Brad DeLong
put a long quote from Abba Lerner on his blog a few days ago. Lerner is
sometimes said to be the founding father of Modern Monetary Theory (MMT).
Then he had
an article published by Project Syndicate which is pretty much MMT compliant.
My only
quibble with the latter article is that he seems to suggest that if the
interest rate demanded for holding a country’s debt rises too far, the country
is in trouble. I beg to differ.
If those
bond vigilantes want an excessive amount of interest, the relevant country can
just print money instead of borrow it (as Keynes and Milton Friedman pointed
out). And that activity is NOT NECESSARILY inflationary: after all we’ve
printed astronomical and unprecedented amounts of money via QE, and excess
inflation is nowhere to be seen.
However, if
it looks like inflation WILL ENSUE, that just proves the economy is at
capacity, thus printing cannot be taken any further.
In other
words, as MMTers have pointed out ad nausiam, the debt and deficit are not
constraints. Inflation on the other IS A CONSTRAINT. Or rather, it’s THE
constraint.
One can
never be 100% sure what is going on in someone else’s mind, but it looks to me
like DeLong is edging towards MMT.
Abba Lerner (1943) thought that you could always run a large enough budget surplus if necessary to keep inflation low, and the debt would never explode. I don't think that is correct in general--although it may be correct for countries that are at the center of the global monetary system and possess d'Estaing's "exorbitant privilege": it's an empirical question...
ReplyDeleteI certainly can’t claim you are 100% wrong. Which raises the question: what does a small country with its own currency do when “paradox of thrift” raises unemployment? MMTers say “just run a deficit and let the debt or monetary base expand”. But against that, the debt or currency of a small country tends to be vulnerable, as you point out.
DeleteI think my answer is that a small country (which does a normal amount of trade with the rest of the world) works to a significant extent in a US dollar environment. Thus if citizens of the small country save, they’re quite likely to save US dollars, so to that extent there’s no effect on unemployment in the country. (And there is plenty of that type of saving going on right now: Argentina is, and has been an example for some time.)
And if a significant amount of saving is done in US dollars, then the relevant small country won’t need to run such a large deficit to deal with paradox of thrift unemployment.