Wednesday, 15 April 2015

Martin Wolf keeps repeating Summers’s secular stagnation nonsense.

Martin Wolf is the Financial Times chief economics commentator and he is my own favourite economics commentator (an accolade which is of course much more important than the above FT one). But he goes off the rails in today’s FT.

His basic claim is that, “Output . . . is financially unsustainable if generating enough demand to absorb the output of the economy requires too much borrowing or real rates of interest that are far below zero.” Wolf actually attributes that idea to the latest IMF World Economic Outlook. But I’ve been through that IMF document and while there is material that hints at the latter “unsustainable” idea, I couldn’t find anything very specific. But never mind.

The important point is that the above “unsustainable” argument is plain wrong and the flaw in it is simple and is thus. Demand CAN BE generated by cutting interest rates, but it’s not the only way. One of the alternatives is simply to have the state create and spend new money into the economy (and/or cut taxes). Indeed, that’s exactly what we’ve done over the last three years or so. That is, we’ve implemented fiscal stimulus (government borrows money, spends it and issues bonds to its creditors), and followed that by QE (the state prints money and buys back those bonds). That nets to “the state prints money and spends it, and/or cuts taxes”.

Indeed, the latter method of implementing stimulus is exactly what the leading advocate of Modern Monetary Theory, Warren Mosler, proposes in his “Mosler’s law”. That law reads “There is no financial crisis so deep that a sufficiently large increase in public spending cannot deal with it.”

The above Wolf idea, namely that there is nothing government can do to increase demand when interest rates are zero is exactly the fallacious point that Lawrence Summers made in his original “secular stagnation” speech to an IMF audience in 2013.

As Summers put it, “But imagine a situation where natural and equilibrium interest rates have fallen significantly below zero. Then, conventional macroeconomic thinking leaves us in a very serious problem…”. Er no. There is NO PROBLEM there whatever. As to “serious problems”, forget it.

Actually it’s not entirely clear what Summers is trying to say, but in as far as his speech is decipherable, I go along with the summary of it set out by Gavyn Davies in the Financial Times.

As Davies puts it, “In a largely unsuccessful effort to close the gap, the central banks have created asset price bubbles (technology stocks in the late 1990s, housing in the mid 2000s and possibly credit today), since this has been the only means available to boost demand.”

I.e. Davies seems to be saying that central banks have cut interest rates to near zero (which has created “asset price bubbles”). Plus Davies confirms that what Summers seems to suggest is that interest rate cuts are the “only means available to boost demand”, to quote Davies. That is nonsense.

The reality (as MMTers keep pointing out) is that a government which issues its own currency can choose any combination of interest rates and stimulus it wants. For example with a view to escaping zero rates (which according to the IMF, Martin Wolf and Summers is some sort of horrendous problem), such a country just needs to proceed as follows.

First print and spend large dollops of money into the economy (and/or cut taxes). That will raise the private sector’s stock of money (base money to be exact). And there has to be some point at which (as MMTers keep pointing out) the private sector has so much money that interest rates have to be raised in order to prevent aggregate spending rising too far and sparking off excess inflation.  Moreover, the latter strategy can in principle be used to raise BOTH stimulus AND interest rates as far as you like. And what’s nice about that solution is that it disposes of the asset price bubbles (if you believe they’re a problem).

It should of course be said that while the latter strategy is a very simple solution IN PRINCIPLE to the problem that Summers, Wolf etc seem to think is insoluble, that does not mean that actually implementing the strategy would be all plain sailing. But then steering a course between excess inflation and excess unemployment is NEVER EASY!!!

Another possible criticism of the above “print money” strategy is that it is arguably a classic example if the very problem to which Wolf alluded in the quote at the outset above. That is, Wolf says that a boost to the economy is not “sustainable” if it involves much more borrowing or a much lower interest rates than we’re used to. Likewise it could be argued that issuing larger amounts of base money than has hithertoo been the norm, is not “sustainable”.

Well the answer to that is that just because something is unusual by historical standards, that does not mean it is unsustainable. It could be the new norm. To illustrate, if the citizens of some European or North American country took to accumulating large stocks of saving like Japanese households do (in the form of base money and/or government debt) then the government of that country would just have to accommodate that desire to save by running a relatively large deficit for several years, and thus letting private sector savings build up.

Doing that, while it does have obvious risks, is better than making no attempt to boost demand and thus having an excessive proportion of the workforce condemned to unemployment.

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