Wednesday, March 5, 2014

New Keynsians’ faux pas.

Following on from my previous post which highlighted the fact that the geniuses at the British Treasury have recently re-discovered a point made by Keynes 80 years ago, it seems that New Keynsians are equally dumb (and MMTers correspondingly smart).
For MMTers (and indeed anyone with some common sense) it is obvious that a household’s spending will tend to be positively related to it’s stock of cash. In plain English, when a household wins a lottery, its spending rises.
According to Nick Rowe, “New Keynesians have . . . .  forgotten that some sort of real balance effect is the only thing that might (or might not) bring the economy to full employment automatically.”
That is, if government runs a deficit funded by new money, then the private sector’s stock of cash rises, all else equal. The fact of spending that money (or cutting taxes) will of course raise demand. But in addition, the mere fact of the private sector having an increased stock of what MMTers call “private sector net financial assets” will also tend to increase demand.
“Private sector net financial assets” is a collective term for base money and government debt, and MMTers are right to use that phrase because base money and government debt have something in common: they are both assets as viewed by the private sector to which there is no corresponding debt.
But perhaps that’s beyond the comprehension of New Keynsians.
And finally, I have of course extrapolated from the micro to the macro above, which is always dodgy, but I think it works in this case.

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