparently emphasises changes in liquidity preference as a cause of unemployment, has refuted the New Keynesian idea that price and wage stickiness is the fundamental cause of involuntary unemployment, and rejects Say’s law. If this is the case, these ideas make him much closer to Post Keynesian macroeconomics than he perhaps realises (see Felipe Rezende, Keynes’s Relevance and Krugman’s Economics, August 18, 2009, New Economic Perspectives Blog).