Bill Mitchell Weighs in on Economic Arguments as Stalking Horses

     He adjudicates the debate between Krugman and Russ Roberts. For the original debate please see here.

     http://diaryofarepublicanhater.blogspot.com/2015/06/noah-smith-get-out-of-scott-sumners-head.html

     Mitchell argues that this argument is false:

     "There was an interesting if not ego-centric interchange last week involving the New Keynesian economist Paul Krugman and others about whether the sort of macroeconomic policy positions one takes is more motivated by ideological motives (about the desirable size of government) rather than being evidence-based. Apparently, if you support austerity it is because you really just want smaller government and vice versa. This is an oft-stated claim made by conservatives. That if you support fiscal stimulus and government regulation that you are automatically in favour of big (intrusive) government. The point is not valid. Whether one supports a larger proportional government or smaller is a separate matter to understanding how the monetary system functions and the capacities and options available to the government. Modern Monetary Theory (MMT) provides the basis for that understanding but not a prescription for a particular size of government."

    "To begin, there is no necessary correspondence between support for fiscal stimulus and one’s perception of how large the government sector should be as a proportion of the overall economy."

   "Continuous fiscal deficits of some proportion may be necessary irrespective of the size of government. To argue otherwise is to misunderstand the role of fiscal deficits in the monetary system."

    http://bilbo.economicoutlook.net/blog/?p=31112

    He quotes Krugman's answer to Roberts:

   "In his latest entreaty into the subject (June 6, 2015) – Why Am I A Keynesian? – he repeats that construction in a defensive way to disabuse readers of any notion that he supports “bigger governnment”:

If I were, shouldn’t I be advocating permanent expansion rather than temporary measures? Shouldn’t I be for stimulus all the time, not only when we’re at the zero lower bound? When I do call for bigger government — universal health care, higher Social Security benefits — shouldn’t I be pushing these things as job-creation measures? (I don’t think I ever have). I think if you look at the record, I’ve always argued for temporary fiscal expansion, and only when monetary policy is constrained.

   "The essential point that Paul Krugman has been making about his own conception of what constitutes Keynesian thinking is that “recessions … [result from] … failures of aggregate demand” and that there is a role for governments to reverse those failures using monetary or fiscal policy."

     "I think it's difficult to really show where one's 'science' ends and ones 'ideology' begins. Mitchell strikes me as to confident of this. Take the case of Krugman. He says he supports fiscal stimulus at the lower bound and calls for bigger government for other reasons. At the end of the day though he still supports both fiscal stimulus and bigger government."

    I think it'd be pretty hard to find someone who is 

    1. A big supporter of fiscal austerity but:

   2. Generally favors bigger government. Like can you imagine a deficit scold after finishing warning about out of control public debt then declaring that SS should be expanded?

    As for those who advocate fiscal stimulus, how many of them also support cutting the size of government-other than perhaps the foreign policy side of it?

    Here I don't buy this:

  "Whether one supports a larger proportional government or smaller is a separate matter to understanding how the monetary system functions and the capacities and options available to the government. Modern Monetary Theory (MMT) provides the basis for that understanding but not a prescription for a particular size of government."

   The MMT explanation by definition prescribes a bigger size of government. 

   In a sense it's true the debate over 'bigger vs. smaller government' is as misleading as the debate over taxes. It's not that the GOP wants less taxes just they want a more regressive tax system. 

   The GOP loves big government if it's on the military side. Even domestic they are all for big government in the War on Drugs, anti-abortion laws and cracking down on Latino immigration. 

   Mitchell does have an interesting discussion about Krugman's liquidity trap explanation for doing fiscal stimulus. 

   I agree that the unfortunate side of Krugman's mainstream NK view is that it still normally favors monetary policy in dealing with the business cycle. 

    "I explain in detail in this blog – Whether there is a liquidity trap or not is irrelevant – why this appeal to Keynes is invalid."

    "In summary (you should read the whole blog if you are curious), the liquidity trap does not require a zero interest rate to become operational."

    "The Keynesian link is usually made by appealing to a section in Keynes’ 1936 book – The General Theory of Employment, Interest and Money – specifically Chapter 15, Section II."

    The thing to understand is that Krugman and the NKers don't' really even like grounding themselves in Keynes but rather in Hicks. Krugman has often scoffed at those who spend time 'debating what Keynes really meant.' For NKers that's an unimportant excursion into the history of economic thought. 

    Mitchell is worth reading here in entirety as usual. 

     

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