Commentaries (some of them cheeky or provocative) on economic topics by Ralph Musgrave. This site is dedicated to Abba Lerner. I disagree with several claims made by Lerner, and made by his intellectual descendants, that is advocates of Modern Monetary Theory (MMT). But I regard MMT on balance as being a breath of fresh air for economics.
Boom Finance and Economics makes a bizarre claim about debt and money. They claim that the existing form of money comes in the form of debt (correct) and that there is not enough debt to enable us to expand the money supply sufficiently (incorrect). Scroll down a bit on the right hand column where they say:
“Our aged monetary system where almost all new money is created as debt in bank loans is saturated and unable to respond effectively. In essence, the advanced economies have simply run out of sufficient borrowers to continue to adequately expand the money supply.”
So how much debt is there in total? Well in the UK, SME trade debts alone come to three times GDP. Then there’s big firm trade debts to add to that – another two times GDP? Then there’s household debts – very roughly equal to GDP. Plus there’s national debt – also very roughly equal to GDP.
Grand total: VERY ROUGHLY five, six or seven times GDP.
In contrast, the amount of money households need will be VERY ROUGHLY enough to tide them over from one monthly pay cheque to the next: i.e. very roughly one tenth of GDP. Double that to cater for the money needed by employers.
So…. total amount of debt is VERY ROUGHLY thirty times the amount of debt.
There are mistakes and there are mistakes. But being out by a factor of about thirty is pushing it!!!!!!!
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P.S. (an hour after the above went online). Moreover, the popular claim that “without debt there’d be no money” is not actually true. That is, if all players in the economy were simply after some form of money, but didn’t want to go into any sort of long term debt, the existing bank system could easily do that. Reasons are here. (But that's not to suggest that I back privately created money. I back full reserve banking, a system under which only the state creates money.)
Prof Werner (who I normally agree with) makes the bizarre claim in this video that the money which people deposit in banks is not owned by those depositors (around 51.30).
Let’s think about that. If I deposit £X in a bank, and assuming the money goes into an instant access account (or “checking” account, to use US parlance), then I am entitled to demand that £X back at any time (e.g. via an ATM). And if the bank doesn’t meet my demands, I can sue the bank.
Now I’d guess that about 99% of the population understand that to mean that the depositor “owns” the £X. And the word “own” like every other word in the English language means what most people understand it to mean. So in exactly what sense is the £X put into a bank not “owned” by the depositor? I’m baffled.
Put another way, the depositor has COMPLETE AND TOTAL CONTROL over the £X. And “complete and total control” equals “ownership” as the word “ownership” is understood by 99% of the population.
Werner then claims that the deposit is not a deposit, but that it’s a “loan” to the bank. Well, yes it is indeed a loan. But lending something and owning it are not mutually exclusive: if I lend someone my car, I remain the owner of the car don’t I? Why I’m even having to discuss this stuff is a mystery.
Another point is that if my £X goes into a TERM ACCOUNT rather than a current / checking account (i.e. if I give up any right of access to the money for a month or two), then that’s more in the nature of a loan. But that’s what might be called a “shade of grey” point. The fact that one type of deposit is more “loanish” than another isn't important.
Banks don’t lend money?
Next, Werner makes another bizarre claim, namely that “banks don’t lend money” (around 52.40). Well let’s think about that.
Money is defined in economics dictionaries as something like “anything widely accepted in payment for goods and services”. Now if I get a loan for £Y from a bank, I can then use that £Y to buy goods and services without any great problems. So… the bank has supplied me with money! Doh!
Moreover, I’ll have to repay the £Y at some stage. When person A supplies you with item B which you have to return to A at some stage then person A has loaned item B to you – as 99% of the population understand the word “loan”.
Richard Murphy is the brains behind peoples’ QE, though it’s debatable as to how appropriate the word “brains” is. (Incidentally peoples’ QE is the idea that the state should print money and spend it on infrastructure.)
Anyway, the latest pronouncement from the high priest of PQE is that PQE is appropriate for Britain because the Murphmeister (as Tim Worstall calls Murphy) has decided the Britain needs more investment, whereas PQE is not appropriate for China because China has an excess amount of investment. I smell confusion of issues.
He says that printing money and spending it on a general increase in demand is not appropriate because: “…if we were to do it almost all the benefit would flow to China via a short term spending spree with no long term benefit to the UK at all.”
Well you wouldn’t think it, but Murphy is an accountant. And as every clued up accountant knows, when there’s an increase in demand for anything, that induces a proportion of relevant producers to invest more! Put another way, when applying to a bank for a loan to make an investment, there’s nothing that induces the bank to make the loan like the sight of hoards of customers coming thru the front door.
