Saturday, 9 October 2021

 Crowding out: a slight mistake by Stephanie Kelton and Bill Mitchell.

One of MMT's main objections to the conventional wisdom involves so called “crowding out”: that's the idea that if government spends more, it will have to borrow more, which will raise interest rates, which in turn will cut private sector investment, i.e. “crowd out” the latter investment. Alternatively government will have to raise taxes, which will crowd out a broader range of spending by the private sector.

The response by leading MMTers like Kelton and Mitchell to that is that more government spending will not necessitate a rise in interest rates or increased taxes if the economy has spare capacity, i.e. where we are not at full employment. In other words in the latter scenario, the extra government spending can go ahead, and the only net effect will be reduced unemployment, an obviously desirable outcome.

But it follows from the above that if the economy IS IN FACT at full employment, then extra public spending WILL CROWD OUT private sector spending (investment spending or other spending). But strange to relate neither Kelton nor Mitchell actually mention that!!

At least I can't find anything to that effect in Kelton's book “The Deficit Myth” nor in Bill Mitchell's articles. But of course it's always possible Kelton or Mitchell do actually that point and it's just that I failed to find it! But certainly a good 99% of their material on crowding out is devoted to debunking the above mentioned conventional wisdom, rather than admitting that the crowding out idea is valid where the economy is at capacity.

My above “crowding out is sometimes needed” point may be IMPLICIT in Kelton and Mitchell's arguments in that they say deficits are limited by inflation, i.e. if government were to spend more when the economy is at capacity WITHOUT raising interest rates or taxes, the effect would be excess inflation. Still, they really ought to have made that point EXPLICITELY in the passages of their works which deal with crowding out.

If you don't make everything 100% clear, your opponents will get the wrong end of the stick or jump on it and claim they've spotted a flaw in MMT, as Ann Pettifor does in relation to the above crowding out point and MMT. See just under her heading “Mainstream economic theory and deficit financing” in her article entitled “‘Deficit Financing’ or Deficit-Reduction Financing?”

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