Sunday, 19 January 2020

Simon Wren-Lewis, MMT & Positive Money on fiscal / monetary coordination.

SW-L recently published an article entitled “Monetary and fiscal cooperation: the case for a state dependent assignment.”

He seems to have moved a bit closer to the MMT and Positive Money (PM) positions. Assuming I’ve got the SW-L, MMT and PM positions right (rather a big assumption perhaps), the three positions are thus.

SW-L says “use interest rate cuts to impart stimulus if rates are well above zero, and if they are near zero, then go for monetary / fiscal coordination, i.e. just create more base money and spend it, and/or cut taxes.” (Incidentally Keynes gave the thumbs up to the “print and spend” idea in the early 1930s)

MMT says, “Interest rates should ideally never rise above zero (i.e. the rate paid on government and central bank liabilities should not rise above zero)”. Milton Friedman thought likewise. However while MMTers back monetary / fiscal coordination, they are unclear on exactly who decides how much stimulus to impart.

PM’s position is the same as MMT, except that PM is very clear on who takes the above decision. PM says some independent committee of economists should decide the size of the deficit (maybe a central bank committee) while strictly political decisions, like what proportion of GDP is allocated to public spending stays with politicians and the electorate. (Incidentally Ben Bernanke said recently that he thought that sort of PM arrangement would be OK. See his passage starting “A possible arrangement…” here.)

I agree with the MMT / Friedman idea that interest rates on central bank and government liabilities should remain at zero, except in emergencies. Reason is that any rate above zero means that tax has to be raised on the population as a whole to fund interest paid to people who have nothing better to do with large amounts of cash than deposit it at the central bank.

SW-L’s flawed criticism of MMT.

I don’t agree with one criticism SW-L makes of MMT. That’s in this para:

“The first is MMT. This in effect reverses the conventional assignment, with fiscal policy doing the demand and inflation stabilisation in all states of the world. If that happens debt looks after itself. I am not in favour of MMT, because I think independent central banks have been very successful at controlling inflation, and a government using fiscal policy would be less successful.”

The flaw there is that MMT does not actually advocate what might be called “conventional fiscal policy” (i.e. government borrows $X, spends it and gives $X of bonds to lenders). That is, MMT (as intimated above) advocates fiscal / monetary coordination. Indeed, Warren Mosler in the second last para of a Huffington article entitled “Proposals for the Banking System” advocates the abolition of government debt.


SW-L versus PM.

Re the apparent difference between SW-L and PM namely that SW-L says the central bank should “advise” on how big the deficit should be whereas PM says the central bank should determine how big it is, there is not actually much difference there.

Reason is that as SW-L says, and rightly, ultimate power rests with politicians, thus politicians can always ignore advice or “determination” coming from the central bank. However, the advice of the central bank (or other committee of economists) should certainly be made public. The electorate have an absolute right to know if government has ignored expert advice.

Monday, 13 January 2020

Beware of semantic tricks by the University College London Institute for Innovation and Public Purpose.

In August 2018, Charles Leadbeater, visiting professor at the UCLIIPP published an article entitled “Movements with missions make markets.”

Incidentally, UCLIIPP drew attention on Twitter to this article about eighteen months after the article was written. One reason for that, I’d guess, is that no one seems to pay much attention to UCLIIPP. Certainly it’s rare for anyone to respond to their tweets and there are no comments after Leadbeater’s article, even eighteen months after it was published. UCLIIPP personnel seem to be desperate to draw attention to themselves and justify their salaries. Personally I give my own blog articles just one mention on Twitter: the day they are published. And that’s it, unless an article is of specific relevance to something I’m dealing with months or years later.

Anyway, Leadbeater’s article basically claims that the contraceptive pill, and the success thereof is an example of the so called “mission” idea pushed by UCLIIPP, and which thus supports the latter idea.

A “mission”, as the word is used by UCLIIPP authors, is a project which has no immediate economic benefits, but which does involve technological spin-offs, i.e. solving technical problems, which at a later date will probably bring economic benefits. The example cited over and over again in UCLIIP literature (including in Leadbeater’s article) is Kennedy’s Moon shot. The latter was clearly astronomically expensive and there were almost no obvious economic benefits: the main motive was to get one up on the Russians.

