As formulated by Alvin Hansen and others who have developed and popularized it, the new fiscal theory (which was first put forward in substantially complete form by J.M. Keynes in England) sounds a little less novel and absurd to our preconditioned ears than it does when presented in its simplest and most logical form, with all the unorthodox implications expressly formulated. In some cases the less shocking formulation may be intentional, as a tactical device to gain serious attention. In other cases it is due not to a desire to sugar the pill but to the fact that the writers themselves have not seen all the unorthodox implications – perhaps subconsciously compromising with their own orthodox education.
Think Simon Wren-Lewis, Paul Krugman, Joseph Stiglitz, or Thomas Piketty.
But now it is these compromises that are under fire.
Thus we arrived at the modern consensus, in which ‘New (ersatz) Keynesians’ debate with ‘New Classicals’ about how many angels can dance on the head of a neoliberal pin.
Now more than ever it is necessary to pose the theorems in the purest form.
And now again.
Only thus will it be possible to clear the air of objections which really are concerned with awkwardnesses that appear only when the new theory is forced into the old theoretical framework.
To put it in the simplest possible terms: Krugman et al still talk (with occasional lapses into the realm of truth) as though the government has to finance its deficits by borrowing from the public, out of a fixed supply of loanable funds.
Thus they’re still vulnerable to the ‘crowding out’ argument. If the government borrows out of the supply of loanable funds, it deprives private investors of those funds, thus crowding out their investment. They can reply that the government makes better investments than private investors. But does it? The Right are perfectly justified in questioning this assumption, and by casting doubt on it they can make the case for expansionary austerity.
Krugman et al claim that private investors, in a ‘liquidity trap’, don’t invest enough and the government needs to step up. But it’s open to right-wingers to propose that the ‘multipliers’ on government investment may be very low or even negative. This is a murky area in which to be arguing, and it is at any rate pointless, since the premises that get us there are all wrong.
What MMT has been arguing for decades is that the government doesn’t borrow out of a fixed supply of funds at all. It effectively spends money into existence then drains off the new reserves created by its spending by selling bonds, to help support a higher-than-zero interest rate (or at any rate higher than the interest paid on reserves). Since it spends money into existence, it doesn’t reduce a fixed supply of loanable funds. And central banks (except the ECB apparently) always accommodate as much lending as banks are capable of doing at the target rate. Nobody can be crowded out of an infinitely large room. Inflation is the only constraint.
For the proper explanation, and a thorough trashing of the positions of mainstream economists on both the right and the left, see this article.
The left-wing mainstream economists, Krugman et al, place the argument about austerity into a domain where it depends on intuition-swapping about the efficacy of state vs. private investment or the size of mysterious multipliers. That’s a good place for the anti-austerity side to lose the argument. Better to stay within the domain of reality. There expansionary austerity makes no sense because crowding out is impossible – speaking in terms of available money rather than available resources.