The Lighting Budget of Thomas Jefferson

Paul Krugman: Running on MMT: "I was glad to see Stephanie Kelton responding.... The problem is that I don’t understand her arguments.... A key proposition of Abba Lerner’s doctrine of 'functional finance', which is in turn a large part of the MMT doctrine, is that the appropriate size of the budget deficit can be determined by how big it needs to be to ensure full employment.... [But] as long as monetary policy is available, there is a range of possible deficits consistent with that goal. The question then becomes one of tradeoffs...

...This seems clear to me, and hard to argue with. But Kelton does argue with it, or at least I think she does.... Kelton seems to claim that expansionary fiscal policy... will lead to lower, not higher interest rates. Why? It seems as if she’s saying that deficits necessarily lead to an increase in the monetary base, that expansionary fiscal policy is automatically expansionary monetary policy. But... think of the loose fiscal/tight money combination in the 1980s.... I hope she means something different. Yet I can’t figure out what that different thing might be.... 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. No more Calvinball...


#noted

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