Paul Krugman may be starting to get it.

Mitchell’s laws: The more budgets are cut and taxes inceased, the weaker an economy becomes. To survive long term, a monetarily non-sovereign government must have a positive balance of payments. Austerity = poverty and leads to civil disorder. Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.

Perhaps a bit late to the party, but welcome anyway, economics Nobel winner Paul Krugman shows signs of understanding the economy.

Paul Krugman: The Problem With Deficit-Mania
May 9th, 2012 12:01 am
National Memo

The following is an excerpt from End This Depression Now!, the recently published book by Nobel Prize-winning economist and New York Times columnist Paul Krugman.

By the fall of 2009 it was already obvious that those who had warned that the original stimulus plan was much too small had been right.

I was one of those, and I didn’t wait until fall of 2009. Here’s what I said in an April 9, 2008 Email to the Chicago Tribune.”

“Every U.S. depression, and the vast majority of recessions,, have coincided with reduced growth in the money supply. Today again, the U.S. economy is starved for money, which no amount of interest rate reductions can cure. To a small degree, interest rate reductions actually reduce the amount of money in the economy, because the federal government is required to pay less interest on its debts.

“There is one cure, and one cure only, for a recession, or depression: Increase the money supply. How? By federal deficit spending.

“The federal government creates money when it pumps more money into the economy than it removes by taxation. The $150 billion stimulus package is an example, albiet too little and too late.

“To prevent a serious meltdown of our economy, the federal government must pump $500 billion – $1 trillion into the economy. The government should reduce or eliminate certain taxes and/or increase spending on certain projects.

“Example: The federal government estimates its 2008 collection of the FICA tax at $821 billion. Were FICA eliminated, workers and business (each of which pays half) would benefit immediately. The recession, would end; a depression would be prevented.

“Contrary to common wisdom, this $821 billion addition to the federal debt would not cause inflation. The Reagan/Bush $6 trillion addition to the debt did not cause inflation, which easily was prevented with interest rate control.

In summary, this recession, was preventable and now is curable, simply by pumping money into the economy. Cutting interest rates has not, and will not, accomplish anything. Americans should be outraged at the ineptness demonstrated by Congress, the President and the Fed. There is no reason for this disaster, when the prevention and cure so easily could be implemented.

Rodger Malcolm Mitchell”

So there it was, way back in April 2008, not fall of 2009, it was clear to me, that the proposed stimuli were “too little, too late.

Now continuing with Krugman’s comments:

This was exactly the kind of situation in which White House aides had originally envisaged going back to Congress for more stimulus. But that didn’t happen. Why not?

One reason was that they had misjudged the politics: just as some had feared when the original plan came out, the inadequacy of the first stimulus had discredited the whole notion of stimulus in the minds of most Americans and had emboldened Republicans in their scorched-earth opposition.

There was, however, another reason: much of the discussion in Washington had shifted from a focus on unemployment to a focus on debt and deficits. Ominous warnings about the danger of excessive deficits became a staple of political posturing.

As the opening quotation makes clear, Obama himself got into this game; his first State of the Union address, in early 2010, proposed spending cuts rather than new stimulus. And by 2011 blood-curdling warnings of disaster unless we dealt with deficits immediately (as opposed to taking longer-term measures that wouldn’t depress the economy further) were heard across the land.

Right on target.

The strange thing is that there was and is no evidence to support the shift in focus away from jobs and toward deficits. Where the harm done by lack of jobs is real and terrible, the harm done by deficits to a nation like Americain its current situation is, for the most part, hypothetical. The quantifiable burden of debt is much smaller than you would imagine from the rhetoric, and warnings about some kind of debt crisis are based on nothing much at all.

In fact, the predictions of deficit hawks have been repeatedly falsified by events, while those who argued that deficits are not a problem in a depressed economy have been consistently right. Furthermore, those who made investment decisions based on the predictions of the deficit alarmists, like Morgan Stanley in 2010 or Pimco in 2011, ended up losing a lot of money.

Yes, you go boy! Absolutely correct. Debt-hawk predictions have been wrong, wrong and wrong again.

Yet exaggerated fear of deficits retains its hold on our political and policy discourse. I’ll try to explain why later in this chapter. First, however, let me talk about what deficit hawks have said, and what has really happened.

Back in the 1980s the business economist Ed Yardeni coined the term “bond vigilantes” for investors who dump a country’s bonds—driving up its borrowing costs—when they lose confidence in its monetary and/or fiscal policies. Fear of budget deficits is driven mainly by fear of an attack by the bond vigilantes. And advocates of fiscal austerity, of sharp cuts in government spending even in the face of mass unemployment, often argue that we must do what they demand to satisfy the bond market.

