Wednesday, 19 September 2018

Krugman’s not too clever criticism of MMT.

Krugman claimed in 2011 that if government ran a deficit of 6% of GDP when the economy was at capacity, then government might “lose access to the bond market”. Well the economy is either at, or pretty much at capacity right now, and there’s a 5% deficit. Any sign of losing access to the bond market? Nope.

I got that info thanks to Stephanie Kelton:

Moreover, MMTers do not advocate big deficits when the economy is at capacity. The latter policy is clearly daft. Thus if bond markets take a dim view of a government, like Trump’s, which is behaving in a daft manner, and charge that government extra interest, that says nothing about MMT.

And finally there is no such thing (as implied just above) as “losing access to the bond markets”. If a government behaves irresponsibly, lenders will charge more for lending to such a government. But as long as the interest rate is sufficiently attractive, they will nevertheless lend. Robert Mugabe, Argentina, Greece etc can always borrow – at a price.

Monday, 17 September 2018

J.T.Harvey claims private money creation means borrowers don’t need to wait for loans.

Harvey is professor of Economics at Texas Christian University. In this Forbes article entitled “Four Lessons (not) Learned from the Financial Crisis”, his first lesson is that we should bail out debtors not creditors (i.e. banks). So the US should have let half of US banks go under during the crisis? I think that would have been too disruptive.

Certainly it’s important to let one or two go under in a crisis “pour encourager les autres” as the French say: i.e. as a lesson to other banks thinking of taking excessive risks. But letting half the bank system collapse would have been going too far.

Next, he claims an advantage of letting private banks create and lend out money is that borrowers don’t “need to wait for people to save up their money before it can be borrowed…” Wrong.

If private banks were barred from creating money, clearly the initial effect would be to cut demand. But that’s easily countered by having government and central bank create and spend extra base money into the economy.  Savers would allocate some of that extra money to saving in various forms: mutual funds, organisations which make small and large loans etc. Net result: there’d always a pot of money available to borrowers, just as under the existing system.

However, a saving grace of Harvey's article is that he debunks the idea that deficits are invariably a problem. That’s not to say they are NEVER a problem: running a large deficit when the economy is at or near capacity is plain irresponsible, which is what Trump is doing right now. But deficits in a recession are not a problem.

Tuesday, 11 September 2018

What are “normal” interest rates?

You can hardly have failed to have noticed the large amount of talk recently about returning to the sort of interest rates that prevailed prior to the 2007/8 crisis. Those rates are often described as “normal”.

In fact there are good reasons for thinking those rates were actually ABNORMAL and that the current very low rates are normal, or put another way, that the current low rates are the GDP maximising rates. Reasons for thinking that are as follows.

First, as David Hume pointed out nearly 300 years ago, politicians are always tempted to fund public spending via borrowing rather than via tax because voters notice tax increases and blame politicians for them, whereas voters tend not to blame politicians for the interest rate increases that stem from government borrowing. 

As Hume put it, “It is very tempting to a minister to employ such an expedient, as enables him to make a great figure during his administration, without overburdening the people with taxes, or exciting any immediate clamors against himself. The practice, therefore, of contracting debt, will almost infallibly be abused in every government. It would scarcely be more imprudent to give a prodigal son a credit in every banker’s shop in London, than to empower a statesman to draw bills, in this manner, upon posterity.” 

Simon Wren-Lewis (former Oxford economics prof) refers to that phenomenon as the “deficit bias”. Government borrowing which takes place for the latter reason obviously has the effect of artificially raising interest rates.

In contrast to the latter clearly unjustified reason for public borrowing, there are a host of ostensibly better reasons for such borrowing. Unfortunately even those reasons on closer inspection turn out to be feeble if not wholly invalid, for reasons I set out in section 2 of a recent paper.

This all lends support to the idea put by Milton Friedman in 1948, namely that government should borrow NOTHING. Warren Mosler (founder of Modern Monetary Theory) advocated the same “zero public borrowing” regime, as did Bill Mitchell (Australian economics prof.)

Re Friedman see his para starting “Under the proposal…” here.

Re Mosler, see his 2nd last para here. As to Bill Mitchell, see here.

As distinct to the above point that the current near zero interest rates are the norm or the GDP maximising rates, there is the related question as to whether governments and central banks ought to adjust interest rates so as to adjust demand. As I argue in the above mentioned recent paper, there is actually a good reason for thinking that interest rates should only rarely be adjusted, if at all.

