The link between spending and debt must be severed
Paul Krugman rather disingenuously tells us the other day that “there won’t and can’t be any current-events test of MMT until we get out of the slump, because standard IS-LM and MMT are indistinguishable when you’re in a liquidity trap”. This theorem of untestability is a pretty broad claim by the professor, one that not only lacks imagination but also fails to stand up to the light of the real world.
It’s true that both positions call for increased deficit spending to counter today’s misery, but there’s a fundamental difference: Krugman’s generic center-left school claims the spending must be accompanied by higher public debt while the “Modern Monetary Theory types”, in contrast, see no reason to necessarily link the two. Krugman does sometimes subtly hint that direct monetary creation may be ok, but he never comes close to proclaiming it in a straightforward and obvious way. In the public mind, the center-left platform is quite clear: spending should be increased today but, critically, it should be accompanied by a rise in public debt. This should actually be seen as a quite shocking, even radical, proposition: even though there is massive un/under employment and no identifiable real cost to bringing people into the economy, society must still pay a cost to the “financial markets” in the form of higher indebtedness.
Linking public spending at a time of unemployment to expanded public indebtedness is so embedded in our collective common sense that we’ve become unable to see how absurd it truly is. Suppose Krugman asserted there couldn’t be a “current-events test” between his theory that, say, linked public spending with the sacrifice of a family’s first born son to another that allowed for spending but without the sacrifice. The “current-events test” would then be quite easy would it not? The public would simply not support the former, while it would be expected to support the later.
And that’s the way it is in our real world where the public’s sacrificial offering is rising debt. We find a public that’s confused and powerless. Debt has such hugely negative connotations that no politician can realistically support it for very long. The center-right will be condemned and kicked out of office for failing to provide prosperity, only to be replaced by the center-left which will do about the same, only to be then kicked out in turn and replaced by the center-right, ad infinitum. All populations support public spending, we know this from polls and from common sense; the issue is debt. A perfectly reasonable “current-events test” clearly shows that Krugman’s proposition is completely nonviable and won’t ever be tried; while the MMT position would be highly popular if presented as an option.
Financial Times writer Tony Barber gives us a few independent words on this general subject today. Speaking of Europe, but the same applies everywhere, Barber notes that “a collective howl of protest and despair” is on the streets this May Day and “for the first time in generations, parents fear the future living standards of their children will be lower than their own.” Clearly there’s massive support for a public spending solution, but he rightly observes there’s little action from the center-left parties who “no longer appear capable of fulfilling their historical mission as protectors of jobs, welfare and social cohesion.” It’s an endless circle: “the shortcomings of centre-right governments guarantees that the centre-left will one day return to power” but the center-left’s “fatal” problem is that it presents itself as “an engine of high public expenditure”, violating the central tenant that “responsible nations keep public debts and budget deficits under control”. “Winning a reputation for sound management of the public finances”, Barber correctly tells us, “is essential for the left’s long-term success”.
This is the on the ground reality, the “current-events test” – spending will not occur if it’s to be tied with rising debt. Ignoring this, Krugman marches forever onward as the proud leader of a school of thought that can’t possibly garner widespread support. The real world gives us exactly the “current-events test” we need, and nothing can be clearer – Krugman’s position is politically and morally bankrupt. The link between spending and debt must be severed.