Another example of UCLIIPP literature which explains what is meant by a mission is an article of theirs entitled "Missions: a beginner's guide."

Unfortunately the contraceptive pill is a hundred miles from being an example of a mission. The motive of the pharmaceutical companies in developing the contraceptive pill was (gasps of amazement) to make money: to make a profit! I.e. the pill was seen from the outset as something which, unlike Kennedy’s Moon shot, had an immediate economic benefit. Or at least it had an economic benefit on the assumption that anything which makes profits for corporations involves an economic benefit, an assumption which of course can be criticised. 

But that isn't the only example of UCLIIPP authors citing projects which would happen anyway (i.e. without any help from UCLIIPP) as an example is their “mission” idea. Another example is the Green New Deal: that is, UCLIIPP authors try to portray the GND as an example of a “mission”.

Well the first flaw in that claim by the UCLIIPP is that scientists and others were aware of the problems stemming from CO2 induced global warming decades before the UCLIIPP introduced its “mission” idea.  That is, we would be going ahead with the GND in some shape or form even if the UCLIIPP had never started wittering on about “missions”.

Second, the GND cannot be classified as a project, like Kennedy’s Moon shot, which has no immediate economic benefits. The GND, if it is successful, will stop numerous coastal cities being flooded, plus it will stop parts of Africa becoming so hot that they are uninhabitable. Those two strike me as pretty clear economic benefits!

Saturday, 11 January 2020

Mariana Mazzucato’s ideas on the value of everything are of no value.

Near the start of her book “The Value of Everything” she tries to define value. In a passage which is highlighted and which is thus presumably supposed to be of central significance, she says:

“By ‘value creation’ I mean the ways in which different types of resources (human, physical and intangible) are established and interact to produce new goods and services.”

So she isn't using the word “value” in the normal way, i.e. to refer to the worth of goods and services (i.e. what the customer is prepared to pay for goods and services). Instead, “value” refers to a process bringing about innovations and inventions.

But the above sentence is immediately followed by this sentence (also highlighted): “By ‘value extraction’ I mean activities focused on moving around existing resources and outputs, and gaining disproportionately from the ensuing trade.”

But that second sentence uses the word “value” in something much nearer the conventional meaning of the word. I.e. it refers to coming by money in an unacceptable way: a monopoly or cartel which exploits its monopoly or cartel powers to make excessive profits is presumably an example.

If you’re starting to get the impression that her book is a car crash, then be warned: it gets worse.

Shortly after the above highlighted passage, there is another highlighted passage, as follows:

“I use ‘value’ in terms of the ‘process’ by which wealth is created – it is a flow. This flow of course results in actual things, whether tangible (a loaf of bread) or intangible (new knowledge). ‘Wealth’ instead is regarded as a cumulative stock of the value already created.”

Now wait a moment. In that second highlighted passage, she appears to be saying that “value” is the wealth production process (e.g. making steel, growing food, etc). Well that’s a lot different to the above “innovation and invention” meaning of the word referred to above!!

A page or two later she says, “If bankers, estate agents and bookmakers claim to create value rather than extract it, mainstream economics offers no basis on which to challenge them, even though the public might view their claims with scepticism. Who can gainsay Lloyd Blankfein when he declares that Goldman Sachs employees are among the most productive in the world? Or when pharmaceutical companies argue that the exorbitantly high price of one of their drugs is due to the value it produces?”

Well clearly having a go at bankers and estate agents will go down well with the more simple minded section of the political left. But on the more serious question as to whether “mainstream economics” is in capable of challenging the claim by bankers, estate agents and others that their activities are worthless, that is just plain nonsense.

Introductory economics text books make it perfectly clear that while the free market price of something is one way of valuing stuff, that method of valuation is clearly a long way from being flawless. The example often given in economics text books is the “nurse and prostitute” example. Some members of the latter profession doubtless get paid more than the former, but it’s blindingly obvious that claiming prostitutes are worth more than nurses is a very dubious claim.

To summarise so far, the opening pages of Mazzucato’s book are nonsense, so I can’t be bothered making much of an effort to get to grips with the rest of the book. But she has nothing to worry about on that score: in economics and some other subjects, as long as you can spew out a string of important, technical sounding terms, you’ll go far. And if you press lefties’ emotional pleasure buttons, which Mazzucato does very well, you’ll go even further.

