Krugman Gives DeGrauwe 2011 Credit for What MMT Has Argued for 15+ Years

By Scott Fullwiler

In the comments section of my last post, Neil Wilson linked to this piece by Paul Krugman from last fall.  It’s a useful lecture in that it shows mainstream economists are beginning to understand that currency issuers under flexible exchange rates (a term he actually uses) are not generally subject to bond vigilantes, a condition that applies only to nations without their own currencies, debt in other currencies, and/or fixed exchange rates.

In the paper, as he’s done before, he cites DeGrauwe 2011 as the “seminal” paper demonstrating that Eurozone nations are subject to bond vigilantes while others like the US, Japan, and the UK would not be.  I’ve got nothing against DeGrauwe 2011 aside from his own failure to cite heterodox literature that preceded him by decades in some cases.  Ok, so I do have something against it, but not in terms of content (though I haven’t read closely so perhaps I’d find something).  And in fairness Krugman’s suggestion that DeGrauwe 2011 is “seminal” could be due to the fact that the latter provides a model (though the Kelton/Henry paper I cite below does, too; though it’s quite different, it would not be difficult to build on in the direction DeGrauwe 2011 moves)—and we all know that neoclassicals have difficulties discussing anything outside the context of a formal model (not that models aren’t extremely useful for many things, but they should not be the tail that wags the dog, and for neoclassicals they are essentially that).

The key point, however, is that Krugman attributes the following contributions to DeGrauwe 2011, all of which had been previously examined and noted by MMTers and others:

“countries that retain their own currencies are less vulnerable to sudden losses of confidence than members of a monetary union – a point effectively made by Paul De Grauwe (2011)” (p. 2)

“The seminal paper in this area is De Grauwe (2011), who pointed in particular to the comparison between Spain and Britain, which have similar levels of both debt and deficits, but pay very different interest rates. De Grauwe argued that the crucial difference was that Spain lacks a lender of last resort, leaving it vulnerable to self-fulfilling liquidity crises: investors might pull back from a euro zone nation’s debt, fearing default, and in so doing drive that nation’s borrowing costs so much higher (and depress that nation’s economy so much, reducing revenues) that they provoke the very default investors fear. This can’t happen in Britain, he suggested, because the Bank of England can always step in to buy government debt in a pinch.” (p. 5)

Regarding the final point from DeGrauwe/Krugman on the UK’s ability to have the Bank of England act as a “lender of last resort,” I actually pointed this out in 2010 when I provided a general view of how interest rates on the national debt were determined for sovereign currency issuers (see here, last page—no doubt other MMTers and heterodox economists had noted this, too):

One can then think of three different degrees or “forms” (to borrow the taxonomy used by financial economists in describing the efficient markets hypothesis) related to deficits and interest on the national debt for a currency issuer under flexible exchange rates.  The “strong form” deficits would be where the Treasury has an overdraft or similar at the Fed and interest on the national debt is essentially at the Fed’s target rate or on average a bit higher if the Fed issues time deposits to drain reserve balances.  While the “strong form” is operationally “pure,” it is again obviously not current law in the US.  The “semi-strong form” deficits would be where the Treasury is not provided with overdrafts and must issue its own securities to have positive balances in its account before spending again while the securities issued—given their zero-default-risk that results from operational realities and the fact that any “constraint” on the Treasury is self-imposed—mostly arbitrage with the Fed’s target (for short-term Treasuries) and the expected target rate (for longer-term Treasuries) aside from some technical effects (like convexity) and some demand/supply issues (like maturity and liquidity at different maturities).  Examples of the “semi-strong form” would be here and hereThe “weak-form” deficits would consider that bond markets might at some point choose to repudiate even a currency-issuer’s debt with zero default risk (the “semi-strong form” does, too, but presumes the effect is temporary as arbitrage relationships would over-rule at least in the medium-term), but recognizes that the Fed always has the ability to set the market rate on Treasuries as long as it is willing to buy all quantities offered at its bid price (and has no operational or even legal constraint for doing so).  Examples would be the Fed’s “Operation Twist” or the Fed prior to the Treasury Accord, or in the non-currency issuer case, consider how the recent EMU crisis quickly faded once the ECB began purchasing the debt of troubled member nations. 

