Mark Thoma has the goods on the debate between Jamie Galbraith and Paul Krugman over whether deficits are always ok. Go read his block quoting, and then return here for my thoughts…
OK, in case you don’t want to go over there, here’s the gist of the argument. Krugman is worried that at some point, governments will run into the problem of inflation as a result of the deficits. He makes a small model, and then writes,
To spend, the government must persuade the private sector to release real resources. It can do this by collecting taxes, borrowing, or collecting seignorage by printing money. And there are limits to all three. Even a country with its own fiat currency can go bankrupt, if it tries hard enough…
Since the price level is, by assumption, proportional to M, this tells us that the higher the debt burden, the higher the required rate of inflation — and, crucially, that as D-S heads toward a critical level, this implied inflation heads off to infinity…
So there is a maximum level of debt you can handle.
Galbraith says that Krugman makes a false assumption:
Paul’s logical error here is that of assuming-the-consequent. He assumes the inflation which causes dumping of money. But if there is no dumping of money, the inflation will not generally occur.
Yes, again, it’s technically possible that the banks and others would start dumping dollars and buying up oil, wheat, rubber, and so forth (and leasing storage facilities for the stuff) thereby driving up the price level.
Then Krugman says that at some point, there will be supply-side constraints, as the private sector will step in adequately. Given the last 20 years of economic history, I find this assumption dubious:
Someday the private sector will see enough opportunities to want to invest its savings in plant and equipment, not leave them sitting idle, and the economy will return to more or less full employment without needing deficit spending to keep it there.
The MMTers (at least at the teach-in I went to) believe that we’re nowhere near this constraint- private sector money is in the side lines, and they desire the saving opportunities that only government deficits can provide. Galbraith doesn’t say as much in his second response, but instead challenges Krugman to lay off on the long-term budget issues.
Paul, I challenge you to drop the long-term deficit argument entirely– it will be used in a few months, in a dishonest way by unscrupulous people, to support cuts in Social Security and Medicare that cannot be justified by economic logic. These are cuts which, I am sure, you will oppose when they are proposed.
This debate is a healthy thing for our economic discourse. Krugman (without calling it by name) recognizes the MMT argument in Galbraith for what it is. Galbraith and Krugman ultimately divide on their trust of the private sector’s viability. I side with Galbraith on this one, certainly. While I agree with Krugman when he argues that the current conjecture means that he and Galbraith have no substantive short-term policy differences, I also believe that Galbraith is being more practical in the long-term. I’m simply unconvinced by the debt service arguments, given over a decade of stagnant job growth.
Krugman seems to be limited here by his place in the mainstream, which ultimately believes the capitalist class will apportion money in a way that benefits society, even if it needs a Keynesian nudge. Galbraith, on the other hand, is able to take a more realistic approach because he sits outside the mainstream. Let’s hope this debate catches fire in the discipline at large.
Also, see Galbraith’s testimony for a lengthy argument on the wrong-headedness of the deficit commission.