Yet Another Example Of Mainstream Handwringing About Debt

John Cochrane has given us yet another example of how neoclassical economics differs from MMT on the question of fiscal policy. Arguing that there is “nothing new to MMT” is not paying attention.

I just highlighted some of the points of the article:

The first thing to note is that he uses the primary fiscal balance equation without any consideration that behaviour might change as the stock of debt rises. His entire mental model is based on a trivial mathematical framework where feedback loops between wealth and income do not occur.

In words, growth in the debt to GDP ratio equals the difference between rate of return and GDP growth rate, less the ratio of primary surplus (or deficit) to GDP. 

Next, interest rates paid are not a policy variable, they are determined only by what bond investors wish they could get.

 But if investors get worried about the US commitment to repaying its debt without inflation, they might charge 5% interest as a risk premium.

Finally, the U.S. faces the exact same rollover risk as Greece,

It’s not a total guarantee. A debt crisis can break out when the country needs to borrow new money, even absent a roll over problem. But avoiding the roll-over aspect would help a lot! Greece got in trouble because it could not roll over debts, not because it could not borrow for one year’s spending. 

I addressed these points in recent articles, so I will just observe that MMT contradicts all three.

(c) Brian Romanchuk 2020