Paul Krugman has a write-up on VoxEU about a new paper with Gauti Eggertsson, “Debt, Deleveraging, and the Liquidity Trap.” This paper is vintage Krugman (I say that having known about the man for 4 whole years)- he comes up with a simple and elegant model, and derives salient insights. I think he moves his arrow closer to Modern Monetary Theory here, in that he begins to probe the distribution of debt. In particular, he writes,
Ignoring the foreign component, or looking at the world as a whole, the overall level of debt makes no difference to aggregate net worth – one person’s liability is another person’s asset.
I wrote about attending part of the MMT teach-in back in March. Randy Wray brought up this asset/liability idea as a way to express MMT to skeptical parties, particularly non-economists. Rather than thinking of our economy as a household, he said, realize that every asset is a liability. If one wants the non-government sector be net savers, the government sector must be a net borrower.
Now, recall that back in July, Krugman and Jamie Galbraith had a friendly skirmish over whether deficits ever matter. Krugman wrote,
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.
Then, Galbraith argued that by talking about future inflation, Krugman assumed the consequent, etc. I’m not here to rehash that. I do want to point out that in this paper, Krugman seems more concerned about the distribution of debt.
It follows that the level of debt matters only because the distribution of that debt matters, because highly indebted players face different constraints from players with low debt. And this means that all debt isn’t created equal – which is why borrowing by some actors now can help cure problems created by excess borrowing by other actors in the past. This becomes very clear in our analysis. In the model, deficit-financed government spending can, at least in principle, allow the economy to avoid unemployment and deflation while highly indebted private-sector agents repair their balance sheets, and the government can pay down its debts once the deleveraging crisis is past.
I believe MMTers would argue that this need for non-government deleveraging is necessary in cases other than a liquidity trap. I think this point is where we see the divergence, and Krugman’s eventual caution against high levels of government debt (it’s the inflation at full employment, stupid, he would say). While I side with MMT on this front, I think Krugman can move the discussion in a positive direction by encouraging folks to think clearly about debt distribution. When calling for the government sector to dissave, do conservatives and neoclassical economists really want the private sector to be saving more? In a vacuum of aggregate demand? I’m sure they will reject his model out of hand, which isn’t surprising, because much of center and right economics seems politically and not intellectually motivated. Boo on them.
As for Krugman, I’d love to see his insights on what happens when we’re not in a liquidity trap, but household debt remains a crippling burden. Remember, much of his discussion of depression economics is around this idea of a liquidity trap, Nipponization, etc. If the liquidity trap ends, and unemployment remains high and resources underutilized, does Krugman have a model for that? Because I know MMT does. Somehow I think that Krugman will sound a lot more like Galbraith in 2 or 3 years.