But the market itself doesn’t seem to agree; if anything, it’s saying that America should borrow more, since at the moment U.S.borrowing costs are very low. In fact, adjusted for inflation, they’re actually negative, so that investors are in effect paying the U.S.government a fee to keep their wealth safe. Oh, and these are long-term interest rates, so the market isn’t just saying that things are OK now; it’s saying that investors don’t see any major problems for years to come.

Never mind, say the deficit hawks, borrowing costs will shoot up soon if we don’t slash spending right now. This amounts to saying that the market is wrong—which is something you’re allowed to do. But it’s strange, to say the least, to base your demands on the claim that policy must be changed to satisfy the market, then dismiss the clear evidence that the market itself doesn’t share your concerns.

The failure of rates to rise didn’t reflect any early end to large deficits: over the course of 2008, 2009, 2010, and 2011 the combination of low tax receipts and emergency spending—both the results of a depressed economy—forced the federal government to borrow more than $5 trillion.

And at every uptick in rates over that period, influential voices announced that the bond vigilantes had arrived, that America was about to find itself unable to keep on borrowing so much money. Yet each of those upticks was reversed, and at the beginning of 2012 U.S.borrowing costs were close to an all-time low.

But debt-hawks think the finances of our Monetarily Sovereign federal government are the same as monetarily non-sovereign personal finances, so they simply do not pay any attention to facts.

1. The Wall Street Journal runs an editorial titled “The Bond Vigilantes: The Disciplinarians of U.S. Policy Return,” predicting that interest rates will go way up unless deficits are reduced.

2. President Obama tells Fox News that we might have a double-dip recession if we keep adding to debt.

3. Morgan Stanley predicts that deficits will drive ten-year rates up to 5.5 percent by the end of 2010.

4. The Wall Street Journal—this time in the news section, not on the editorial page—runs a story titled “Debt Fears Send Rates Up.” It presents no evidence showing that fear of debt, as opposed to hopes for recovery, were responsible for the modest rise in rates.

5. Bill Gross of the bond fund Pimco warns tha tU.S.interest rates are being held down only by Federal Reserve bond purchases, and predicts a spike in rates when the program of bond purchases ends in June 2011.

6. Standard & Poor’s downgrades the U.S.government, taking away its AAA rating.

And by late 2011 U.S.borrowing costs were lower than ever.

The important thing to realize is that this wasn’t just a question of bad forecasts, which everyone makes now and then. It was, instead, about how to think about deficits in a depressed economy.

To date, the right wing, Tea/Republican Party, with its anti-spending crusade, has done everything in its power to crush the U.S. economy. I believe this was not out of economic ignorance, but was a deliberate plan, the purpose of which was to create voter dissatisfaction with President Obama.

The plan worked, in part, because Obama himself fell for it. He and his advisers, being ignorant of Monetary Sovereignty, began to parrot the “cut-the-federal-debt” mantra, and that ignorance very well could be his undoing.

Rodger Malcolm Mitchell

No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. Two key equations in economics:
Federal Deficits – Net Imports = Net Private Savings
Gross Domestic Product = Federal Spending + Private Investment and Consumption + Net exports


16 thoughts on “Paul Krugman may be starting to get it.

  1. Krugman is a neo-Keynesian deficit dove. He agrees with the post-Keynesians that we need stimulus now. However, he also believes in the balanced budget multiplier, so he thinks its OK to raise taxes to “pay for” stimulus. And he wants to lower interest rates even more, since he is a big believer in the IS/LM model.

    Keen and Krugman got in a big dust up over banking practices recently, when Krugman insisted that banks merely loan customer deposits, and can’t create money out of thin air. I felt embarrassed for Paul.


  2. Rodger:

    You don’t have to do this or anything, but because people seem to like stories better than data it might be a project worth undertaking.

    Specifically, I think it might be an extremely good idea to do history pieces on the times in which countries became (accidentally) monetarily sovereign. Such as the Second Continental Congress issuing continentals and Abraham Lincoln issuing greenbacks. And the sharp recessions (panics) that happened immediately after the governments went back to being monetarily non-sovereign. I’d also recommend going over the economies being taken off of the gold standard for the World Wars, but people are so polarized over FDR that it might be better to leave that out..Imperial Japan and Stalinist Russia are also really good data points for how powerful MS is — but again, I can understand why you’d leave those analyses out. 🙂

    Maybe even point to some counter-intuitive data points, like the money supply during the “Era of Good feelings’ more than quadrupling in half of a decade but ‘only’ getting 25% inflation.

