Yves here. Larry Summers, like Hillary Clinton, does not seem willing to get the message that it would behoove him to retreat from public life.
Lawrence Summers, according to Lawrence Summers, is a “serious economist.” He has just written an op-ed in the Washington Post in which he seriously explains why Modern Money Theory—as proposed by “fringe economists,” as he calls them—is a recipe for disaster. I am going to leave it to the “fringe economists” to rebut Mr. Summers; (I’m confident that professors Wray, Kelton, Tcherneva, Tymoigne, and Fullwiler can take care of that job quite easily). What I want to consider is something even more fundamental: How is it that someone who presents himself as a “serious economist” can get away with speaking incoherently while expecting us—the everyday citizens of America—to take what he is saying as true?
Here is Summers’ first point about why MMT is a recipe for disaster: “Modern monetary theory…holds out the prospect that somehow by printing money, the government can finance its deficits at zero cost. In fact, in today’s economy, the government pays interest on any new money it creates, which takes the form of its reserves held by banks at the Federal Reserve. Yes, there is outstanding currency in circulation, but because that can always be deposited in a bank, its quantity is not controlled by the government. Even money-financed deficits cause the government to incur debt.”
Yes, that’s very clear and logical, isn’t it? The government “prints” money and then pays interest on it? The interest it pays become the “reserves” in the Federal Reserve system? And what exactly does that have to do with “outstanding currency in circulation”? And what is it exactly that happens when that “outstanding currency” gets deposited in a bank? And if “money-financed” deficits cause the government to incur debt, maybe we should think about financing our deficits with something other than money? These are all serious economic questions.
Summers’ incoherent rambling reminds me of another case of incoherent ramblings reported, coincidentally, in the same edition of the Washington Post: Donald Trump’s CPAC speech as evaluated by columnist Eugene Robinson. Here are a few instances of Trump apparently giving his best impersonation of Lawrence Summers:
“When the wind stops blowing, that’s the end of your electric. Let’s hurry up. ‘Darling—Darling, is the wind blowing today? I’d like to watch television, Darling.’ No, but it’s true…. Now Robert Mueller never received a vote, and neither did the person that appointed him. And as you know, the attorney general says, ‘I’m going to recuse myself. I’m going to recuse.’ And I said, why the hell didn’t he tell me that before I put him in? How do you recuse yourself?”
Lawrence Summers’ second point about the fallacy of MMT goes like this: “Contrary to the claims of modern monetary theorists, it is not true that governments can simply create new money to pay all liabilities coming due and avoid default. As the experience of any number of emerging markets demonstrates, past a certain point, this approach leads to hyperinflation. Indeed, in emerging markets that have practiced modern monetary theory, situations could arise where people could buy two drinks at bars at once to avoid the hourly price increases. As with any tax, there is a limit to the amount of revenue that can be raised via such an inflation tax. If this limit is exceeded, hyperinflation will result.”
Really, that all must be true, because Summers is a serious economist. Didn’t really know there were third world countries that have been practicing Modern Money Theory for a long time—but obviously it didn’t work out well for them. And, clearly, you can’t tax people more than they possess, so that proves it: hyperinflation!
Donald Trump had more to ramble about as well: “And they showed—they showed from the White House all the way down…There were people. Nobody has ever seen it. The Capitol down to the Washington Monument—people. But I saw pictures that there were no people. Those pictures were taken hours before…. They had to walk with high-heels, in many cases. They had to walk all the way down to the Washington Monument and then back. And I looked, and I made a speech, and I said, before I got on—I said to the people who were sitting next to me, ‘I’ve never seen anything like this.’”
Lawrence Summers’ third denunciation of MMT is as follows: “Modern monetary theorists typically reason in terms of a closed economy. But a policy of relying on central bank finance of government deficits, as suggested by modern monetary theorists, would likely result in a collapsing exchange rate. This would in turn lead to increased inflation, increased long-term interest rates (because of inflation), risk premiums, capital fleeing the country, and lower real wages as the exchange rate collapsed and the price of imports soared.”
But of course! That’s all obvious, isn’t it? Mr. Summers is just pointing it out. Exchange rates would collapse. It’s the most obvious thing any reader of his argument can easily grasp and understand—and that means “risk premiums” too (which clearly nobody wants).
At one point in his CPAC speech Donald Trump says this: “You know I’m totally off-script right now. And this is how I got elected, by being off-script. True. And if we don’t go off-script, our country is in big trouble, folks. Because we have to get it back.”
What strikes me is that our country is, indeed, in big trouble—but it’s because the “script” that’s being read to us by our political leaders, commentators, and “serious economists” is nothing more than an incoherent babbling.