The reason for thinking that is that in a perfectly functioning free market, the failure of interest rates to fall is not the cause of recessions lasting longer than we would like. The actual market failure that causes recessions to endure is the failure of wages and prices to fall, which in turn would increase the real value of the stock of money (base money in particular), which in turn would encourage spending. That’s known as the “Pigou effect”. The reason wages and prices do not fall significantly is of course Keynes’s “wages are sticky downwards” phenomenon: the fact that, particularly in heavily unionised sectors of the economy, it is very difficult to cut wages.

I deal with the Pigou effect in the 3rd section of the above mentioned paper.

Thursday, 6 September 2018

Random charts - 63.

Large pink text on charts below was added by me.

Wednesday, 29 August 2018

The IMF has a grasp of macro-economics???

Simon Wren-Lewis (former Oxford economics prof) claims in this recent article (1) that the IMF is on balance quite enlightened when it comes to economics. That’s not entirely consistent with this passage of his: “The IMF itself wavered on austerity. At first (before 2010) it encouraged coordinated fiscal stimulus. As the Eurozone crisis began to unfold it changed its mind, and advocated austerity. But this did not last that long.”

My translation of that is “when the comes to austerity, the IMF doesn’t know whether it’s coming or going”. Or maybe that’s over-cynical.

Certainly anyone or any organisation which thinks there is anything at all to be said for austerity (in the sense of pitching aggregate demand lower than is consistent with keeping inflation under control) is basically clueless.

That certainly ties up with Bill Mitchell’s view of the IMF (2), namely that the IMF is so hopeless, it should be closed down. (Mitchell is an Australian economics prof.)

Fiscal space.

Another piece of evidence that the IMF (along with the OECD) do not have much of a grip on macro-economics is that both organisations have long supported the nonsensical “fiscal space” idea. Bill Mitchell pours cold water on the "fiscal space" idea here (3) for example, and I demolished it here (4), here (5), and here (6).
Given that both Bill Mitchell and I are MMTers, the obvious conclusion is that if the IMF and OECD were replaced with a committee of MMTers, millions of people worldwide who have remained unemployed for years on end over the last ten years would had jobs. Millions would not have been kicked out of their homes because of inability to make mortgage interest payments and many a suicide would have been avoided.

Having said that, I’m well aware of the weaknesses of MMT. For example it is often said there’s nothing new in MMT. That’s true in that MMT is just Keynes writ large. However Keynes (or at least his main work, the “General Theory of Employment Interest and Money” is ridiculously complicated). I.e. what MMT has done is to take Keynes and simplify it.

Plus it’s clear that the IMFs and OECDs of this world do not understand Keynes. That is, they don’t get the point that the solution to recessions is easy: just have the state create more money and spend it (and/or cut taxes). So MMT has done a good job in simplifying Keynes: maybe the little dears at the IMF and OECD will then understand it.

In contrast to the above “non-original” idea that the solution to recessions is easy, there’s another idea advocated by several MMTers which is definitely more original: that’s the “permanent zero interest rate” idea.


Titles of articles referred to:

1. The IMF as a transmission mechanism for academic knowledge.
2. IMF still away with the pixies.
3. The ‘fiscal space’ charade – IMF becomes Moody’s advertising agency.
4. More fiscal space nonsense.
5. "Fiscal space" is hogwash.
6. Ghosh – IMF authors define “fiscal space”.

Stop press. (30th Aug 2018). The fiscal space brigade have unfortunately and coincidentally piped up again in the last 48 hours.

Bill Mitchell, quite rightly, tries to get them to shut up for the umpteenth time….:-)

Monday, 27 August 2018

The big flaw in artificial interest rate adjustments.

There is a widely accepted principle in economics, namely that government should intervene in the free market where there is what is called “market failure”. A classic example of market failure is monopolies which exploit their monopoly powers to make unacceptably large profits.

The artificial interest rate adjustments implemented by central banks are an obvious case of intervention in the free market, and the popular justification for that is that central banks do that when there is a clear case of market failure in the form of a recession which market forces are failing to deal with fast enough.

Unfortunately there’s a monster flaw in that argument, namely that the failure of interest rates to fall all that much in recessions is not the market failure that causes recessions to last longer than we would like. Indeed, it’s puzzling that anyone should think THAT IS the relevant market failure because the market for loans is at least on the face of it to be very much a genuine free market. That is, there are millions of would be borrowers and lenders out there and thousands of intermediaries trying to bring lenders and borrowers together. That is just the sort of scenario where markets work well.

In fact the market failure which prolongs recessions is the failure of wages and prices to fall. That is, given a perfectly functioning free market, wages would fall (in terms of money) and prices would fall. That would increase the real value of the money supply (base money in particular), which in turn would encourage spending, which would put an end to the recession. That “falling prices ends recessions” phenomenon is known as the “Pigou effect”.