Tuesday, 17 December 2019

N.G.Mankiw’s criticisms of Modern Monetary Theory.

Mankiw, who is a Harvard Economist, recently published a work criticising MMT entitled “A Skeptic’s Guide to Modern Monetary Theory”.

His first criticism is that MMT advocates are not too clear on exactly what it is they are trying to say. While I have supported MMT for several years, I think that’s a fair enough criticism. As he says, advocates of a new idea often come in the form of a group of academics, while MMT advocates are a much more diverse lot (of which I am perhaps typical). That diversity almost inevitably leads to a less clear message than where just one or two academics advocate an idea. Mankiw is generous enough to say that that diversity is not necessarily a flaw.

Mankiw’s first main error comes in the last para of his second page, where he claims there’s a problem with the MMT claim that governments and central banks can  simply create and spend money (and/or cut taxes) up to the point where inflation becomes excessive. The alleged problem is that that new money ends up as bank reserves and that central banks have to pay interest on money. 

Well the obvious flaw in there is that interest on reserves is not inevitable: in fact it’s a very recent development for central banks. Moreover, many MMTers specifically advocate a permanent zero rate of interest policy. (That’s a permanent, or at least more or less permanent zero rate on government and central bank liabilities, which includes reserves. In contrast, the rate of interest on mortgages, pay day loans etc will of course always be well above zero.)

Mankiw’s second criticism.

His second criticism (top of his p.3) is that the latter increase in reserves will increase bank lending, which in turn will further exacerbate inflation.

Well Mankiw apparently hasn’t noticed that quantitative easing resulted in an astronomic and unprecedented increase in reserves, but the effect on bank lending was decidedly muted. And that is not entirely surprising: as J.K.Galbraith famously put it, “Firms invest when they can make money, not when interest rates are low.” I.e. it’s customers coming thru the door that induces firms to borrow and invest.

Of course QE is not exactly the same as cutting interest rates, but it’s near enough the same. Central banks cut interest rates by creating money and buying up government debt. QE is simply a continuation of that “buy up” process when interest rates are near zero and the “buy up” may not actually influence interest rates. 

And another flaw in Mankiw’s above second criticism is that if there is indeed a feed-back mechanism of the type he proposes (i.e. more reserves means more lending, which raises demand), then the solution is simply to go for less of a “reserve increase” (i.e. a smaller deficit) than would otherwise be the case!

Feed-back mechanisms are all over the place in our daily lives. E.g. getting drunk may cause you to behave in an even more irresponsible way and drink even more. Solution: don’t drink so much that the latter feed-back mechanism kicks in!! 

The third criticism.

Mankiw’s third criticism (also at the top of his p.3) is: “Third, the increase in inflation reduces the real quantity of money demanded. This fall in real money balances, in turn, reduces the real resources that the government can claim via money creation.”

Well the simple answer to that is that if there is excess inflation, there is no need for government to “claim more resources via money creation” (i.e. raise public spending)! Indeed there is no need for it to “claim more resources” in any other way!


I don’t think MMTers need to seriously re-consider their ideas in the light of Mankiw’s criticisms.

Friday, 6 December 2019

Richard Murphy and Colin Hines’s way of funding the Green New Deal.

Murphy & Hines have just published their ideas on this subject in a work entitled “Funding the Green New Deal”.

I’m all for the GND, but Murphy & Hines’s (M&H) way of funding it leaves a bit to be desired. Basically they claim that funds can be nicked from other types of investment: in particular they advocate changing the rules for ISAs and pension funds so that a proportion of the savings currently going to the latter two are diverted to bonds to fund the GND, and certainly that’s possible.

Problem though, is that would starve the banks, firms etc which rely on ISAs and pension funds for money for investment, which would push up interest rates. And that in turn would benefit creditors / the rich while hitting borrowers, e.g. those with mortgages.

That wouldn’t be the end of the world given that in the 1990s UK mortgagors were paying nearly three times the rate of interest they pay nowadays, and strange to relate, the sky did not fall in in the 1990s. But M&H ought to be more open  about that interest raising effect.

