Thread by @DeficitOwls

While this is at least a noticeable improvement from his earlier "work" engaging MMT, this piece by Krugman still has quite a few issues. In this thread, I'll tackle just one, the issue of government surpluses. nytimes.com/2019/02/12/opi… (1/)

Krugman, citing a hypothetical world in which r (the interest rate on gov debt) becomes larger than g (the nominal GDP growth rate) for a prolonged period even though this never happens in real life, notes this would lead to runaway debt and claims it requires gov surpluses. (2/)

Then he argues that gov surpluses are very hard to do, that's why they're rare. It would require punishing taxes, or cuts to medicaid, or yada yada yada. We don't have the political will, and therefore it would be a disaster of some kind. (3/)

This sort of thinking makes a classic mistake that MMTers have been trying to get people to stop doing for decades. Namely, it tries to consider the budget position **separately from the economy**. You can't do that! (4/)

The reason that budget surpluses are hard in the US is because of our trade deficit. We buy more stuff from abroad than they buy from us, which net sends dollars overseas. That widens the gov budget deficit, as it tries to make up for the lost domestic financial assets. (5/)

By contrast, some nations that have prolonged trade surpluses, like Germany, find it much easier to run budget surpluses. The income from abroad increases tax collections and decreases need for gov services. (6/)

So what story is Krugman telling? He's talking about a world where people don't want to accumulate US debt. Let's take that to mean that people have saved all they want to save, and try to spend their money instead (I'm being generous by assuming he understands this). (7/)

The spending of that money by US citizens would tend to push the US budget towards surplus. More US spending at home = more US income. More income -> more income tax collection & less need for gov services, decreasing gov spending. (8/)

The spending of that money by foreigners, trying to buy goods from the US, would turn the trade deficit into a trade surplus. That would also tend to move the budget toward surplus by increasing US income (more tax revenue, less gov services). (9/)

In other words, this (unlikely) hypothetical world where Krugman thinks we need to run gov budget surpluses, is also the *easiest possible world to run gov surpluses in*. So easy it would probably happen on its own, purely through automatic adjustments. (10/)

Why is Krugman making this mistake? Because he has yet to learn a critical MMT lesson: you cannot consider the budget position in isolation from the economy. (Fine)