Friday, April 22, 2011

Paul Krugman wrestles with Modern Monetary Theory.

Krugman’s criticism of an article by Steve Landsburg makes it clear that Krugman still doesn’t understand MMT. Although Steve Landsburg’s clever clever exposition of an MMTish point is not a big help to anyone trying to understand MMT.

Here are the details.

Steven Landsburg’s article is a rather extreme and stylised illustration of the difference between MMT thinking and conventional economics. The article makes the point that if government tries to raise revenue by taxing a rich person who subsequently does not reduce their consumption, this gets government nowhere: it does NOT, repeat NOT, enable government to spend more (assuming full employment).

Reason is that for government to be able to spend more, spending somewhere else has to be reduced, else aggregate demand becomes excessive.

Landsburg describes a rich man who fits the above description as “The Man Who Can’t be Taxed” – that’s the title of his article. And that is a silly title, because in a sense a rich man who fits the above description obviously CAN be taxed in the sense that money can be taken from him by government.

So Mr Landsburg – and one or two others – please stop trying to be clever. Just keep it simple. Getting the MMT message across is difficult enough without people trying to be too clever and introducing ambiguities.

And Krugman is completely wrong when he says that taxes “don’t primarily exist as a way to induce lower private consumption, although they may sometimes have that effect; they are there to ensure government solvency.”

That statement is totally wrong first for the reason given above, namely that for government to spend more, spending or consumption somewhere else must be reduced. Second, taxes have nothing to do with “solvency” for a sovereign currency issuing government, because such a government can print its way out of “insolvency” anytime. Of course an irresponsible use of the printing press will lead to excess inflation, but “insolvency” is plain impossible.


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