The above “rate of interest raising” effect does not actually have anything specifically to do with ISAs or pension funds or any of the many other possible ways of diverting funds to the GND. To illustrate, if government just offered bonds to fund the GND at whatever rate attracted lenders in sufficient quantities, the inevitable effect would be a rise in interest rates and attract funds away from other types of investment.

Put another way, if government decides to borrow and spend an extra £Xbn a year, and assuming the economy is already at capacity (which it more or less is in the case of the UK in 2019), that extra spending is not permissible unless some form of spending cut is implemented so as to balance the extra spending. That cut can be brought about by a rise in interest rates or a rise in tax, for example.

And frankly it does not make a huge difference which one is chosen: if the interest rate rise option is chosen, then in effect it’s mortgagors and other borrowers who are induced to spend less. And mortgagors are pretty much the same collection of individuals as taxpayers, though clearly not exactly the same collection of individuals.

And finally, if the distribution of after tax income is what government thinks is optimum before implementing the GND, then funding the GND via borrowing will disturb that optimum set up (e.g. because mortgagors are worse off). Thus government will have to adjust tax on so called “unearned income” (on the rich) and subsidies for mortgages (if there are any) etc etc. 

Be simpler fund the GND via tax, and in a way to maintains what government thinks is the optimum distribution of after tax income, don’t you think?

Wednesday, 4 December 2019

Why the IMF was so hesitant about stimulus during the recent recession.

As others have noted, the IMF was positively schizophrenic on the subject of stimulus during the recession that started in 2007/8. In one breath they backed stimulus, while in the next, they warned of the dangers of the alleged increased debt that governments incur when they implement stimulus.

The first obvious flaw in the latter “debt” point is that to a large extent, governments just didn't incur more debt when they implemented stimulus! To be more exact, in the first instance they incurred more debt, but then their central banks did large amounts of QE: i.e. they printed money and bought back that debt.

Thus in effect what many governments did (assisted by their central banks) was simply print money and spend it (and/or cut taxes).

Yet strange to relate, the recently retired chief IMF economist, Olivier Blanchard claims here that low interest rates facilitate fiscal stimulus. His actual words: “…..low interest rates increase the room to use fiscal policy.” (See p.4). (Article title: “Interview with Olivier Blanchard”, published by Goldman Sachs).

To repeat, the going rate of interest has absolutely no bearing on the ease with which government can implement fiscal stimulus because (to repeat) governments and central banks between them can fund fiscal stimulus by simply printing money!!!!!

Keynes pointed out in the early 1930s that stimulus can be funded simply by printing money. You’d think his message would have got thru by now, wouldn’t you?

As Claude Hillinger put it in his paper entitled “The Crisis and Beyond: Thinking Outside the Box”:

“An aspect of the crisis discussions that has irritated me the most is the implicit, or explicit claim that there is no alternative to governmental borrowing to finance the deficits incurred for stabilization purposes. It baffles me how such nonsense can be so universally accepted. Of course, there is a much better alternative: to finance the deficits with fresh money.”

Wednesday, 27 November 2019

Some popular misconceptions about the debt and deficit.

Scott Wolla and Kaitlyn Frerking, two St Louis Fed authors, try to enlighten us on the deficit and debt. They make some valid points, but also a few mistakes, which I’ll deal with in the paragraphs below. Their article is entitled “Making Sense of the National Debt”.

The first mistake, which appears in the first two paragraphs, is the idea that government, can increase everyone’s consumption by borrowing, just like a household can temporarily bring about a increase in its consumption by borrowing to go on a world cruise or buy an expensive new car, and do that via borrowing. The authors say:

We live in a world of scarcity—which means that our wants exceed the resources required to fulfill them. For many of us, a household budget constrains how many goods and services we can buy. But, what if we want to consume more goods and services than our budget allows? We can borrow against future income to fulfill our wants now. This type of spending—when your spending exceeds your income—is called deficit spending. The downside of borrowing money, of course, is that you must
repay it with interest, so you will have less money to buy goods and services in the future. Governments face the same dilemma. They too can run a deficit, or borrow against future income, to fulfill more of their citizens' wants now.”

Unfortunately the world of macroeconomics (e.g. the world of government and the economy as a whole) is very different from microeconomics (which is concerned with individual products, households, firms, etc).