Particularly in the case of economics, the failure to cite heterodox literature perpetuates the marginalization of heterodox economists from the top journals, which then marginalizes them from the top university positions—and this further influences future economists studying at these top institutions and publishing in top journals and teaching yet another generation to similarly marginalize heterodox economists.  One need only read Krugman’s blog posts mentioning heterodox criticisms of neoclassicals to see rather quickly the contempt with which he and the rest of the profession holds heterodox economists.  In short, our research is all that we have to build our careers, and the same goes for our students—if it’s ignored or otherwise passed over by those that control the top-ranked journals and hiring in top institutions, then we have virtually no recourse.

Unlike years prior, since 2008 it’s rather clear to many (if not to neoclassicals) the importance of alternative ideas, frameworks, and methodologies—including MMT and the dozens of other approaches—that could contribute to building a new, more relevant field of economics.  But the mainstream of a field that didn’t see the crisis coming has doubled down, essentially rewriting history by declaring that nobody could have seen the crisis coming, and that virtually nobody did.  (Of course, it’s true that neoclassicals couldn’t have seen the crisis coming given that their models do not include a financial system—so in that sense they aren’t lying, just obviously casting their net too narrowly, by design.)

Consequently, ignoring the literature by MMTers and others that preceded DeGrauwe 2011 is just another example of deliberate marginalization.  Thanks to the blogosphere, neoclassicals have heard of us.  They’ve even read our stuff and written critiques of us.

In order to help folks out, I’m going to list a sampling here of material by MMTers and related individuals that explained the difference between currency issuers/users and exchange rate regimes that preceded DeGrauwe 2011.  There are frankly too many of them to list here given my time constraints today, so the list is far from exhaustive and includes only those that I can think of off the top of my head right now.  Also, I’m only mentioning MMTers (and some friends) here even as there are a number of Post Keynesians that also understood some of the problems with the Eurozone.

Wynne Godley, Maastricht and All That (1992)

Charles Goodhart, One Government, One Money (1997)

Warren Mosler, Exchange Rate Policy and Full Employment (1998)

L. Randall Wray, Understanding Modern Money (1998)

Charles Goodhart, Two Concepts of Money (1998)

Mathew Forstater, Introduction to Symposium on The European Economic and Monetary Union (1999) (note other papers in the symposium, too)

Stephanie Kelton, The Role of the State and the Hierarchy of Money (2001)

Stephanie Kelton and Edward Nell, The State, the Market, and the Euro, (2003)

L. Randall Wray, Is Euroland the Next Argentina? (2003)

Stephanie Kelton and John Henry, When Exports Are A Benefit and Imports Are A Cost—The Conditions Under Which Free Trade Is Beneficial (2003)

Stephanie Kelton, Convergence Going In, Divergence Going Out? (2003)

Scott Fullwiler, Sustainable Fiscal Policy and Interest Rates Under Flexible Exchange Rates (2008)

Stephanie Kelton and L. Randall Wray, Can Euroland Survive? (2009)

Yeva Nersisyan and L. Randall Wray, Deficit Hysteria Redux (2010)

Dimitri Papadimitriou, Yeva Nersisyan, and L. Randall Wray, Endgame for the Euro? (2010)

Yeva Nersisyan and L. Randall Wray, Does Excess Sovereign Debt Really Hurt Growth? (2010)

14 responses to “Krugman Gives DeGrauwe 2011 Credit for What MMT Has Argued for 15+ Years

  1. “Hip Heterodoxy,” by Chris Hayes –

  2. Krugman et al behave like we live in a pre-internet era. Keep rewriting history, doggedly and consistently ascribing every insight to come from the maistream. DeLong tried to pull the same trick saying that “Minskyans” got the crisis right; his “Minskyans”: himself and Krugman!, who as is recorded on his very blog first read Minsky in 2009 or something. These days however we have internet and this BS looks just lame. Keep hammering.

  3. I can’t conceive how anyone can discuss Krugman in a serious fashion, given that he is obviously a completely inept bank lobbyist, who is either completely devoid of any knowledge about finance, global finance, and economics — or else completely dishonest.

    Whether displaying abject ignorance of speculation on various exchanges (especially ICE) when he proclaims the speculated up price of oil/energy in 2008 was “simply supply and demand” or when he goes before the EPI and proclaims that the top banks are healthy, and that the cause of the global economic meltdown was too much household debt, or his absolutely pathetic argument with Steve Keen about banks not creating credit, this Group of 30 clown is just that . . . a clown!

