Reconciling Krugman Vs Kelton

Warning – This is going to be another nerdy one. I apologize in advance.

Paul Krugman and Stephanie Kelton are two very good economists. They’re also people I’ve had fights with over the years. Not physical fights. Make no mistake – I am a big wimp, but I could kick both of their asses at the same time with one arm tied behind my back. But as someone who leans somewhat towards Post-Keynesian economics and is critical of both MMT (Kelton’s camp) and New Keynesian economics (Krugman’s camp) I’ve found myself in the middle of disagreements with them. So that naturally makes me the perfect person to untangle the most recent disagreement between them.

Now, this all started a long time ago and I think Paul Krugman has been swayed by MMT and Post-Keynesian ideas over the years. For instance, in 2011 several of us had been engaging with Krugman in a series of debates about currency sovereignty and endogenous money. Krugman was unsure of why Italy’s interest rates were rising while Japan’s were remaining low. MMT and Post-Keynesians had been explaining the difference for years – Italy didn’t control its own currency so there was credit risk embedded in the price of their bonds. Then, in November of 2011 Krugman changed his mind on this and started saying exactly what MMT and PK economists had been saying all along.

The second big change occurred more covertly. Me, Steve Keen and Scott Fullwiler had engaged Krugman on a series of back and forths about the importance of endogenous money and the myth of the money multiplier. We regularly pointed out the flaw in Krugman’s use of the IS/LM model and the fixed money supply. As the debates unfolded Krugman started using David Romer’s IS/MP model which includes endogenous money. He basically changed his model after the debates to accept for the fact that the money supply is endogenous.

These were not small changes. They were bigly. So, in the long-run war between the Post-Keynesians and New Keynesians, the Post-Keynesians seem to be winning some important battles. More recently, the war has picked up again as MMT has gained some press due to AOC and the Green New Deal. People are starting to ask how MMT will not only pay for the huge price tag of the program, but how they might control inflation if the program causes it. But I am not sure that MMT has advanced the ball much here. In fact, I think Krugman might be gaining ground and that MMT might have hurt itself a bit.

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Gary Anderson 7 months ago Contributor's comment

Kelton is like Trump. They want to bust open the New Normal and force the Fed to forget about ever causing recessions. They believe low rates allow bigger deficits. The Fed will never forget about causing recessions. Has the Fed done a bad job? Has the Fed pulled the inflation trigger a little too early? Of course. But MMT certainly is not the answer. Still, demand is low. We have a form of austerity. Austerity can kill economies too. If we reject MMT there should be something else, like helicopter money.