Assuming the economy is at capacity, if government spending is $X more than income, excess inflation will ensue unless there’s an $X CUT in spending elsewhere. Unfortunately borrowing $X won't cut spending all that much. In fact it might not cut it at all. Reason is that it’s the rich who lend to government, and the rich don’t change their weekly spending much in reaction to a change in their stock of cash. In fact, given that they won’t lend to government unless they think they’ll make a profit in the long term, they may actually spend that profit before it crystalizes, i.e. raise their weekly spending!!

Thus in the later “borrow and spend” scenario, government and/or central bank has to find some way of supressing demand to balance the increase in demand coming from the “borrow and spend” exercise. Most commonly the central bank, as soon as it spots the above deficit will raise interest rates. Or it may wait till the above mentioned excess demand and inflation actually materialises before raising interest rates. But the exact timing is not of importance to the basic point being made here.

Thus it just isn't possible, in the words of the St Louis Fed article, for government to arrange for the country as a whole to   “consume more goods and services than our budget allows”. For example, in the case of the above interest rate rise, that will dissuade people from buying new or bigger houses, which of course amounts to consuming FEWER goods.

 Borrowing from abroad.

Having said all that, there is one slight reservation that should be made, which is that if a government borrows from abroad rather than from its own citizens, that will enable the relevant country to consume more than it produces for a while. E.g. if China supplies the US with goods, while the US abstains from paying cash on the nail, and borrows from China instead, that will give the US a temporary increase in living standards.

But only a minority of most countries national debt is funded from abroad, so that point is of limited relevance.

Interest on the debt is an opportunity cost?

The authors’ second error is in the passage starting “However, this does not mean that debt is without cost. It is important to understand that debt has an opportunity cost.”

In fact interest on the debt is simply a transfer from one lot of people to another: it’s a transfer from taxpayers (who fund the interest) to holders of government debt. Now why would that have any influence on government’s ability to “finance other projects”?

Clearly the money grabbed off taxpayers is an opportunity cost in the sense that it then becomes more difficult to grab yet more money off those taxpayers. On the other hand, debt holders are better off in that they’ve received the money grabbed of taxpayers, so it is then easier to milk those relatively well off people. All in all, I suggest there is not much of an “opportunity cost” there.

Put another way if government grabbed $Xbn a year off males and gave the money to females (or vice versa), GDP would remain much the same, and hence government’s ability to “finance other projects” would remain much the same.

Growth in the debt is unsustainable.

Next, the St Louis Fed authors trott out a common concern about the debt, namely that if it’s growing faster than GDP in real terms, that is clearly not sustainable in the very long term, which (allegedly) is a problem.

Well now an accelerating car is an “unsustainable” system: it cannot  go on accelerating indefinitely. That’s first because of speed limits on roads, and second, there’s a physical limit to the speed of any car (determined by its engine size and other factors.)

So are accelerating cars a problem? Well clearly not, because there are (to repeat) natural limits to the speed of a car.

And much the same applies to the debt. That is, while the amount of debt that the private sector wants to hold my rise steadily over a period of years or even decades, there must be some sort of limit that the average household wants to hold (either directly or via pension funds and similar).

To illustrate, if someone on average wages discovered they had ten million dollars of government debt, would they just carry on accumulating it, or would they cash it in at the earliest possible opportunity and go on a bit of a spending spree? I think I know the answer to that.

Conclusion: there are natural limits to the amount of debt the private sector will want to hold.


Under the heading “Debt Risks”, the St Louis Fed  authors then worry about the possibility of a government defaulting on its debt when the debt gets sufficiently large and the private sector starts to doubt government’s intention to repay its debt, with the result that debt holders then start demanding a much higher rate of interest for holding debt.

Well the solution to that problem is easy. If interest demand does rise significantly, government can just tell debt holders to get lost when their existing debt matures. In effect, that equals QE.

Of course that would result in former debt holders having a larger stock of cash than previously, which might result in excess inflation (although the actual effect of QE in recent years does not seem to have been inflationary). But if excess inflation does loom, all government has to do is raise taxes. That will produce a deflationary effect to counter the above mentioned inflationary effect.

Nothing difficult in principle there.