Friday, 11 September 2015

Krugman is catching up with Positive Money and the NEF.

Krugman suggests that printing money and spending it on “stuff” is better than traditional QE, i.e. spending it on buying government debt or other assets held by the private sector. As he puts it:

“What’s remarkable about this record of dubious achievement is that there actually is a surefire way to fight deflation: When you print money, don’t use it to buy assets; use it to buy stuff. That is, run budget deficits paid for with the printing press.”

Just to be accurate (and perhaps pedantic) there’s no reason to confine spending to “stuff”: that is, where SERVICES rather than GOODS seem good value for money, there’s no reason not to buy services. Indeed, the total spent on services in the US is about 50% more than what’s spent on goods, so if services are left out that significantly restricts the amount that can be spent.

Anyway, printing and spending on goods and services is what Positive Money and the New Economics Foundation have long advocated.

Next, Krugman misses out the question as to whether to boost PRIVATE spending or PUBLIC sector spending. That decision, as PM&NEF rightly point out is a POLITICAL decision and should be left to politicians.

That point is a big problem in the US because when it comes to spending decisions, members of Congress spend about a year squabbling before coming to a decision. But that won’t be a problem in several other countries.

Next, Krugman makes the common assumption that “print and spend” should be confined to when the central bank’s freedom to effect more stimulus is limited by low or zero interest rates. That assumption is debatable and is disputed by PM&NEF.

One reason is that it’s hard to see the logic in adjusting JUST ONE form of spending when there is a GENERAL lack of spending / demand. That is, an interest rate change affects just households and firms with variable rate loans and not those with fixed rate loans or no loans at all.

That makes as much sense as doing helicopter drops, but only on households where at least one person is bald, or one person is a Buddhist, or is a football fan.


  1. Good arguments above, except:

    It is misleading, maybe even dishonest, to repeatedly link the ideas of "print and spend" to Positive Money/New Economics Foundation/Prof Werner.

    1. The PM submission (for which you give a link) was primarily concerned with the stability and proposed changes for banking institutions. Little is said about macroeconomic management apart from a monetarist proposal that a Monetary Policy Committee should determine the money supply in order to control inflation.
    2. Long before the foundation of PM many economists advocated "print and spend" during recessions. Nearly 70 years prior to PM, Abba Lerner set out the principles of Functional Finance:
    1. The government shall maintain a reasonable level of demand at all times.
    If there is too little spending and, thus, excessive unemployment, the government shall reduce taxes or increase its own spending.
    If there is too much spending, the government shall prevent inflation by reducing its own expenditures or by increasing taxes.
    2. By borrowing money when it wishes to raise the rate of interest, and by lending money or repaying debt when it wishes to lower the rate of interest, the government shall maintain that rate of interest that induces the optimum amount of investment.
    3. If either of the first two rules conflicts with the principles of ‘sound finance’, balancing the budget, or limiting the national debt, so much the worse for these principles. The government press shall print any money that may be needed to carry out rules 1 and 2.
    -- Lerner, A. 1941. The economic steering wheel. University Review, June, 2–8.

    Note that, in contrast to PM, Lerner's third principle holds that the money supply should be neither a policy instrument nor a policy target.

    1. Hi KK,

      Re the first of your numbered points, I suggest the authors do actually have a fair amount to say about “macroeconomic management”. E.g. on p.10 the authors argue against interest rate adjustments, and they then go on to argue (up to p.12) for an alternative in the form of demand management in the form of “print and spend and/or cut taxes”. Granted that’s only two pages, but the entire work is only 37 pages.

      Re your second point, you’re right: “print and spend” was being advocated long before Pos Money appeared: Keynes advocated it in the early 1930s. So point taken.

      Re Lerner, I agree with him that the money supply should not be a target. Re “instruments” and Lerner’s claim that given a need for more demand, “government shall reduce taxes or increase its own spending”, it strikes me that there is an inevitable monetary effect there. The money supply rises. So I’d guess that Lerner had that monetary effect in mind, though I can’t quote chapter and verse.


Post a comment.