Thus the suggestion that a general increase in demand does not lead to more investment is plain nonsense.
That “more demand leads to more investment” point certainly applies to the PRIVATE sector. But it should also apply automatically to the PUBLIC sector, assuming those who do investment appraisal in the public sector know what they’re doing.
Moreover, while obtaining the funds for investment from printed money rather than money obtained by borrowing (or tax) may have some effect on the amount invested by the PUBLIC sector, the decision to implement one option or the other probably has NO EFFECT AT ALL on investment in the PRIVATE sector.
Do we need more public sector investment?
And where is the overwhelming clear evidence that we need loads more public sector investment? There’s a huge amount of debate over whether the proposed £30bn HS2 rail project in the UK is worthwhile. As to roads, the traffic flows pretty freely on 90% of roads 90% of the time in the UK. Of course that’s not the case in rush hours. But then if you build so much road that traffic flows freely in rush hours, then there’s over-capacity at other times.
As for the channel tunnel, the original investors have lost nearly all their money.
One of the biggest investment items in any country is housing. In the UK there’s certainly a shortage of housing, but the reasons for that shortage are complex and much disputed. One of the favorite explanations is local government refusal to allow building on agricultural land brought about by pressure put on local governments by people living in agricultural areas who don’t want loads of new houses in their area.
Thus it’s not clear that funding state owned houses by “print and spend” rather than “borrow and spend” or via tax would make any difference.
In this article in the Sydney Morning Herald he claims we face a monster problem which (to quote) is as follows: “Citizens demanded and governments allowed the build-up of retirement and healthcare entitlements as well as public services to win or maintain office. The commitments were rarely fully funded by taxes or other provisions.”
Well I have terrible news for him: in the UK and several other European countries the state pension isn't “funded” AT ALL. Never mind not “fully funded”: to repeat, several state pension schemes are not funded AT ALL. And worse still, nor is the state health care system. That is, both schemes are what’s called “pay as you go”. I.e., this year’s pensions and healthcare costs are paid out of this years tax. Also both systems in the UK are supposed to be funded out of a payroll tax called "National Insurance". But no one is too bothered about whether NI fully covers the cost of the NHS and the state pension. That is, if part of the cost of the UK's National Health Service and state pension comes from other taxes, who cares? Why does that matter? So there are two senses in which those two systems are "unfunded" or not fully funded. Horrors.
But that system basically works. Of course there are constant arguments over how generous the state pension should be and how much we should spend on the NHS. But basically, to repeat, the system works.
Moreover, the NHS is clearly more efficient than the US largely private health care system.
Even more ridiculous is the claim by Satyajit Das that: “The 2008 global financial crisis was a warning of the unstable nature of these arrangements.” (“These arrangements” being not fully funded health and pension systems).
So the financial crises in the UK was caused by the unfunded NHS and state pension system? My guess is that about 99% of the population will tell you the crisis was down to irresponsible behavior by banks and that the crisis had precisely nothing to do with the NHS or the unfunded (shock horror) state pension scheme. And my guess is that 99% of the population are right.
Ann Pettifor writing in The Independent claims that the fact that total private and public debts in China are 250% of GDP is a problem.
The first problem there is that UK public debt (never mind private debt) just after WWII was also 250% of GDP, but that didn’t cause any obvious problems in the 1950s or 60s, during which period, that debt gradually declined. (Compare that with the fact that in the US and UK half the population are having a nervous breakdown over the fact that public debt is approaching 100% of GDP, and you’ll realise you’re living in a mad-house, if you didn’t already know that)
But there’s worse to come. In fact you may need to tighten your seat belt. According to this source, UK SME trade debts are nearly three times GDP. So if we add to that the trade debts of LARGE enterprises, then presumably the total will be five or six times GDP.
Then there’s UK household debts which like several other countries are roughly equal to GDP. And UK government debt which is approaching 100% of GDP, as mentioned above.
So we can be pretty sure that total UK debts are up to the 600% level. However, I’ll be sleeping soundly.
My main objection to those debts is the role played by banks in organising them, i.e. intermediating between borrowers and lenders, and the fact that banks are subsidised.
If government (i.e. taxpayers) are IN NO WAY ON THE HOOK for debts, then all and sundry can lend as much to each other as they like. And if some of them make silly choices and go bust as a result, I couldn’t care less, cynical old me.