But of course the Pigou effect does not work in the real world because of Keynes’s well known “wages are sticky downwards” phenomenon. That is, in heavily unionised sectors, it is often plain impossible to cut wages, and even in non-unionised sectors, trying to cut wages can be more trouble for an employer than it is worth.

To summarise, there is no obvious market failure when it comes to interest rates, but there is a glaring market failure in the form of wages and prices not falling in recessions.

Thus the logical cure for recessions is not artificial interest rate adjustments: the logical cure is something like the Pigou effect, that is increasing the real value of the private sector’s stock of money. And that is easily done via a helicopter drop.

However, it seems a bit silly to set up an entirely new system for distributing money to all and sundry, given that we already have such systems in place. That is, plain old public spending (funded with new base money) feeds money into the private sector, and where public spending takes the form of simple transfer payments (e.g. state pensions or unemployment benefits), increased spending there would amount to a helicopter drop.

As for those on the political right who aren’t too keen on more public spending, money can always be distributed to households via tax cuts.

Another advantage of increased public spending as compared to helicopter drops is that there is what might be called an “immediate fiscal effect”. To illustrate, if government and central bank create money and hire a thousand extra teachers, employment rises the minute those teachers start their jobs, i.e. before the money supply increase effect kicks in.

That “immediate fiscal effect” also applies to tax cuts: there is plenty of empirical evidence that while households obviously save a proportion of the extra income they get from a tax cut, they also spend a significant proportion.  However, there is probably little difference between tax cuts and helicopter drops when it comes to the immediate fiscal effect.

The above arguments against interest rate adjustments form a significant part of a paper of mine which will appear in a journal shortly. There is earlier draft of it at “Open Thesis” entitled “A permanent zero interest rate would maximise GDP”. Watch this space.

Saturday, 25 August 2018

Physics prof at my local university writes about MMT.

Having supported MMT for about ten years and living two miles from Durham City centre (UK), I’m pleased to see a Durham University academic writing about MMT (Charles Adams). The title of his article is "Fiscal policy is a matter of life and death", published by Progressive Pulse.

I agree with the basic argument in his article, i.e. that balanced budgets are a nonsense. I also have a couple of quibbles, as follows.

First, Prof Adams claims “All money is created in the form of debt…”. That’s actually debatable. Certainly money created by commercial banks is a form of debt. In contrast, is central bank money a form of debt? Certainly £10 notes say “I promise to pay the bearer the sum of £10”, and that is signed by the Bank of England chief cashier. But that promise is just there as a nice bit of history: you won’t actually get £10 of gold from the BoE for your £10 note.

It can be argued that BoE money is debt in the sense that it can be used to cancel out another debt: a debt owed by taxpayers to government. But what about those who pay no tax, e.g. people living just on the state pension? Far as I can see there is no definitive answer to the question, is central bank money a debt?

For what it’s worth, the founder of MMT, Warren Mosler suggested central bank money is not a debt when he said that such money is like points in a tennis match: they’re assets as viewed by the players, but are not a liability as viewed by the umpire (i.e. the central bank).

Next, Prof Adams says “The finance sector prefers private debtors to government debt because it can extract a higher rent (a higher interest rate).” A problem with that claim is that the extra interest yielded by private debt simply reflects the higher risk. At least that’s the case in a perfectly functioning market. Thus in theory lenders will be indifferent as between public debt and private debt. Certainly the finance sector (i.e. banks, insurance companies and pension providers) are willing to hold very large amounts of public debt.

Finally, I’m not sure about Prof Adams’s claim (penultimate para) that if extra money (or more broadly “stimulus”) comes from more public debt, government can spend that on health and education, whereas if stimulus comes from a build-up in private debt, that increased spending on education & health is necessarily foregone. Strikes me that if stimulus does come from the latter source, there’d be nothing to stop government spending more on health and education by raising taxes.

I suggest the standard MMT view, at least certainly my view and that of several MMTers and indeed Keynes, is that the deficit simply needs to be whatever brings full employment. That’s why Keynes said “look after the unemployed, and the budget will look after itself”. To illustrate, it could be that in any particular year, enough stimulus comes from private debt build-up that government does not need to run a deficit at all.  (Steve Keen has done a lot of work on the relationship between debt build-up, and aggregate demand).

Alternatively, in some years the private sector will be paying off debts, in which case the government deficit will need to be much larger than normal. 

And finally, Charles Adams is nowhere near the first physicist to get interested in economics: several physics academics have. Physics and economics seem to go together. Certainly physics was the subject I was best at at school, though the teachers there would probably have used the phrase “least bad at” rather than “best at"….:-)