Friday, April 12, 2019

Unpleasant Keynsian arithmetic

In "Macroeconomics vs Modern Money Theory: Some unpleasant Keynesian arithmetic," Thomas Palley artfully demolishes a straw man of such egregious flimsiness that it is difficult to avoid concluding bad faith.

Referring to Kelton et al., We Can Pay For A Green New Deal, Palley claims, "Proponents of MMT assert [financing a Green New Deal] is a non-problem and the programs can be financed by “printing” money and without causing higher inflation." However, Kelton et al. add an important condition, arguing that deficit financed programs are not inflationary so long as we are not at full employment. Palley simply repeats Kelton et al. own assertion as if he were correcting their error.

Kelton et al.:
Despite lawmakers’ stated fears, larger public deficits are not inherently inflationary. As long as government spending doesn’t cap out the full productive capacity of the economy ― what economists call “full employment” ― it won’t spin prices out of control. Inflation isn’t triggered by the amount of money the government creates but by the availability of biophysical resources that money tries to go out and buy ― like land, trees, water, minerals and human labor. [emphasis added]

Palley:
As has long been known by Keynesians(Blinder and Solow, 1973), money financed deficits can be used to finance programs when the economy is away from the full employment -vinflation boundary.vHowever, that space will be temporaryvto the extent deficits increase real financial wealth and automatically drive the economy to full employment, at which stage there will be an inflationary gap. . . . There is a money financed free lunch as long as the economy is below full employment, but the free lunch inevitably disappears.

Palley continues to misrepresent MMT scholars. When calculating his "unpleasant Keynesian arithmetic", he includes Medicare for all and free college tuition. However, he does not cite anything to support the implicit assertion that MMT scholars advocate using deficit spending to finance Medicare for all or free college tuition. It seems blindingly obvious that the best way finance Medicare for all is through taxes to replace insurance payments.

It is a core tenet of MMT that spending precedes taxation, but requires subsequent taxation to prevent inflation at full employment. But this reordering is an entirely different position than the position that MMT critics attribute to MMT proponents, i.e. that MMT says that we can have unlimited government spending without inflation.

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