I'm not in 100% agreement with Krugman's ideas in this article which argues for more national debt. But note that this is a thought provoking article: to illustrate, Warren Mosler responds to it, as does Winterspeak.
Krugman says (his words are in green italics):
“Believe it or not, many economists argue that the economy needs a sufficient amount of public debt out there to function well. And how much is sufficient? Maybe more than we currently have. . . . . . But the power of the deficit scolds was always a triumph of ideology over evidence, and a growing number of genuinely serious people — most recently Narayana Kocherlakota, the departing president of the Minneapolis Fed — are making the case that we need more, not less, government debt.
Why?
One answer is that issuing debt is a way to pay for useful things, and we should do more of that when the price is right. The United States suffers from obvious deficiencies in roads, rails, water systems and more; meanwhile, the federal government can borrow at historically low interest rates. So this is a very good time to be borrowing and investing in the future…”
The first problem with the above passage, and this is not a very serious objection, is that funding infrastructure and other public investments is NOT NECESSARILY best done by borrowing. Kersten Kellerman in the European Journal of Political Economy argued that public investments are best funded via TAX rather than government borrowing.
Second, the idea that more public investment is justified because interest rates are low is a popular one, but it’s not a strong argument. Reason is that when considering an investment, the important rate to look at is the AVERAGE rate that will have to be paid over the life of the relevant asset, and that can be a century or more.
Of course it’s very difficult to predict that average rate. But certainly the fact that rates have recently dropped is not an argument for assuming those low rates will last for the next century. Perhaps some sort of rolling average rate over the last half century would be appropriate.
MMT and private sector net financial assets.
Next, Krugman argues that the private sector may need an increased stock of what he calls “safe assets”. Advocates of Modern Monetary Theory have long shared that view, or something similar. That is MMTers have long drawn attention to the fact that the private sector’s tendency to spend must vary with its stock of net paper assets or “Private Sector Net Financial Assets” to use MMT parlance. And PSNFA consists of base money and government debt. (Incidentally, Mosler, Winterspeak and yours truly are all MMTers)
However, is there any particular reason for the private sector to be provided with a stock of INTEREST YIELDING PSNFA as opposed to “non interest yielding” PSNFA? Or to put it figuratively, is there any reason why taxpayers should have to pay interest to those who choose to hold a relatively large stock of dollar bills under their matresses? Clearly not.
Thus while I don’t speak for every MMTer, I’d guess that most MMTers would say that the private sector should certainly be provided with the safe assets / PSNFA it wants in the form of enough base money, there’s no particular reason to supply it with national debt, i.e. interest yielding PSNFA.
Conclusion.
The long held MMT belief that the private sector should have the stock of base money it wants remains valid. As to whether INTEREST YIELDING government debt needs increasing, that’s more debatable. Indeed, Milton Friedman argued that government should issue no interest yielding liabilities at all.
Of course there are doubtless good arguments for the state wading into the market and borrowing as an emergency measure when the economy needs cooling. But the arguments for having a stock of interest yielding state liabilities as a long term objective are a bit weak.
As to government bonds which fund infrastructure, if we’re going to have those (contrary to the advice of Kellerman) those should be kept separate, plus they should all be LONG TERM to reflect the long term nature of relevant investments / assets.
Peoples’ QE-itis is a rapidly spreading disease, which consists of an unhealthy desire to have the state print money and spend it on infrastructure projects.
The individual widely held responsible for introducing this disease to the country, Richard Murphy, has recently made matters worse by publishing a list of infrastructure projects suitable for PQE.
It’s certainly possible that more and better infrastucture makes sense – I’m not an expert on that. But its equally possible that hiring more nurses, doctors or teachers would make even more sense. Or perhaps priority should go to school books, or to the armed services, or fighting ISIS: the list of stuff to spend money one is just endless.
Moreover, I assume government have a rough idea on where best to spend extra resources: certainly opposition parties are not advocating a HUGE re-allocation of resources, like for example HALVING what we spend on education and DOUBLING what we spend on health.
A further problem is that there is already a shortage of skills required for infrastructure projects.
If you’re an enthusiastic supporter of PQE, you can help rid yourself of your misguided enthusiasm by pondering the above two points: first, why exactly should infrastructure take precedence over other types of spending, and two, where do skills come from for a big increase in infrastructure spending?
Failing that you could try attending the Richard Wilson Bloody Minded Disapproval of Everything school.
Richard Murphy has just announced that Bank of England independence is a fiasco because politicians have the power to withdraw that independence. See here and here. (For non-UK readers, Corbyn is running for leadership of the Labour Party).