    And at a dig at OWS, you could also do things like showing how Jackson’s thoughtless veto of the Second Bank of the United States means that it isn’t enough just to defeat tyranny and class warfare — you also need to replace it with something else. Otherwise what comes afterward can EASILY lead to something worse. The U.S. was damn lucky that it ‘just’ got off with the highest unemployment in its history and a four year depression.


  3. Rodger,

    A couple of questions about MMT and the JG have been circling in my head for the past few days. So, I just submitted a comment to Randy Wray over at New Economic Perspectives. I asked these two questions:

    1. Since money growth does not cause inflation, why does MMT prescribe money reduction as a cure for inflation?

    2. Since money growth does not cause inflation, why does MMT claim that low unemployment as a result of anything other than the Job Guarantee would produce unacceptably high inflation?

    I look forward to Dr. Wray’s answers.


    1. Randy’s wife died suddenly a few days ago so I dunno when he’ll be able to answer your questions.

      Re: “money growth.” Aggregate demand can cause inflation when the economy is running at or near full capacity. That’s called demand-pull inflation. (I prefer not to use the phrase “money growth” because that’s a monetarist term).

      I think what Roger is referring to when he says most recent inflation has been caused by oil, is that we have not been at full capacity since the 40’s and 50’s, so there has been little demand-pull inflation. Instead, we have cost-push inflation caused by commodities like oil.

      Re: the JG. Roger is not a fan of the JG, but . . . you have to crank up the aggregate demand to reach 0% unemployment without a JG. WWII is the closest we’ve ever come to 0% unemployment, and there was significant inflation then despite wage and price controls.

      One of the ideas behind the JG is to eliminate unemployment without the excessive inflation. There are some papers on Warren Mosler’s site (or on Randy’s blog) that explain the concept in more detail.


  4. Tyler,

    I’m not sure Randy is up to answering questions; his wife recently and suddenly died.

    However if he does answer, he probably will say something like:

    1. Money growth can cause inflation if it occurs at a time of full employment.

    2. Money growth at that time could cause inflation by forcing employers to pay higher salaries, which would translate to higher production costs, and so, higher prices.

    Actually, #1 has not happened in recent history, though it may have happened during World War II, when soldiers were employed in the war.

    I say “may,” because widespread product shortages probably were more responsible for the 1943 inflation, and we had an even worse inflation after the war (in 1947), when hundreds of thousands of soldiers returned to the workforce.

    The last time I discussed this very question with one MMTer, he said I was “another crazy, right-wing, nut-job,” so I guess you can say these folks feel rather strongly about the subject.


  5. Dan,

    Immediately upon answering Tyler’s question, I clicked a button, and there was your answer. JG is where MMT departs from pure description to hypothesis, and I address it at:

    and again at:

    Since JG seems to be at the heart of MMT, questioning it is something like telling a parent his kid is ugly. Because I developed Monetary Sovereignty independently, well before I even knew MMT existed, I’m not burdened with pride of ownership, at least not with regard to JG.

    While MS tends to agree with MMT on the description side, we do have different hypotheses.

    Rodger Malcolm Mitchell


  6. Cullen Roche of Pragmatic Capitalism is spearheading an effort to develop a theory of “Modern Monetary Realism” that (in his view) retains the descriptive features of MMT while eliminating the “prescriptive” ones like JG:

    Re what was posted above about the accidental monetary sovereignty of the “continental”, the British tried to destroy the value of this currency through counterfeiting and actually helped the American colonies economically by putting more “money” into circulation. Even fake money is better than no money.


  7. Yeah I saw him on msnbc today and I couldn’t believe what I was hearing, hopefully it will soak in with enough people to make a difference


  8. The Return of Depression Economics by Krugman was a good read, in my opinion. Have you had a chance to read it yet, Roger?


  9. Rodger,

    Thanks for your response. My condolences go out to Dr. Wray, his family, and the whole modern money family.

    Regarding inflation, I sympathize with middle-class retirees who want their dollars to be as strong as possible. Paul Krugman and the other inflationists don’t think about middle-class retirees enough.


  10. i think krugman got it long ago, but he can’t bring himself to admit that he was wrong and, thereby, invalidate all the books he’s written up until now.


    1. Yes, Kim,

      Krugman understands that deficit spending is necessary to grow the economy, but incredibly he also believes that once the economy is growing, deficit spending should be reduced or ended.

      So he partly gets it and partly doesn’t.


  11. Hey Rodger,

    I took a bit of a break, but glad to see you’re still chugging….

    Anyway, maybe MMTists leaning on Krugman is starting to pay off:

    “Greece has the problem of not having its own currency.”

    “All the severe crisis countries that we think of as being fiscal crisis countries are actually EURO crisis countries.”



Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s