Economic fluctuations since 1870.

This chart is from a Financial Times article by Samuel Brittan. Fluctuations seem to have moderated a bit since the 1800s. The chart appeared on the hard copy version of the article but not on the internet version.

The economics of degrees.

A report in today’s Guardian cites an Office for National Statistics (ONS) study which shows that those with degrees earn more than those without. As is entirely predictable, someone then jumps to the conclusion that this shows that getting a degree is worthwhile.

In this case, it is Nicola Dandridge, chief executive of Universities UK – at least she very much seems to imply that the ONS study demonstrates that getting a degree pays off.

The problem with the above line of argument is thus. Those with degrees tend to come from stable and/or middle class backgrounds, and these sort of people tend to earn more even when they DON’T have degrees. Thus to prove to what extent having a degree pays off financially, it is necessary to control for family background: something the ONS study does not do.

The only study I know of that DOES control for family background shows (as might be expected) that getting a degree DOES pay off, but the pay-off can be undramatic. In particular arts degrees for men are a waste of time from the purely commercial point of view.

As if to prove the point, the above Guardian article features a picture of a male graduate wandering the streets with a placard saying “Job wanted. History graduate. University of Kent. Interview me.”


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Stiglitz doesn’t get Modern Monetary Theory.

Joseph Stiglitz wrote an uninspiring guide to reducing the deficit at the end of last year. Here is guide to the main ideas in the paper.

He gives seven main ideas, starting on page 1.


Brainwave No 1.

The first idea is to go for “Public investments that increase tax revenues by more than enough to pay back the principle plus interest reduce long-run deficits.”

One flaw in that idea is that worthwhile public investments (and private investments) should be being made ANYWAY – regardless of whether we are in a recession or not.

The second problem is that if the investment “increases tax revenues by more than enough to pay back the principle plus interest…” then the investment will withdraw cash from the private sector. In a balance sheet recession that’s plain daft. Or in MMT parlance, the last thing that needs to be done in a recession is to reduce private sector net financial assets.

Thirdly, public sector investments often require specialised labour, e.g. highway or bridge construction. A dramatic increase in public sector investment in a recession could be plain impossible or difficult for lack of the relevant skilled labour. But even if it is possible, to dramatically expand one sector of the economy, only to contract it again come the recovery simply distorts the labour market: hardly desirable. The distortion has to be unwound come the recovery.

Stiglitz then enlarges on this public sector investment idea under item A in his page 2. Here he claims that public sector investments during a recession a good idea because interest rates are currently low.

Well hang on. WHY are interest rates low? It’s because the government / central bank machine has DELIBERATELY lowered them! And those low interest rates have been lowered by printing money and buying government debt.

So Stiglitz is saying government should borrow the stuff (i.e. money) which government itself has produced. Well now, why go to all the trouble of dishing out money to the private sector only to borrow it back again????

It would be much simpler just to print money and spend it (in a recession), which is what MMT advocates!!!

His next reason under item A for public investment is that given high unemployment, the multiplier from such investment will be high. True. But the same goes for any sort of spending, so this is not specifically a point in favour of investment!

MMT beats Stiglitz yet again: MMTers tend to favour payroll tax reductions in a recession. Having expanded the economy via such payroll tax reductions, a portion of the expanded economy will doubtless end up in the form of extra public sector investment. But that’s by the by.


Brainwave No 2.

Stiglitz’s second brainwave is that “It is better to tax bad things (like pollution) than good things (like work).” Revelation of the century! There was me wondering why we tax alcohol. Now I know.


Brainwave No 3.


His 3rd idea is that “Economic sustainability requires environmental sustainability. The polluter pay principle—making polluters pay for the costs they impose on others—is good both for efficiency and for equity.”

Quite right, but what’s that got to do with deficits or recessions? Absolutely nothing. Again, the above principle applies recession or no recession.


Brainwave No 4.

This is that “Eliminating corporate welfare is good both for efficiency and for equity.” True, but for the umpteenth time, this has nothing specifically to do with recessions or deficits.


Brainwave No 5

This is “Given the increases in inequality and poverty and given the inequitable nature of the 2001 and 2003 tax cuts, the incidence of any tax increases should be progressive, and there should be no increases in the tax burden on the poorest Americans.”

At last: an idea with a small amount of logic! The inequality point is irrelevant in that optimising the level of inequality is a valid aim recession or no recession. But the idea does have a small amount of logic in that the poor have a higher propensity to spend income increases than the rich. Thus transfers of money from rich to poor would be stimulatory. But as far as I can see Stiglitz has not grasped the latter “stimulatory” point: at least I can’t find it in his paper.


Getting technical.