  4. The Wynne Godley article from October 8, 1992 is perfect. It’s almost like it was written now looking back over the previous seven years instead of looking ahead to a crisis fifteen years in the future.

  5. Well, let’s all keep pushing to get Krugman to recognize “What MMT Has Argued for 15+ Years . ” I hope that Professor Black can find someone he knows who also knows Krugman and thus get introduced to him.

    And since Krugman has a blog and comments are posted on it here,
    we can all make comments on his posts that reference MMT, to increase the chances that he will eventually become aware of MMT and what it has to offer.

    Also, we can post references to MMT in the comments sections of economics-related articles e.g. on Huffington Post, or other news web sites– so that the general public becomes more aware of MMT. Where the people lead, the leaders will follow. If the general public becomes more aware of MMT, famous economists like Krugman will have to catch up with them, e.g. in order to understand the questions they are being asked when they are interviewed.

    I don’t think we can depend on Krugman or anyone else to just find on the Internet. There are a zillion things on the Internet. I read a lot about economics, and even write some about it, and I never found this site until a few months ago. The only reason I found it is because another site referred me to it. It is not hard for me to believe that perhaps the sites Krugman reads do not ever refer to this site here.

    • Jill,
      Krugman is well aware of MMT. He got hundreds of comments on it there. Read his 2011 “puzzlement” over why Italy had higher rates than Japan, some ppl simply said “read MMT, they know”. He also criticized MMT a couple of times missing the point entirely. Then he lost badly a debate about endogenous money and took to ignoring MMT – too danderous, he prefers to debate clueless people.

      • Thanks, Roberto, and also Tom below, for informing me about the situation with Krugman. That’s unfortunate that he knows about MMT but still fails to give MMTers credit where credit is due. I guess we’ll all just have to pull the public’s attention toward MMT, until Krugman can no longer ignore it because people are asking him about it.

  6. Scott Fullwiler

    I forgot to add this paper to the list. It’s excellent:

    Andrew Terzi, Fiscal Deficits in the US and Europe–Revisiting the Link with Interest Rates (2007).

  7. “European Monetary Union: An Old Keynesian Guide to the Issues,” Banco Nazionale del Lavoro Quarterly Review, vol. L, no. 201 (June 1997), 147 164.

    “However, it is also the case that governments will only be able to pursue such policies through fiscal policy since they will have surrendered control over monetary policy on joining the EMU… (F)inancial capital may still be able to discipline governments through the bond market. Thus, if financial capital dislikes the stance of national fiscal policy there could be a sell-off of government bonds and a shift into bonds of other countries. This would drive up the cost of government borrowing, thereby putting a break on fiscal policy (Palley, 1997, pp. 155-156).”

  8. There are generally comments by MMT proponents at Krugman’s blog, and when he criticized MMT some time ago, MMT economists responded there, as did Jamie Galbraith.

    No way that Krugman could be unaware of MMT’s positions and the MMT literature even if he hasn’t done research outside the mainstream. It’s been put right under his nose.

  9. If memory serves (and it may not), Scott you pointed out the De Grauwe literature some time ago and wished he had cited some of the heterodox (MMT) literature as references.

    However, you say the De Grauwe model ‘would not be difficult to build on’ – perhaps that is an opportunity for actual engagement?

  10. Rob Parenteau

    Good solid rejoinder Scott. Way to document how many mainstream economist operate: they ignore and marginalize heterodox work until the mainstream drivel is thoroughly discredited and exposed, then they water the heterodox insights down, assimilate some of it, and if their egos are swollen enough, have the gall to make pretend they invented it. Occasionally they will directly engage with heterodox work, but it is just too embarrassing for them, as the cost/benefit analysis from their side is skewed heavily against them. Hence, the whole endeavor is more of about theology than science, and the high priesthood is not about to voluntarily give up its perqs.

    Kruggie’s response today on Palley’s recent inflation point is even further instructive about the ways they marginalize and assimilate heterodox views. Note the method of engagement.

  11. Joel A. Barker, a student of Thomas Kuhn’s work, writes:

    “When a paradigm shifts, everyone goes back to zero. Your past success guarantees nothing in your future.”

    Even if Barker were only half right, the minority of neoclassical economists who had the needed aha! experience would have a great incentive to claim, even believe, they “knew it all along.”