I formulated Monetary Realism largely out of frustration over politics. I had basically bounced around from economic theory to economic theory for years and years continually becoming frustrated with various ideologies. It had become clear to me that every single economic school that exists is based largely on promoting some sort of policy agenda. For instance, the Keynesians will almost always respond to an economic problem with “more government spending”. Monetarists will almost always respond to an economic problem with “the Fed can fix that”. Austrians will almost always respond with “the government can’t fix that”. Market Monetarists will always respond with “NGDP Targeting can fix that”. MMTers will almost always respond with “bigger deficits and our government Job Guarantee can fix that”. They’re all cookie cutter approaches for the most part. But you could also argue that they all have valuable contributions to make.
I was reminded of all this as I read Dr. Krugman’s latest piece which I think is off the mark. He says (implying that his approach has not been politically motivated):
“The key to understanding this is that the anti-Keynesian position is, in essence, political. It’s driven by hostility to active government policy and, in many cases, hostility to any intellectual approach that might make room for government policy. Too many influential people just don’t want to believe that we’re facing the kind of economic crisis we are actually facing.
I know, the critics will respond that I’m the one who’s being political — but again, look at how the debate has run so far.”
Keynesians are no different than every other school. Yes, the author of the “Conscience of a LIBERAL” blog is politically motivated (shocking, I know!). We know this for a fact because of Dr. Krugman’s harsh criticism of the deficit back in 2003 when it was a Bush deficit driven by the Bush tax cuts. He said:
“…we’re looking at a fiscal crisis that will drive interest rates sky-high….But what’s really scary — what makes a fixed-rate mortgage seem like such a good idea — is the looming threat to the federal government’s solvency.
…How will the train wreck play itself out? ….my prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt. And as that temptation becomes obvious, interest rates will soar.”
Anyone who understands MR knows how flawed this thinking is. But more importantly, the reason he’s bad-mouthing the deficit in 2003 is because it was driven mainly by a Conservative tax cut approach as opposed to a government spending approach. Of course, now that the current deficit is Obama’s and driven largely by government spending Dr. Krugman says it’s not large enough. Talk about having it both ways!
There are, of course, plenty of examples of this in other schools of thought where the thinking is clearly motivated by political cherry picking so I don’t mean to single Dr. Krugman out. But that’s all beside the point. The point is, politics and policy agendas shouldn’t steer our thinking. We should start by understanding the modern monetary system so we can then begin to diagnose specific economic problems as they arise. Then we can apply the right medicine. At times it will have a Keynesian flavor. At times it will have a monetarist flavor. At times it will have an Austrian flavor. The economy is a complex dynamical system. This idea that there is some sort of cookie cutter one trick pony approach to fixing the problems only contributes to making the dismal science that much more dismal. There’s a better way to approach all of this and it starts with a better foundational understanding of the system and an open-minded approach to solving the problems we will inevitably encounter.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.