Ep. 177 Semi-Sensible Krugman vs. Modern Monetary Theory (MMT)

23 February 2019     |     Tom Woods     |     19

Modern Monetary Theory (MMT) is picking up steam (thanks to Alexandria Ocasio-Cortez and Bernie Sanders), to the point that even Krugman is alarmed. Yes, he says, you will have to raise taxes to pay for what progressives want. This is the episode folks have been asking us for.


Krugman Posts Discussed

What’s Wrong With Functional Finance?” (February 12, 2019)

How Much Does Heterodoxy Help Progressives?” (February 12, 2019)

Related Episode, Tom Woods Show

Ep. 38 Murphy Takes on MMT

Related Episode, Bob Murphy Show

Ep. 18 Warren Mosler Defends the Essential Insights of Modern Monetary Theory (MMT)

Related Links

Murphy: MMT and the Green New Deal
Murphy vs. Mosler Debate on Austrian vs. MMT
Bob’s Mises Wire critique of MMT
Bob defends Krugman against MMTers
Stephanie Kelton responds to Krugman

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  • Lysander Spooner

    At the beginning you mention the charge from leftists that the rich are ‘hoarders’.

    The real ‘hoarders’ are political governments: think of all the centrally located properties owned by city administrations, or the vast tracts of Western land ‘owned’ by the FedGov. So much potential wealth left lying about, often poorly maintained and barely used.

    How much wealthier would we all be if these hoarded properties were used for money generating purposes?

  • Craig

    I hope this does not disappoint Walter Block too much.


    Uno de los más de 100 militares de Venezuela que desertaron de las Fuerzas Armadas hacia Colombia este sábado durante la jornada en la que el régimen venezolano reprimió a cientos de personas que pedían que se permitiera el ingreso de la ayuda humanitaria, dijo que sus compañeros dejaron las filas venezolanas porque “están cansados de defender lo indefendible”.

    One of the more than 100 Venezuelan soldiers who defected from the Armed Forces to Colombia this Saturday during the day in which the Venezuelan regime repressed hundreds of people who asked that humanitarian aid be allowed, said that their comrades left the Venezuelan ranks because “they are tired of defending the undefendable”.

  • Subway Hobo

    why are these no longer on youtube?

  • Matt Voegtli

    I think Tom is going to loose the debate because almost everyone has to agree with his position from the get go. As Tom said theres probably not more than 2 to 3 people that are going to start off in Bob’s camp, and those people won’t budge because they are basically commies.

    • martinbrock

      The pacifism debate? Communism is a stateless system, even in Marxism, but parties calling themselves “Communist” in the 20th century don’t have a great record of statelessness or pacifism. They claim, after Marx, to seek statelessness following a revolutionary overthrow of capitalist states, but their states are even less friendly then capitalist states to the working class, and the stateless, communist stage of Marxist history never arrives.

      I’m rooting for Bob, but the outcome depends on whose definition of “pacifism” the crowd accepts. If non-aggression is pacifism, Bob wins. If self-defense violates pacifism, Tom has the upper hand, but I don’t expect Bob to agree that self-defense violates pacifism. Self-defense does not contradict “turn the other cheek”. On the contrary, “turn the other cheek” is self-defense.

      • Matt Voegtli

        He broke it down pretty hard on The Bob Murphy Show. Self-defense violates it based off what he said. He says it will be completely unnecessary.

  • davegrille

    The MMT is two and two is five mathematics.

  • martinbrock

    MMT (as described by Mosler for example) does not imply that a state may create real resources by creating and spending money. Mosler explicitily disputes this claim every time he encounters it, including the debate with Bob Murphy.

    When “leftists” answer the “how will you pay for it?” question, I rarely hear “MMT”. I hear, “the same way we paid for the “war on terror” and Trump’s trillion dollar (over a decade) tax cut and his simultaneous, trillion dollar increase in offense spending.”