Well the average fifteen year old has worked out that ultimate power always lies with politicians. We all know that one of those politicians, Gordon Brown, granted various forms of independence to the BoE. Plus we all know that Brown’s successors can withdraw that independence if they wish. And apart from the Bank of England, the Foreign Office, the Army, Navy and Airforce all have a MEASURE OF independence. Every head teacher in the country has freedom to make various decisions relating to their schools without consulting the minister of education.
Contrary to the false logic advocated by Richard Murphy, the fact that politicians can withdraw some form of independence from some arm of government is not of itself an argument for withdrawing that independence. Put another way, it's not an argument for ceasing to delegate various decisions to various arms of government.
Moreover (as the average fifteen year old also knows) there is a VERY GOOD argument for giving the central bank a say, if not a dominant say, in how much stimulus there is: it's that if POLITICIANS determine stimulus (i.e. have access to the printing press) they're liable to organise booms just before elections.
The fact that I need to spell out this elementary stuff is an indication that Jeremy Corbyn needs to get himself a different economic adviser.
To see why, let’s compare the basic ideas in the above work to similar and competing ideas which have subsequently appeared, and which are nonsense by comparison. One of those competing ideas is the Corbyn / Murphy “peoples’ QE” idea, namely that the state should print money and spend it on infrastructure. For more on the latter idea, see for example here, here or here.
The basic ideas in the work pictured above are thus.
1. In a recession, the state should create or “print” extra money (i.e. base money) and spend it, and/or cut taxes. That idea incidentally also seems to be favored by most advocates of Modern Monetary Theory. Plus Keynes advocated the idea in the 1930s, as did Milton Friedman after WWII.
2. As to WHO DECIDES how much new money to create, that’s decided by some committee of independent economists. In the case of the UK, the existing Bank of England Monetary Policy Committee would do. Indeed, the BoE MPC already takes very much that sort of decision: that is, it periodically decides how much stimulus is suitable.
3. As to how that new money is allocated, that is an obviously POLITICAL decision, and should be left to politicians and the electorate.
4. The above work also advocates full reserve banking. But that can be ignored because it's a separate issue. That is, the latter three points could perfectly well be put into effect without full reserve banking.
Peoples’ QE.
Now let’s compare that to PQE. Under PQE, the state creates new money and spends the money mainly on infrastructure. And that’s it.
Well the first blatantly obvious flaw there is that the amount of new money that should be created and spent depends on whether stimulus is actually needed!!!! That is, if the economy is booming, then little or no stimulus is needed.
However, Jeremy Corbyn and Richard Murphy, the main advocates of PQE, seem to be oblivious of that point.
Second, “print and spend” is stimulatory. Now if P&S is concentrated on infrastructure, then relevant infrastructure projects will contract dramatically, or even grind to a complete halt in years when little or no stimulus is needed. Barmy.
Conclusion: Corbyn and Murphy are intellectual pygmies compared to the authors of the work pictured above. Put another way “peoples’ QE” is nonsense.
Another competing idea.
This idea is that the central bank should have the power to distribute new money to every adult in the country with a view to dealing with recessions. That idea is advocated by Simon Wren-Lewis (Oxford economics prof) and Mark Blyth (professor of international political economy at Brown University).
Well the problem with that idea is that it ASSUMES that stimulus should take the form of extra PRIVATE spending, which clashes with the fact that a left of centre government would probably want to a decent chunk of any stimulus devoted to extra PUBLIC spending.
Moreover, if that “distribute to every adult” idea was implemented, a left of centre government could easily collar the extra money for public spending purposes, if it so choose. All such a government would need to do is announce loud and clear that it intended taxing the extra money away from households and spending it on infrastructure, education or whatever.
And finally….
The only real problem with the ideas in the work pictured above is that it probably wouldn’t work in the US. Reason is that as soon as Congress is allowed to spend more money net of tax, it would spend a full 12 months quarreling over how to spend it, or whether to cut taxes. In contrast in the UK, VAT was adjusted at the flick of a switch during the recent crisis.
What a delight to see Jeremy Corbyn being accused of racism. Apparently he’s “deeply offended”. Well poor little Corby worbies.
Given that “racist” is the favourite put down used by lefties, particularly on the subject of immigration, it’s good to see a leftie being accused of racism. I assume Corbyn as a leftie has accused others of racism in the past without good reason, so my reaction to Corbyn himself being accused of racism is: “poetic justice”.
