Paul Krugman Pushes Factually Inaccurate Arguments About Argentina

Naked Capitalism has the article Philip Pilkington: Paul Krugman Pushes Factually Inaccurate Arguments About Argentina to Support Discredited Monetarist Ideas.

Paul Krugman is waving his true colours while his followers try to look the other way and pretend that he’s not making stuff up. Basically Krugman is saying, following that pundit Yglesias, that Argentina’s inflation problems have to do with their fiscal balance. Here is the quote from Krugman,

Matthew Yglesias says what needs to be said about Argentina: there’s no contradiction at all between saying that Argentina was right to follow heterodox policies in 2002, but it is wrong to be rejecting advice to curb deficits and control inflation now. I know some people find this hard to grasp, but the effects of economic policies, and the appropriate policies to follow, depend on circumstances. (My Emphasis)

Of course, Krugman — instead of engaging in tough guy rhetoric (“doing what needs to be done” etc.) — could have done two quick Google searches to see if Argentina had been running major deficits in the years when it was suffering from inflation. If he had he would have found that for many of the years after the 2001 default Argentina ran substantial fiscal surpluses.

With my newly found understanding of Modern Money Theory (MMT), it is above my pay grade to try resolve the dispute between economists who are far more knowledgeable about these matters than I am.

On the one hand, it might appear that the MMTers are trying to defend their position despite the evidence presented by the Argentina experience.  On the other hand, they appear to be right that Krugman is misrepresenting that evidence.  In either case, it presents a conundrum as to what the solution is to Argentina’s problem.

The solution proposed by Pilkington is summarized below with this excerpt:

During the 1990s the government tried to wring the inflation out of the system with a misguided currency board arrangement that fell apart in 2001. And I don’t think anyone would openly advocate that they try that again.

So, what are the solutions? Unfortunately, there are no easy solutions. In an ideal world the government would allow the burst of inflation that is going to accompany the recent devaluation of the peso to run through the system and then they would step in with well-enforced wage and price controls. Such controls, if history is to be any guide, are often less popular than inflation — with both trade unions and companies feeling their rights being encroached upon.

So, the likely path that Argentina will have to take is to try to keep economic growth buoyant while navigating the inflation. By not allowing incomes to fall too much the government can ensure that people do not experience their loss of purchasing power as an all-out impoverishment. Meanwhile, the government should bring the trade unions and the management of the firms to the table and try to make them gradually see reason. But again, that’s a tough game indeed.

This seems to go outside the solution I might have expected would have something to do with taxes.  However, it does seem reasonable.  To me it does seem to show that there is something else about the value of a fiat currency than the need to pay taxes.  The emphasis that MMT proponent L. Randall Wray puts on taxes as the driving force for the acceptance of fiat money is way over done in my opinion.  As I read his book, he just can’t seem to let this idea fade into the background.  He insists on continuing to drive it home.

Examples from L. Randall Wray.


We are now able to answer the question posed earlier: why would anyone accept government’s “fiat” currency? Because the government’s currency is the main (and usually the only) thing accepted by government in payment of taxes. To avoid the penalties imposed for non-payment of taxes (that could include prison), the taxpayer needs to get hold of the government’s currency.


The state must take back its IOU in payments made to itself. “Taxes drive money”—these “money things” are accepted because there are taxes “backing them up”, not because they have embodied gold.

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