Thursday, 27 August 2015

Krugman says we need more government debt.

I'm not in 100% agreement with Krugman's ideas in this article which argues for more national debt. But note that this is a thought provoking article: to illustrate, Warren Mosler responds to it, as does Winterspeak.

Krugman says (his words are in green italics):

“Believe it or not, many economists argue that the economy needs a sufficient amount of public debt out there to function well. And how much is sufficient? Maybe more than we currently have. . . . . . But the power of the deficit scolds was always a triumph of ideology over evidence, and a growing number of genuinely serious people — most recently Narayana Kocherlakota, the departing president of the Minneapolis Fed — are making the case that we need more, not less, government debt.


One answer is that issuing debt is a way to pay for useful things, and we should do more of that when the price is right. The United States suffers from obvious deficiencies in roads, rails, water systems and more; meanwhile, the federal government can borrow at historically low interest rates. So this is a very good time to be borrowing and investing in the future…”

The first problem with the above passage, and this is not a very serious objection, is that funding infrastructure and other public investments is NOT NECESSARILY best done by borrowing. Kersten Kellerman in the European Journal of Political Economy argued that public investments are best funded via TAX rather than government borrowing.

Second, the idea that more public investment is justified because interest rates are low is a popular one, but it’s not a strong argument. Reason is that when considering an investment, the important rate to look at is the AVERAGE rate that will have to be paid over the life of the relevant asset, and that can be a century or more.

Of course it’s very difficult to predict that average rate. But certainly the fact that rates have recently dropped is not an argument for assuming those low rates will last for the next century. Perhaps some sort of rolling average rate over the last half century would be appropriate.

MMT and private sector net financial assets.

Next, Krugman argues that the private sector may need an increased stock of what he calls “safe assets”. Advocates of Modern Monetary Theory have long shared that view, or something similar. That is MMTers have long drawn attention to the fact that the private sector’s tendency to spend must vary with its stock of net paper assets or “Private Sector Net Financial Assets” to use MMT parlance. And PSNFA consists of base money and government debt. (Incidentally, Mosler, Winterspeak and yours truly are all MMTers)

However, is there any particular reason for the private sector to be provided with a stock of INTEREST YIELDING PSNFA as opposed to “non interest yielding” PSNFA? Or to put it figuratively, is there any reason why taxpayers should have to pay interest to those who choose to hold a relatively large stock of dollar bills under their matresses? Clearly not.

Thus while I don’t speak for every MMTer, I’d guess that most MMTers would say that the private sector should certainly be provided with the safe assets / PSNFA it wants in the form of enough base money, there’s no particular reason to supply it with national debt, i.e. interest yielding PSNFA.


The long held MMT belief that the private sector should have the stock of base money it wants remains valid. As to whether INTEREST YIELDING government debt needs increasing, that’s more debatable. Indeed, Milton Friedman argued that government should issue no interest yielding liabilities at all.

Of course there are doubtless good arguments for the state wading into the market and borrowing as an emergency measure when the economy needs cooling. But the arguments for having a stock of interest yielding state liabilities as a long term objective are a bit weak.

As to government bonds which fund infrastructure, if we’re going to have those (contrary to the advice of Kellerman) those should be kept separate, plus they should all be LONG TERM to reflect the long term nature of relevant investments / assets.

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