Tuesday, 17 December 2013
Secular stagnation: MMT is right. Summers and Krugman are wrong.
In the Financial Times yesterday, Summers again trotted out his nonsensical secular stagnation theory: the idea that demand will be depressed for a long time and there’s no way we can raise it. I dealt with this nonsense here about a week ago. Plus Krugman has written TWO articles supporting Summers one of which I dealt with at the latter link. So I’ll run thru K’s other article to see if it’s any better (which it isn't).
When prudence is folly.
In the first section of K’s article (entitled “When Prudence is folly”) he points to the fact that Keynes’s paradox of thrift is responsible to a significant extent for our current woes, and then points out (as indeed did Keynes) that in a paradox of thrift environment, ANY SORT OF SPENDING however daft helps the situation. Now that’s true. E.g. if people are employed all day to dig holes in the ground and fill them up all day long, at least the money they earn will be spent on something more sensible, and on balance we’ll benefit.
But K then concludes that since “daft” spending doesn’t bring huge benefits (or won’t last all that long), that therefor we’re scuppered!
What’s wrong with simply creating new money and spending it not on something daft, but on something sensible (as advocated by Keynes, MMTers and others)? If you’re on the political left you’ll tend to want to see extra money spent on public sector items: roads, education, law enforcement or whatever. And if you’re on the political right you’ll want to see extra money fed into household pockets so that householdes can sepend the on whatever they want: better housing, longer holidays, etc.
A ten year old can understand that, but apparently it’s beyond the comprehension of “sophisticated” economists like Krugman and Summers.
Krugman’s second section.
In the 2nd section of K’s article entitled “An economy that needs bubbles”, he deals with Summers’s point that prior to the crisis, economies were being driven by housing bubbles. True: they were.
But Summers and K then argue that but for bubbles, we’d have been in recession well before the crisis, ergo we’re in for some sort of PERMANENT AND NEVER ENDING recession.
That is, given a recession starting around the year 2000, what would there have been to stop us applying well known Keynsian techniques to escape such a recession? Nothing!!!
Krugman’s third section.
This section is entitled “Secular stagnation?” Basically this section just argues that population growth is lower than it was during the baby boom era, ergo less investment is needed and less investment spending means less aggregate demand. Well sure: less investment spending means less AD, but so what? Money that WOULD HAVE been spent on investment may be automatically re-allocated by the market to consumption spending, in which case: problem solved. But if it doesn’t all we need do is apply the Keynsian / MMT solution.
No problem there. The problem is entirely in the bad dreams that Sumner and Krugman seem to be having.
Krugman’s fourth section.
This is entitled “Destructive virtue”. This contains a truly wonderful sentence: “He (i.e. Summers) goes on to say that the officially respectable policy agenda involves “doing less with monetary policy than was done before and doing less with fiscal policy than was done before,” even though the economy remains deeply depressed.”
Well quite. Our economically illiterate politicians and several economically illiterate economists are sitting around saying “nothing can be done”, when in fact the solution can be explained to a ten year old, as pointed out above.
And in the next sentence, K refers to Summer’s claim that “improved financial regulation is not necessarily a good thing – that it may discourage irresponsible lending and borrowing at a time when more spending of any kind is good for the economy.”
“Irresponsible lending and borrowing” is . . . what’s the word I’m looking for . . . ah yes . . . “irresponsible”!!!!
That is, there is no need to expand the financial sector to the point where it has to resort to NINJA mortgages to keep itself employed. The financial sector should be regulated sufficiently tightly that it keeps to . . . what’s the right phrase . . . ah yes . . . “responsible lending and borrowing”. And if that doesn’t produce enough aggregate demand, then apply the solution spelled out about which ten year olds ought to be able to understand.
Finally, K advocates disposing of physical cash and imposing negative interest rates. (The reason for disposing of physical cash is that if negative rates were imposed but physical cash were still available, people would be able to hold monetary base without paying the negative interest rates by simply storing cash under their matresses or wherever.)
Now disposing of physical cash is a hilariously dumb idea. Physical cash is U-S-E-F-U-L. That’s why people use it. The total turnover of physical cash has doubtless declined as a result of the rise of plastic cards and other methods of payment. But people still hold billions of dollars of the stuff in their wallets.
Moreover, what’s the big idea behind negative rates? It’s to induce people to cease storing and thus spend more of their stock of money than they otherwise would. Now I can think of a better way of inducing people to spend at a rate that brings full employment. It’s the Keynsian/MMT policy mentioned above: i.e. create and spend money into the economy (and/or cut taxes) in a sufficiently large amount that the private sector has a stock of monetary base sufficiently large that it spends at a rate that brings full employment.
As leading MMTer, Warren Mosler puts it at the top of his site (in yellow print): “There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.”