Monday, March 11, 2019

What she said

Stephanie Kelton, quoted by Robert Waldmann in MMT II at Angry Bear:
“MMT would set public spending always to the level required to achieve full employment, and then accept whatever deficit may result.”
I addressed this topic a couple weeks ago, but lets go again.

The quote sounds like a policy statement. I have to see it in context.


I found a source for the Kelton quote at Bloomberg: Paul Krugman Asked Me About Modern Monetary Theory. Here Are 4 Answers by Stephanie Kelton. Turns out the first of her four answers is the relevant one. From her article:
... Paul Krugman is a believer in this doctrine. I’m not, and he’s asked me to explain why. He is responding to a column I wrote critiquing his view of modern monetary theory.
I’m going to respond directly to the questions he raised:
Are MMTers claiming, as Kelton seems to, that there is only one deficit level consistent with full employment, that there is no ability to substitute monetary for fiscal policy? Are they claiming that expansionary fiscal policy actually reduces interest rates? Yes or no answers, please, with explanations of how you got these answers and why the straightforward framework I laid out above is wrong.
Quick responses first, followed by explanations behind my thinking.

#1: Is there only one right deficit level? Answer: No. The right deficit depends on private behavior, which changes. MMT would set public spending always to the level required to achieve full employment, and then accept whatever deficit may result.
So there's the quote Waldmann used. And the context is: The right deficit depends on private behavior, which changes.

Important point. I was gonna bring that up. If the Federal debt is "safe assets" then the Federal deficit is the supply of new safe assets. But the economy is the interaction of supply and demand. The demand for safe assets arises in the private sector, as Kelton says. And it changes.

We cannot consider only supply; we must consider also demand. Similarly, the Federal debt is not only safe assets; it's also a cost. If it wasn't a cost to the public sector it wouldn't be an income-producing asset in the private sector. It is incomplete analysis to think of the Federal debt only as an asset.

There is something else. The private sector demand for "net savings" as Kelton calls it, it's not natural demand. It is exaggerated demand, exaggerated on the one hand by policies that encourage saving, and on the other by the precariously unsound state of our economy. If we got rid of the policies that create the exaggerated demand for saving (and similar lopsided policies), I expect the unsoundness of our economy would slowly fade away on its own.

I quoted Kelton above: "The right deficit depends on private behavior, which changes." Yes, and policy changes it. If we fail to consider that our problems may be consequences of our policies, our analysis is incomplete.


 Stephanie Kelton, quoted by Robert Waldmann in MMT II at Angry Bear; Kelton comes back to our topic after three other "quick responses":
Is there only one right deficit level? No, because for one thing, MMT would establish a public option in the labor market — a federally funded job guarantee — thereby ensuring full employment across the business cycle. The deficit, then, would rise and fall with the cycle, as the job guarantee becomes a new stabilizer, automatically moving toward the “right size” in response to changes in the level of aggregate spending.
Uh, sorry. Can't use that answer. It is based on the hypothetical result of a hypothetically established "public option in the labor market". It is fantasy analysis — thereby insuring precisely the outcome desired by the storyteller. Got anything else?

Kelton does:
In the absence of a job guarantee, things get trickier. Leaving monetary (and exchange rate) policy aside, the government has to allow the deficit to go where it needs to go in order to accommodate the private sector’s net savings desires. If the private sector wants to spend less and save more, the public sector will need to accommodate that desire by running a bigger deficit or the economy will be pushed away from full employment. Krugman drew up the perfect schematic — based on the sector balance framework adopted by MMT — to explain all of this 10 years ago.
Skipping to the end of Kelton's paragraph, Krugman's perfect schematic is interesting. And it fits: It supports Kelton's argument. But that schematic is ten years old now. Krugman, writing in mid-2009, was looking at a Goldman Sachs memo about the change in private behavior which occurred between 2006Q3 and 2009Q1. Minsky Moment stuff.

Minsky Moments are momentary. They don't last forever. Kelton wants us to accept the implicit idea that a permanent, quasi Minsky moment exists and justifies the existence of annual Federal deficits. But that's not how it works. We are not trapped in a permanent, ongoing Minsky moment. That doesn't explain the deficits.


Finally, at Brad DeLong's, a 1965 article from Time magazine discusses Keynes and the Keynesians of the '60s. From the opening:
In Washington the men who formulate the nation's economic policies have used Keynesian principles not only to avoid the violent cycles of prewar days but to produce a phenomenal economic growth and to achieve remarkably stable prices. In 1965 they skillfully applied Keynes's ideas—together with a number of their own invention—to lift the nation through the fifth, and best, consecutive year of the most sizable, prolonged and widely distributed prosperity in history.
Keynes's ideas—plus a few of their own, like the "full employment budget". Kelton describes that one: "Set public spending always to the level required to achieve full employment, and then accept whatever deficit may result.”

But that was not what Keynes had in mind. "What Keynes called for was deficits when the private sector cut back", Mike Kimel wrote (years back, in a comment at Presimetrics) "and surpluses at other times".

Or get it from the horse's mouth. In the New York Times of 10 June 1934, Keynes wrote:
I see the problem of recovery, accordingly, in the following light: How soon will normal business enterprise come to the rescue? What measures can be taken to hasten the return of normal enterprise? On what scale, by which expedients and for how long is abnormal government expenditure advisable in the meantime?
Keynes did not say we should have deficits year in and year out, forever. He wanted the economy to get back to normal ASAP and stop with the deficits already. Kelton's plan is to "accept" the deficits, the growing deficits, "whatever" they are. However much they turn out to be.
"MMT would set public spending always to the level required to achieve full employment, and then accept whatever deficit may result."
In the "public option" paragraph that we skipped, the double-hypothetical paragraph, Kelton hypes the federally funded job guarantee as a way of "ensuring full employment across the business cycle." Full employment in boom and recession alike. Remarkable! For all practical purposes, the "full employment" problem has been solved.

"The deficit," Kelton says, "would rise and fall with the cycle". Note that she does not say deficit in the recession, surplus in the boom. Kelton expects deficits always: larger in recessions and smaller in recoveries, but deficits always. Never surpluses. And that's with normal recessions, not "great" ones.

Keynes expected deficits to give way to surpluses when the Great Depression ended.

The "full employment" problem is worse now than it was in the time of Keynes. The problem was worse in the time of Keynes than it was during the greatest age of the inducement to investment. This is not a one-time change. It is either a recurring change or a continuing, long-term change. Either way, until the cause of this change is addressed, the employment problem will continue to grow worse.

Kelton's plan is necessarily different from Keynes's, because the economy has changed. It changed enough that Keynes's plan (deficits giving way to surpluses) couldn't work today. But if the economy has changed, maybe we don't need Kelton's marathon dance of deficits. We just need to discover the cause of the change. That cause is the problem we must address.


Stephanie Kelton is not looking for the cause of the change. She is looking to work around the change. She hopes to restore full employment using an extreme version of 1960s Keynesianism. But the problem keeps getting worse.

And the solution keeps getting worse: Keynes wanted a one-time burst of annual deficits; Kelton wants deficits always.

As the employment problem grows worse, Kelton's deficits will grow ever bigger. Even if that is harmless, it does not solve the problem.

But rest assured: The employment problem will continue to grow worse until the underlying cause of that problem is solved.


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