Post-Keynesian Smackdown At Columbia

Columbia Law School hosted a revealing debate June 3 between prominent advocates of two sharply opposed schools of thought on monetary and fiscal policy.

The debate pitted Robert Murphy, an avowed ‘Austrian,’ and Associated Scholar at the Ludwig von Mises Institute, against Warren Mosler, the central figure of a school of thought that calls itself “Modern Monetary Theory.”

Murphy received a Ph.D. from New York University in 2003 with a dissertation on “Unanticipated Intertemporal Change in Theories of Interest.”

In Monday's debate, he defended the views generally associated with the Austrian School: specifically, that the booms of the modern world’s business cycles are caused by overly permissive monetary and credit policies, and that the booms make the busts with all their suffering inevitable. Part of this problem, as Austrians see it, is the monetization of debt. Governments borrow money they can’t pay back, which puts pressure on them that their pets, the central bankers, then relieve by creating new money. The creation of new money drives the interest rate down and creates a party atmosphere, followed by ever-worsening busts/hangovers the next mornings.

Problems or Phantoms
Mosler, the advocate of MMT at this debate, takes the view that “the natural rate of interest is zero,” so the government cannot possibly drive interest rates down to an unnaturally low rate. Indeed, in his view all the problems that worry Austrians are phantoms, creatures of the imagination. The government should just rev up those printing presses.

Even Paul Krugman has criticized Mosler and MMT for insufficient concern about deficits on the one hand and the danger of hyperinflation on the other. Krugman has been ridiculing the concerns of the “austerians” for years (that is a label apparently concocted to connote both “Austrian” and “austerity.”) But MMT goes far beyond the Keynesian or neo-Keynesian premises with which Krugman is comfortable.

Murphy set the stage for this confrontation in May 2011, when he wrote “The Upside-Down World of MMT.” He argued there that MMT, and in particular its use of accounting equations to seek to portray its conclusions as mathematically rigorous, is “misleading at best, and downright false at worst.”

Accounting Equations
The debate – which will eventually be available to all in archived form, but as yet, alas, is not — saw both men rehearsing with erudition positions that both have already set out in their writings. Here is a classic statement of Mosler’s views; The Natural Rate of Interest is Zero, co-written with Mathew Forstater in 2005.

You’ll see at the heart of that essay the following simple equation:

Government deficit = Non-government surplus.

This simple and startling statement can be made to look plausible through the definition and use of various accounting terms that lead to this slightly more complicated formula:

G – T = S – I.

Government spending minus tax revenues (that is to say “government deficit) equals the difference between the private sector’s savings and its investment (“non-government surplus”). This is true, if one uses the terms in the accountants’ sense and if one excludes from consideration imports/exports, as one can do for either of two purposes: expository simplicity or the consideration of the planet Earth as a whole.

Importance of the Debate
This, again, is why deficits on a Moslerian view are never a cause for concern. If the left hand side of either of those equations lessens, the right hand side must lessen. And his view is that we have no reason to want to lessen nongovernment surplus. To the contrary, it connotes contraction. Thus, we should resist attempts to reduce the deficit.

The necessary response, though, is that savings are valuable because they make investment possible. Austrians like Murphy don’t value “surplus” in Mosler’s sense at all. They value private investment, and savings as a way of getting there. Thus, the difference between the two, the surplus, is in their eyes a very hollow abstraction, and nothing real follows from the above identity.

What is important about this debate is that it shows that the center in the economics profession is coming apart. The long-time Keynesian orthodoxy in macroeconomics, the views of Krugman-and-friends, simply isn’t where the action is and all the intellectual excitement has moved to the conflict among various sorts of heresy.

That will define the future (and no very-distant future either) of economic policy in the western world and of the fate of all the currencies involved. The question will be: after Keynes, what?