by Paul Krugman’s macro framework is leading him astray. Stephanie Kelton takes on Paul Krugmen. It looks like Albert Edwards is right, MMT has excellent models. MMT is becoming confident.He used the same model to fight the deficit scolds, who were pushing austerity during the Great Recession. (And he deserves credit for being on the right side of that debate!) But his defense of deficits was always contingent on being in a depressed economy, where he argued that monetary policy had become largely powerless (a flat LM curve) due to the zero lower bound (ZLB) so fiscal policy needed to do more to help the economy recover. Now that the economy has escaped the ZLB, Krugman has returned to warning that “deficits matter again.” In his words: What changes once we’re close to full employment?
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Paul Krugman’s macro framework is leading him astray.
Stephanie Kelton takes on Paul Krugmen. It looks like Albert Edwards is right, MMT has excellent models. MMT is becoming confident.
He used the same model to fight the deficit scolds, who were pushing austerity during the Great Recession. (And he deserves credit for being on the right side of that debate!) But his defense of deficits was always contingent on being in a depressed economy, where he argued that monetary policy had become largely powerless (a flat LM curve) due to the zero lower bound (ZLB) so fiscal policy needed to do more to help the economy recover. Now that the economy has escaped the ZLB, Krugman has returned to warning that “deficits matter again.” In his words:
What changes once we’re close to full employment? Basically, government borrowing once again competes with the private sector for a limited amount of money. This means that deficit spending no longer provides much if any economic boost, because it drives up interest rates and ‘crowds out’ private investment.