    The problem with “we’re all Keynesians now” and “deficits don’t matter” is that both ideas come from right, not the left. The former is attributable to Milton Friedman, though Nixon (who said something similar when driving the final nail in the coffin of Breton-Woods) deserves more of the credit. The latter is out of the mouth Dick Cheney who said “Reagan proved that deficits don’t matter”, and he said it to defend the Bush II era deficits.

    AOC may talk up “MMT” as a method of financing a Green New Deal or Medicare for All (contra Mosler), but she’s not discussing some miraculous, new approach. By contrast, Tulsi Gabbard would finance welfare state expansions by ending costly regime change wars, but her approach isn’t really so different, because we’ve financed regime change wars with deficit spending for decades.

    • Bill

      I think the thing that both Keynsians and MMTers get wrong is the concept of “idle resources”. There is a build in presumption that if the government spends into making resources “no longer idle” that there is universally a net positive economic result. Krugman may deny that on a specific microeconomic argument but the macro theory takes it for granted. The MMT and Keynesian approach to aggregate demand take it as a truism if not explicitly stated. The net result is that MMT and New-Keynsianism economists can make prescriptive statements about the economy that has no actual value, they don’t mean anything in practice yet are perfectly valid in their model.

      • martinbrock

        MMTers like Mosler do not claim that any state spending, even state spending employing otherwise idle resources, has a positive economic result. They only claim that a creator of fiat money can’t go bankrupt in the money it creates and that creating fiat money is not necessarily inflationary. It can be inflationary, even hyperinflationary, but in some scenarios, it isn’t. They also claim that budget surpluses (on the budget of the monetary authority) create financial imbalances in a fiat money system, not that a different monetary system must also create these imbalances without deficit spending.

        Clearly, if the state employs people to destroy automobiles as they roll off an assembly line, the net economic result is not positive, and if it employs people to dig holes and refill them, this “employment” produces nothing of value corresponding to the new money and thus could be inflationary. Mosler emphasizes this point every time he discusses the subject. He would say that “infrastructure spending” and the like, financed by monetary expansion, can have net positive effects without inflation, but precisely what sort of spending has these effects is beyond the scope of MMT.

        There is no MMT theory of aggregate demand. MMT describes how fiat money (the actual, existing monetary system in the U.S. and elsewhere) works. It’s only a description of this system. It’s not a general, economic theory. It’s not Keynesianism even if Keynes did it refer to it (as Knapp’s Chartalism).

        Of course, some people want to use “MMT” to justify their favorite state spending, but practically any theory will do in this regard. Trump is among history’s greatest deficit spenders. Is he an MMTer or a Keynesian? I don’t think so. He doesn’t need MMT or Keynes to rationalize his policy. He’s a crony capitalist. He only needs his version of capitalism.

        • Bill

          If we’re willing to accept that mmt is purely a theory on the mechanics of fiat money as it exists and all the prescriptive stuff is outside the realm of mmt proper (and I question this notion but will grant it for sake of argument) is there anything new we’re actually learning? To me it seems Mosler is then restating what Austrians and broadly neoclassical economists already knew but reframes it in an unproductive and not useful way.

          • martinbrock

            Austrians continually predict a hyperinflationary economic collapse as a consequence of monetary expansion that never occurs, so I can’t agree that Mosler simply restates their conclusions.

            Mosler’s formulation distinguishes Treasury securities from conventional “debt”, because the Treasury securities are nominally riskless while conventional bonds have a default risk. You’ll always get your principal and interest from a Treasury security even if the purchasing power is less than what you paid for the security at the time of purchase.

            It makes little sense to speak of Treasury “debt” as debt at all. It makes more sense to speak of it as strategic monetary expansion (or “money printing”). Mosler does agree with Austrians to this extent, but he denies that the monetary expansion is necessarily inflationary and asserts that, in a fiat money regime, failing to deficit spend can have contractionary consequences. I don’t hear Austrians making these points.