But even the above stimulatory effect of transferring money from rich to poor is a feeble saving grace for this paper. Reason is that it is a classic example of the “bang per buck” argument – the idea that there is some merit in getting as much employment as possible from each dollar spent.

The latter apparent merit is not actually a merit at all because the process of government creating dollars and spending them is virtually costless in real terms. The only important question is: what are the REAL effects of the different options available? The number of dollars that need to be created and spent to effect each option is irrelevant.

As Abba Lerner put it (p.39) "government fiscal policy, its spending and taxing, its borrowing and repayments of loans, its issue of new money and its withdrawal of money, shall all undertaken with an eye only to the results of these actions….” (the italicisation of the word “results” is in the original).

Stiglitz’s paper thus consists of a series of random ideas, most of which are no good. But when it comes to the one idea that is half valid, the author does not seem to realise why it is half valid.

I’ve had enough. I’m can’t be bothered reading beyond Brainwave No 5.



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Anti fractional reserve banners on streets of Newcastle.

We set up in the shadow (literally and metaphorically) of Grey’s monument.

Grey was a leading light of the Great Reform Act of 1832 which cleaned up some of the corrupt practices in parliament. He’ll be turning in his grave . The inscription on the monument reads:

This column was erected in 1838 to commemorate the services rendered to his country by Charles Earl Grey,K.G. who during an active political career of nearly half a century was the constant advocate of peace and the fearless and consistent champion of civil and religious liberty. He first directed his efforts to the amendment of the representation of the people in 1792, and was the minister by whose advice, and under whose guidance the great measure of parliamentary reform was, after an arduous and protracted struggle safely and triumphantly achieved in the year 1832.



Plenty of interest in the banners. The daughter of a professor who has done a podcast for Positive Money spotted us and gave us some moral support. And a fellow who helped start a credit union in London stopped for a chat.

Full versus fractional reserve arguments on the streets of Durham, UK.

I set up a couple of anti fractional reserve banners on a street in Durham yesterday. We handed out some leaflets from Positive Money and the Money Reform Party. Both the latter are opposed to fractional reserve. There was plenty of interest.

Even though the university term does not start for a few weeks yet, three or four students who were doing economics came up to us and asked questions.

Expect full versus fractional reserve riots on the streets of North East England in the coming weeks. There were no riots here over the last two weeks. We Geordies don’t go in for your common or garden type of riot: looting and all that. But we get very worked up about more intellectual stuff.



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Krugman on MMT.

I have far more respect for Krugman that for some of the time wasters who claim to be professors of economics – Rogoff and Martin Friedman for example. However, there is just one little nit I’d like to pick with Mr K.

In reference to MMTers he says “I’m not clear on whether they realize that a deficit financed by money issue is more inflationary than a deficit financed by bond issue.” Well thanks Mr K., I’m well aware - e.g. see my last paragraph here.

And from November last year, see here (see paragraph under the para in red). Coincidentally, the latter post deals with some of Martin Feldstein’s nonsense.



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Two points which advocates of “make work” / job guarantee type schemes often don’t get.

The “make work” or “job guarantee” idea has been around for centuries, if not thousands of years. (Pericles advocated or implemented the idea in ancient Athens.) MMTers tend to call the idea “job gurantee” (JG). But the idea has flaws, as follows.

First there is the idea that because the schemes involve public sector type output, no increase in demand is required, hence there is allegedly no inflationary effect.

The latter idea would be valid if the wage paid is the same as unemployment benefit and the only factor of production involved was otherwise unemployed labour (i.e. relatively unskilled labour). But any form of employment that involves only unskilled labour and no permanent skilled labour or materials or capital equipment will be hopelessly unproductive. Ergo finite quantities of the latter other factors of production (OFP) must be employed.

But JG is caught between a rock and a hard place here, as follows. If little OFP is employed, JG will be very unproductive. But the more OFP is employed, the more JG becomes the same as a normal public sector employer. And if JG becomes near indistinguishable from a normal public sector employer, then arguments will arise (trade unions or no trade unions) as to why the pay and perks of JG employees are any different to those of normal public sector employees.

Also, ordering up OFP from the rest of the economy (assuming the economy is at capacity) will be inflationary, so that destroys the “no inflationary effect” idea. Alternatively, if the inflationary effect is dealt with by reducing demand for the rest of the economy, then JG jobs will be AT THE EXPENSE OF regular jobs: not the object of the exercise.

A possible escape from the above dilemma might seem to come where the economy is well BELOW capacity. But in this scenario, JG is not the best solution for the problem: the best solution is to raise demand. That’s what I call a “rock and hard place scenario”.


Are JG schemes are productive?

