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Monday, August 24, 2015

Mosler On Krugman On Debt

Warren Mosler offers a good analysis of Paul Krugman's article "Debt is Good." I try to avoid writing "Paul Krugman does not get it" articles, as that is already a crowded field. However, since the article caught a lot of attention, and is right up my alley, I feel I should comment on it.

One could summarise Mosler's article as that Krugman is directionally correct, but he is still not thinking about things properly. His idea (which he attributes to Ricardo Caballero of M.I.T.) that government debt is "good" because it provides a "safe asset" to investors is hardly novel. It was discussed in depth decades ago by Hyman Minsky, and probably many other economists that I am less familiar with. This offended some fiscal conservatives, but this is because many of them refuse to accept that a central government liability is an asset to the non-central government sector. (We could say "private sector," but that may seem like a strange label for entities like the Chinese reserve managers. It is actually reasonable, since those Chinese reserves are being accumulated to advance Chinese business interests.) Although they want to reduce government debt, they do not offer any mechanism to reduce private sector financial assets.

In Understanding Government Finance, one of the key themes is the central role of central government liabilities for liquidity management. The only way to avoid the use of government bonds in liquidity management is to create bank reserves, which are just a form of government liabilities that have particular restrictions on which entities can (and must) hold them. Although I am allergic to the term, reserves are a form of "financial repression" on the banking system.

The discussion of infrastructure shows the problems with Krugman's analysis.

The United States suffers from obvious deficiencies in roads, rails, water systems and more; meanwhile, the federal government can borrow at historically low interest rates.
Mosler's response:
Wrong answer. Yes, there is a serious infrastructure deficiency. The right question, however, is whether the US has the available resources and whether it wants to allocate them for that purpose.
I agree with Mosler 100%. Common sense tells us that infrastructure needs to be maintained, and kept at serviceable levels, regardless of the state of the cycle. I live in a province where that common sense view was abandoned for decades, and we now face the need for emergency work to prevent various disasters.

If there is a need to stimulate the economy, tax cuts are probably the most effective mechanism to help the economy quickly. Going the other way, if the economy is overheating, the government should raise taxes to slow growth. But the national infrastructure should not be held hostage by silly net present value analysis.

(c) Brian Romanchuk 2015


  1. Also this
    Krugman, Wren Lewis etc use the multiplier effect to argue for govt spending not tax cuts as they "cost" more. The end result of this is a government of size 100% in other words communism.

  2. The main issue is whether it is sensible for the government to pay an income to the holders of its paper.

    The free float of Gilts in the UK are held by the pension funds, overseas and financial sector in roughly thirds, with a small 2% held directly by households.

    The question is why should the private sector be allowed to allocate where 'benefits' are paid in the bond market? You don't get that with disabled people. They get the money, or nobody gets it.

    There doesn't seem to be any good reason to pay the majority of bond holders anything, with any individual requirements for pensions and rainy day funds easily handled by a National Savings facility rather than tradeable paper.

    Let them hold reserves and leverage in the financial sector with their own constructions. Perhaps that will encourage more of them to invest in actual businesses and structures.


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