Tuesday, 3 October 2017

Are Simon Wren-Lewis and Krugman now MMTers?

Lars Syll says “So SW-L has joined Paul Krugman and become an MMTer at the ZLB?” My answer is: “Yes they have”. And here’s my attempt to show why they should be MMTers at ALL TIMES. (I’m sure they’re hanging on my every word, ho ho.)

We’ve established that MMT is a good idea at the ZLB. So is it a good idea when interest rates are higher? Well the answer to that is that interest rates (at least the rate of interest on government liabilities) should basically NEVER be higher.

Warren Mosler (founder of MMT) explained why interest rates should never be higher,  i.e. why a permanent zero rate is desirable in his paper, “The Natural Rate of Interest is Zero”. Milton Friedman agreed with that “permanent zero” idea, incidentally, except that Friedman thought that perhaps government borrowing was justified in war-time. (That’s in Friedman’s American Economic Review paper “A Monetary and Fiscal Framework…”).

As for Mosler’s REASONS for advocating a permanent zero policy, I think I can set out a reason for that policy much more briefly than he does. Here goes.

Assume the yield on government liabilities (i.e. “government debt”) is currently zero or near zero. Assume a rise in demand is required. One way of doing that is simply to issue more government liabilities in the form of zero interest yielding base money. I.e. the state simply prints more money and spends it (and/or cuts taxes). The fact of that spending (on say more education) is to increase the number of teachers employed. Plus the increase in the private sector’s stock of money also increases demand stemming from the private sector.

An alternative and “interest rate increasing” method of raising demand is to issue AN EXCESSIVE amount of government liability and to the extent that government has to rein in some of the resulting demand by raising interest rates.

But what on Earth is the point of issuing an excess amount of “government liability / base money” and then borrowing the excess back? All that does is to artificially raise the rate of interest.

Ergo the optimum arrangement is a permanent zero rate, though I wouldn’t rule out artificial adjustments to interest rates in emergencies. Indeed, that’s more or less what Friedman said, when he suggested that government borrowing was justified in war-time.

Conclusion.  The optimum or GDP maximising arrangement is a permanent zero rate. And from that I conclude that SW-L and Krugman will now declare themselves to be MMTers….:-)

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