            Saying that a fiat monetary authority should deficit spend to avoid contraction (or to enable more net private saving) in some scenarios is not a defense of fiat money. It’s a statement about monetary policy given fiat money. A monetary system without a central bank/Treasury issuing fiat money could be superior to a fiat money system, and MMT has nothing to say about this comparison. Mosler makes this point explicitly in his debate with Bob Murphy.

          • Bill

            First of all not all Austrians constantly claim everything Paul Krugman says will instantly destroy the economy and to those that do it might actually still happen.

            MMT might be a valid theory of fiat money in a universe that is built off MMT’s assumptions. It’s even true that if you look at macroeconomics through a keynesian lens you might believe MMT shows the effectiveness of central planning. But my key objection here is that you say MMT and not a prescriptive theory but that is only true to the extent that Stephanie Kelton can claim to draw accurate prescriptive policy from it.

            MMT is clearly not how fiat money actually works now has Bob has outlined before. To the extent that MMT use a useful theory on fiat money that depends on if you think the prescriptive conclusion are valid. We gain nothing by trying to extend mmt to broader economic thought because the truisms of mmt are already understood by monetarists, Austrians and keynesians.

            If MMT were a theory from the physical sciences it would be clear that it’s useless. It’s like one of the 14 different interpretations of quantum mechanics. The Copenhagen interpretation, the mmt interpretation, the many world’s interpretation…

          • martinbrock

            I’m not generalizing to all Austrians. Bob Murphy himself concedes that he overstated the inflationary effects of QE while Mosler explains nicely why it need not have been inflationary. QE only swapped long term securities for short term securities on the books of banks. It didn’t expand the circulating money supply, because short term reserves don’t determine bank lending. Short term expectations determine short term bank lending regardless of a bank’s reserves. A bank always lends to the extent of its expectation of being repaid subject to Fed regulation. The Fed’s mandatory reserve ratio for member banks determines bank reserves. If a bank overextends and suffers defaults consuming its reserves, shareholders and taxpayers, through the FDIC, take the hit. The moral hazard is a problem, of course, and I’m not defending this system, because I don’t prefer it, but it is the system we have.

          • Bill

            The whole point of QE is to encourage lending and prevent a drop in available credit. Yes that money is not being dumped into circulation and obviously may not directly result in higher gas prices, etc; but by preventing deflation is still an inflation effect. Preventing a collapse in an asset price or equity market IS inflationary. When people are losing income, losing wealth in terms of asset values that natural effect is deflation. Holding up asset prices while people are getting poorer is an inflationary effect if only by preventing a drop in circulating money.

            Its a little hard to accurately analyze because we’re dealing with something that involves so much moral hazard and opportunity cost to begin with. I can’t exactly go and prove that TSLA and Uber wouldn’t be so overvalued had it not been for QE. What is a bit interesting to consider is how much deficit spending and tax cutting the government had been doing prior to 2008/2009 and that we had the credit crunch and bubble pop to begin with. In the MMT framework that should have been increasing the money supply and had a stimulating effect the whole time.

  • martinbrock

    I don’t know about Abba Lerner, but MMT resurrects Georg Knapp’s Chartalism. Mosler’s formulation may differ, and he may not studied have Knapp, but Keynes credited Knapp with the idea. Bill Mitchell is a Marxist economist and may be influenced more by Lerner.

  • martinbrock

    To make sense of Mosler’s idea that the state must spend fiat money into existence before taxpayers can pay taxes, one must understand the banking system’s expansion of liquidity as “state spending”. At this point, in the United States, this understanding is not ridiculous.

    Or as Bill Mitchell puts it in the article linked below, “… despite claims that central banks are largely independent of government, there is no real significance in separating treasury and central bank operations.”

  • Christian Borgelt

    I think it is pretty obvious that the state is financially less constrained than a simple household, as MMT claims, but only in the same sense in which a robber is financially less constrained than an honest person.