Krugman on Modern Monetary Theory

Last summer I wrote a post clarifying some points that I have learned about Modern Monetary Theory. The genesis of the post was a gross mischaracterization of Modern Money Theory (MMT) by Paul Krugman in a piece called “I Would Do Anything For Stimulus, But I Won’t Do That (Wonkish)”, which Paul Krugman had written in July of last year.

Last week Paul Krugman again attempted to take on MMT in another piece called "Franc Thoughts on Long Run Issues." in that post, Krugman makes the same bogus claims about MMT’s saying deficits don’t matter in a fiat currency regime.

Even non-MMT fiat currency sceptics like me have figured it out. Personally, I see something cynical about these repeated bogus claims.

For example, in March, Dr. Krugman wrote:

As I understand the MMT position, it is that the only thing we need to consider is whether the deficit creates excess demand to such an extent to be inflationary.

Clearly he understands the MMT position. Yet last week he wrote:

MMT (modern monetary theory) types… insist that deficits are never a problem as long as you have your own currency.

See the difference?

Statement #1 is correct. Statement #2 is incorrect – and a repeat of what he said last summer. Since Krugman made statement #1 prior to statement #2, I am left guessing why he has returned to the mischaracterization which is the subject of this post.

P.S. – In the end, this is about interest rates. Why is Paul Krugman worrying about the US losing access to the bond market when the term structure of the yield curve largely reflects expected future policy rates? We just saw this is true after the Fed moved to permanent zero at the last FOMC meeting. “The 0.375% US Treasury note maturing on 31 July 2013 is now yielding only 19 basis points.” The Fed can do as much ‘financial repression’ as they want by keeping rates below the headline inflation rate since it has monopoly power in the market for base money. Inflation and currency depreciation are the issues – not a steeper yield curve.

P.P.S – The real issues are currency sovereignty, fiscal space and malinvestment. What we should really be worried about is stopping people worried about the US becoming the next Greece turning the US into the next Japan.

Here’s the original post: Misunderstanding Modern Monetary Theory.

  1. fresno dan says

    I still like Walkman’s primer on MMT

    “A government’s taxing power is limited and socially costly. Governments must maintain a patina of legitimacy so that people pay taxes “voluntarily” or else they must intrusively or even brutally force compliance. In a decent society, it’s perfectly possible that governments will find it politically impossible to tax at the level consistent with price stability goals. A wise, MMT-savvy government would try very hard to regulate the issue of government obligations over time in a way that avoids the need for sharp fiscal shifts in order to stabilize the price level….
    But once you acknowledge this kind of forward-looking dynamic, MMT starts to sound very conventional. We start having to trade off the short-term benefits of fiscal demand stimulation with long-term “exit costs”.

    No way around it – economics is about choices, and if easy and correct choices fell like rain, we would all be rich and happy.

  2. Dave Holden says

    Thanks for the link fresno.

    Personally, I’m currently in Edward’s camp of being somewhat skeptical on MMT. Apparently Steve Keen is putting together a paper on how his work relates to MMT so I look forward to reading that.

    On Krugman my expectations are already low, not least because I’m a regular reader of his blog ;)

    I think Krugman’s ex editor puts it’s nicely “Op-Ed columnist Paul Krugman has the disturbing habit of shaping, slicing and selectively citing numbers in a fashion that pleases his acolytes but leaves him open to substantive assaults.” (

  3. Edward Harrison says

    My main problem with MMT has to do with the legitimacy of fiat currency and policy prescriptions. MMT policy prescriptions are oriented around using the fiscal space that fiat currency provides in beneficial ways, meaning the US or Japan can deficit spend much longer than Greece or Italy.

    The first problem for me has to do with my scepticism of how that spending will be used. Cronyism means that you need to make any stimulus automatic via a robust social safety net to avoid cronyism. I have discussed this with the academic MMTers and they say the exact same thing. But a lot of people think fiscal space means allowing big government to run wasteful programs that add little value. This is not what we want to see.