Make work schemes can be reasonably productive, given very high unemployment, and JG enthusiasts sometimes cite this as evidence that JG schemes can ALWAYS be productive. Examples of relatively productive JG type schemes include the Jefes program in Argentina and the WPA scheme in the US in the 1930s.

Re the WPA, Jonathan Kesselman in a Brookings Institution book called “Creating Jobs” (editor: J.L.Palmer) claims there is evidence that WPA schemes in New York state were 75 – 90% as efficient as their regular private sector equivalents.

Certainly given very high unemployment, JG has relatively few problems. For example there will be a good availability of skilled labour. Plus any OFP ordered up from the regular economy will not be inflationary because the economy is not near capacity.

Unfortunately the above points are not a merit in JG, because (as mentioned above) given very high unemployment, it ought to be possible to go for a much better way of reducing unemployment, namely raising demand!


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In a fiscally united Europe, would core countries subsidise the periphery?

Philip Pilkington (PP), a journalist and writer based in Dublin, has an article on the Naked Capitalism site attacking Otmar Issing (former member of the ECB’s executive board.). As far as I’m concerned it’s game, set and match to Otmar Issing.

PP tries to argue that the core does not subsidise the periphery.

To back his point PP implores us to take a “proper macroeconomic perspective”. OK by me. Unfortunately his article contains far more blarney than macroeconomics.

PP’s main point (towards the end of the article) is that Germans are privileged to be able to sell stuff to Ireland, Greece, etc because it keeps Germans employed. And without such a market, Germans would have to go for greater internal consumption in Germany, i.e. run a larger deficit. And Germans abhor deficits because of the Weimar episode.

The answer to the latter point is that if Germans have the same blinkered attitude to deficits as currently exists in Congress, then Germans (like members of Congress) need to study economics. Having done that, they’d have no problem at all doing without Greeks, the Irish or other periphery states.

But arising from the latter argument, there is the question, given a true fiscal union in Europe, of whether relatively high unemployment in periphery, core taxpayers would in effect be subsidising the periphery. Well it’s pretty obvious they would. And the solution to this problem would be, as it is now, to make the periphery more competitive: i.e. cut real wages in the periphery. That way, unemployment levels would be more or less the same in every country, thus no country would subsidies another.



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More drivel from Kenneth Rogoff.

I pointed to some nonsense emanating from Rogoff here a few days ago. It never rains, but it pours. There is more Rogoff nonsense in the Financial Times a few days ago.

Along with many of the economic illiterates in high places he thinks that more deficit means more debt. See para starting “Everyone agrees that….” The reality is, as both Keynes and Milton Friedman pointed out, that a deficit can perfectly well accumulate as more monetary base rather than more debt.

For Keynes, see 2nd half of 5th para. And for Friedman, see p.250 para starting “Under the proposal…”

Then in the same paragraph Rogoff trots out the old nonsense that higher debt requires higher future tax in order to pay back the debt, which induces households to spend less.

This is a bizarre idea. That is, the idea that the average household pays careful attention to deficit and taylors its weekly spending accordingly is on the face of it pure lunacy. But it might just conceivably be right – however decent empirical evidence is needed to back bizarre ideas, and no evidence has ever been produced to back this idea, as far as I know.

But academics are not too interested in reality: their main concern, all too often, is to keep themselves employed at your expense dreaming up and discussing totally unrealistic ideas. It’s counting angels on pinheads all over again.

Such empirical evidence as there is on the above point actually contradicts the “future tax” idea, as far as I can see. The latter idea is based on the assumption that households try to even out their weekly spending over several years: that is, that they do NOT spend a significant proportion of windfalls. The evidence actually contradicts this. That is, households DO SPEND a significant proportion of temporary increases in their income fairly quickly. See here, here, here, and here.

Whether the deficit accumulates as extra debt or extra monetary base, it is of course POSSIBLE that the debt or base will need reining in via extra taxes. It is equally possible that they WON’T need reining in. For example if the economy expands at a decent rate over the next few years then the debt, relative to GDP will decline.

A second factor which tends to reduce the need to raise taxes so as to rein in debt or base is thus. The debt and base HAVE TO BE INCREASED in nominal terms if they are going to remain (for the sake of argument) constant relative to GDP in REAL terms. That’s because of the effect of inflation. Thus EVEN IF THE ECONOMY DOES NOT GROW, then long term, there STILL might be no need to raise taxes to rein the debt or base.

But that will all be way above Rogoff’s head.

As to the idea that the debt needs reining in because of those allegedly enormous interest payments, interest on national debts has for a long time more or less equalled inflation. Thus in real terms, no interest is paid by most countries on their debt. Most countries never have paid any significant interest in real terms on their debt.

