Krugman out of paradigm

Although it's a terrible word, and an unhelpful communication technique, out of "paradigm" is still the best way I can characterize the continuing struggle academic economics has with understanding how finance, and particularly the monetary system, actually work.

Mosler highlights this when reviewing a recent Paul Krugman column:

Krugman: I know that may sound crazy. After all, we’ve spent much of the past five or six years in a state of fiscal panic, with all the Very Serious People declaring that we must slash deficits and reduce debt now now now or we’ll turn into Greece, Greece I tell you.

But the power of the deficit scolds was always a triumph of ideology over evidence, and a growing number of genuinely serious people — most recently Narayana Kocherlakota, the departing president of the Minneapolis Fed — are making the case that we need more, not less, government debt.

Why?

Mosler: This is the right answer- because the US public debt, for example, is nothing more than the dollars spent by the govt that haven’t yet been used to pay taxes. Those dollars constitute the net financial dollar assets of the global economy (net nominal savings), as actual cash, or dollar balances in bank accounts at the Federal Reserve Bank called reserve accounts and securities accounts. Functionally, it is not wrong to call these dollars the ‘monetary base’. And a growing economy that generates increasing quantities of unspent income likewise needs an increasing quantity of spending that exceeds income- private or public- for a growing output to get sold. 

Krugman: One answer is that issuing debt is a way to pay for useful things, and we should do more of that when the price is right.  

Mosler: Wrong answer. It’s never about ‘when the price is right’. It is always a political question regarding resource allocation between the public sector and private sector.

A lifetime ago, Krugman wrote that mathematical models were useful because they took implicit, inconsistent assumptions and make them both explicit and consistent. This was an aid to clear thinking.

His current thinking on monetary operations has a number of implicit assumptions, which is why he believes a fiat state has the same constraints and responsibilities as a household, and why his thinking fundamentally comes from the "sound finance" school of thought and not the "functional finance" school of thought proposed by Abba Lerner back in 1951.