    The second problem is taxation. It’s unwieldy politically and economically to have tax policy be the driving force of inflation control. Taxes are too political and should not be altered frequently. Higher inflation will always be the result if we wait until full employment and then deal with inflation via taxes. This is why an independent central bank is the main agent of inflation control today – to avoid the politics as much as possible.

    1. Ellen1910 says

      Higher inflation will always be the result [of] full employment . . . . Edward Harrison

      Depends on your definition (NAIRU?) of “full employment,” doesn’t it? And too, what’s so wrong with “higher inflation”?

      As an aside a sensible political economist would note that the utilization of factors is increasing and reduce (because the need has been reduced) government purchases well before wage generated inflation sets in. Additionally, automatic stabilizers would react to increased employment reducing the deficit further.

    2. fresno dan says

      very good points. But I would peel the onion back further and ask an inconvient question:
      Where are all these philospher kings who will get (uh, we will call them the “opposition”) to go along with all this fiat currency issueing and spending?
      If Obama isn’t doing it, who do you see coming along who can/will embrace MMT and implement it?

  4. Tom Hickey says

    “This is why an independent central bank is the main agent of inflation control today – to avoid the politics as much as possible.”

    But that has its problems, too. First, it has not been very successful, or we would not be having this discussion. Secondly, the Fed uses unemployment as a tool in inflation targeting, which contravenes is mandate. Thirdly, the Fed exceeds its mandate in attempting to put a floor under assets (Greenspan/Bernanke put), creating bubbles. Many charge that the Fed has held interest rates too low for too long at various points, thereby creating bubbles. Etc.

    The MMT charge is that monetary policy is a blunt instrument and ineffective. In fact, Warren Mosler argues that interest rate setting actually opposite of way the cb surmises, and there is little empirical data to show that the monetarism is correct.

    A number of MMT proponents are also concerned about cb “independence” since it smacks of a command system. Whoever has control over money has control over the economy. The Constitution recognizes that fact by giving control to the legislative branch. Congress in its infinite wisdom has turn over a significant portion of that control to “financial experts,” i.e., the Fed board. They are not cronies of the financial sector? Here we have a small group of unelected and unaccountable technocrats, many with vested interest, sitting that top of the financial system setting the interest rate and influencing the yield curve. What would Hayek say about that?

    Many MMT economists seek to avoid those problems by recommending that the cb and Treasury functions be formally consolidated under Treasury, i.e., executive branch responsible to the president. They are functionally consolidated anyway. MMT also recommends removing the political restrains on the monetary/fiscal regime to allow the elected representatives of the people to use the full operational power of the system to achieve full employment and price stability. If the current crop of politicians are unsuccessful, they can be replaced at the next election. To recommend political restraints, putting control in the hands of a small group of unelected and unaccountable technocrats, is to distrust democracy. It is also anti-capitalistic, in that it creates a command system.

    The problems are not economic, they are institutional. We need to improve our institutional arrangements and use the full power of our money as a public utility. See, for example, Warren Mosler’s reform proposals. MMT is a lot more than a description of monetary and fiscal operations. It is a well-developed macro theory.

    1. Edward Harrison says

      Good points Tom. In response, I can only say that every system has its weaknesses and benefits. So I would readily acknowledge having the CB as an unelected central planner is a problem. And you’re 100% right about how poor the Fed’s stewardship has been. This is why the Fed is under so much pressure right now.

      I don’t have a strong view on the solution to this within the fiat system, meaning I am not advocating or disavowing the MMT view for consolidating the Fed and treasury.

      Many thanks for the comments though. It is much appreciated.

      1. Dave Holden says

        Much as I find the debates on Keynesianism and MMTism interesting I’m not sure that’s where the focus should be. More so on a system that not only allows but positively incentivizes the private banking sector to engage in unsustainable creation of credit.

        1. Tom Hickey says

          MMT does address this. See Warren Mosler’s proposals for reforming the US financial sector at

          See also the work of Michael Hudson, Bill Black, and Randy Wray, much available at the UMKC blog,

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