That’s another simple point way beyond the comprehension of Harvard economics professors, like Rogoff and Martin Feldstein.

But anyway, let’s suppose that inflation gets uppity in two years time and that taxes ARE raised so as to rein in the monetary base. This taxation simply removes money from private sector pockets that the private sector effectively cannot spend anyway, because if the money WAS spent, it would just stoke inflation. Thus this confiscation of money from the private sector does NOT make anyone worse off. It does not equal austerity.

It is thus completely pointless for private sector entities to save now so as to be able to pay this tax. If they save now, the effect would be deflationary, which would mean that said tax would not be necessary!!! Or put it more accurately, every dollar that the private sector saves now so as to be able to pay the future tax, reduces the amount of that tax by about one dollar.

But frankly that’s all three miles above the head of the average consumer and six miles above Rogoff’s head.


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Joseph Stiglitz has a bright idea.

One of our main economic problems is economists who are household names, perhaps because they won a Nobel Prize twenty years ago, but who now well past retirement age, and totally devoid of any ideas as to how to get out of the current mess. Indeed it is these economists who are part responsible for the system that gave us the credit crunch and the tens of millions who are now unemployed in consequence.

Three of the main perpetrators are Joseph Stiglitz, Kenneth Rogoff and Martin Feldstein.

Stiglitz’s “bright” idea in a recent article in the Financial Times for curing our problems is to make “high-return investments”. Wow! Well if the private sector could see any potential “high-return investments” the private sector would be making such investments!

As to the public sector, if these bizarre “high-return investments” exist, they presumably existed before the crunch. Why weren’t those investments being made then?

Put another way, a public sector investment should be made if it makes sense. The fact of being in a recession or boom is almost immaterial. Moreover, the sort of labour and equipment needed to make public sector investments (education, road building, etc) is pretty specialised. You just cannot produce a thousand economics teachers, or experienced highway construction engineers at the press of a button.

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Oh my God - David Cameron, the UK’s premier, thinks the UK government doesn’t have money to “kick start” the UK economy.

On 26th July, The Times had an article entitled “No money for a kickstart, says Cameron”. The first paragraph reads, “David Cameron warned yesterday that the Government lacks the economic firepower to boost growth as fears mounted over the global recovery. He went on to claim that “the public finances were too strained to allow the Government the possibility of injecting extra life into the troubled economy.”

Inflation might be a constraint on growth, but the idea that the government of a monetarily sovereign country can be short of money is pure nonsense.

In the unlikely event of anyone being interested in Cameron’s ideas on economics, this should be an inspiring read: it’s an article in the Independent newspaper entitled “Why are we silent as Cameron preaches voodoo economics?”


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Rogoff’s lunatic Zimbabwe style solution for the recession: boost inflation.

Rogoff claims that the recession is caused to significant extent by indebted household’s reluctance to spend. So far so good. Well to be more accurate, it’s not household debts that are the problem: it’s household NET ASSETS that are the problem. I.e. households whose debts exceed the value of their assets have BIG problems. Keep that phrase NET ASSETS in mind.

Rogoff’s solution is to inflate away those debts.

The first problem is that it would require five or ten years of seriously excessive inflation to really cut into household debts.

Second, he overlooks the point that inflation also erodes the value of creditors’ assets! In particular, the monetary base and government debt are ipso facto private sector ASSETS. And if the value of those assets is eroded, that will reduce the NET ASSETS of the private sector in general. Oops! Wasn’t it a lack of household net assets that is the root of the whole problem?

Congratulations to Rogoff for jumping out of the frying pan into fire. Just brilliant. No wonder he’s got a job teaching economics at Harvard.

A better solution (wouldn’t you know it) is the standard MMT solution. That is, have the government / central bank machine create new money and spend it into the economy. That is spend it into the economy IN GENERAL, rather than channel the new money in any particular direction (like into the pockets of Wall Street banksters or owners of government debt (QE)).

The inventor Thomas Edison said that any new money should be the property of the people, not of bankers. He was right.

As for the knee jerk reaction that “new” or “printed” money will cause inflation, well if it does, then that’s no worse than Rogoff’s “deliberate inflation” policy. In any case, if the expanded money supply is just enough to give some stimulus, but no so much as to cause gross excess demand, then there won’t be any excessive inflation.

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Afterthought (12 hours after putting the above online): I should have mentioned that transfer of wealth from creditors to debtors WOULD work in that the weekly spending of the poor is more sensitive to their income and net asset changes than is the case with the rich – not that Rogoff seems to have tumbled to that point. However that’s not much of a saving grace for the Rogoff “Zimbabwe” solution.

Afterthought Sept 20th. Paul Volker in the NY Times rails against the pro-inflation lobby.


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