Moreover, Corbyn is a member of a political party which took part in the slaughter of a million Muslims in Iraq for no good reason. So that proves beyond any doubt that he’s a racist. Na, na, na-na, na.
By way of contrast, the anti-immigration and allegedly racist “far right” political parties in the UK (BNP and UKIP) opposed the Iraq war from day one. So they’re clearly nowhere near as racist as Jeremy “wouldn’t touch racism with a bargepole” Corbyn.
Apart from the word “racist”, lefties have a range of other insults lined up for you if your views on immigration don’t quite coincide with standard left of centre views on that subject: insults like “xenophobe”, “Nazi” and “fascist”.
Alternatively you might be a “neo-Nazi”, “neo-fascist” or neo anything else you care to mention. The prefix “neo” sounds soooo sophisticated, and appearing sophisticated is important if you’re one of the pseudo intellectual poseurs who make up a significant portion of the political left.
If the Labour Party had ditched the “loony left / PC / pseudo sophisticated” section of the party fifty years ago, they’d have won every election in the last fifty years, because there’s plenty of support on the political right for what might be called decent or old Labour values: decent pensions & health service etc.
“Peoples’ QE” is a currently fashionable term being used in the UK for a system under which the state prints money and spends it on infrastructure, and perhaps one or two other items.
The reason for the recent interest in PQE is that Jeremy Corbyn who is running for the leadership of the UK’s Labour Party has suggested the idea.
The best form of PQE was actually thought up a few years ago in a submission to Vickers by Prof Richard Werner, the New Economics Foundation and Positive Money. See p.10-12 of the submission. That system is superior to the Corbyn version for the following four reasons. (The latter three authors’ work will henceforth be referred to as the “submission”).
1. “Print and spend” (P&S) whether it is directed at infrastructure or anything else is stimulatory. Thus if infrastructure spending is tied to P&S, then in years when little or no stimulus is needed, infrastructure projects will grind to a halt or near halt. Barmy. And if Corbyn can’t see that he’s not fit to be prime minister, or even run a whelk stall. In contrast, PQE as proposed by the above submission does not envisage CONCENTRATING spending on any particular government department.
Incidentally Richard Murphy, Corbyn’s economic adviser also seems to be incapable of understanding the latter point. What the problem is, I don’t know. It’s a simple enough point.
2. Corbyn is on the political left, if not the far left, and as such he understandably wants to see stimulus money concentrated on more public spending rather than tax cuts. In fact the decision between public spending and tax cuts is purely POLITICAL: that is a right of centre government might prefer tax cuts, and there’s nothing wrong with that as long as the relevant government is democratically elected. PQE as proposed by the above submission allows for that “right wing” type of stimulus, whereas Corbyn’s system does not.
3. Under the submission, P&S isn't just used when interest rates are near zero: it REPLACES interest rate adjustments as the main method of adjusting aggregate demand. That’s for the very good reason that the empirical evidence is that interest rate adjustments just don’t work very well. Second, they are distortionary: initially (i.e before "trickle down" has an effect) they boost only households and firms with significant variable rate loans, not those with fixed rate loans or no loans at all. That’s also barmy.
And there is a third reason for abandoning interest rate adjustments (or perhaps just using them in emergencies). This point is perhaps debatable. But for what it’s worth, it is as follows.
In order to get interest rates up to a level where they can be periodically adjusted, the private sector (aka the rich) have to be supplied with an excess stock of state liabilities to the extent that the rich have to be paid interest in order to dissuade them from spending that stock. I.e. having taxpayers subsidise the rich is an inherent part of an interest rate adjustment system. Also barmy.
4. There are obvious “Mugabe” type risks involved in having the state print money and spend it. Under the system advocated in the above submission, those risks are no more than under the EXISTING system. Reason is that the existing Bank of England Monetary Policy Committee (or some similar committee of independent economists) would decide the AMOUNT of extra money to be printed, while politicians would decide on the way to allocate that money.
That’s no different to the EXISTING system in that under the existing system, the BoE MPC has the final say on stimulus: i.e. it can override what it sees as excess of deficient fiscal stimulus put into effect by the Treasury. In short, the submission sets out a very clear and robust system for avoiding the Mugabe problem. In contrast, Corbyn has not set out similar measure, far as I know.
Finally, note that while the above submission advocates full reserve banking, that’s not a reason to reject the author’s PQE system (if you don’t like full reserve). That is, the authors’ version of PQE can perfectly well be implemented under the EXISTING bank system (sometimes called “fractional reserve”).
Lefties in France over the years have pushed for ever greater job security – for those able to get permanent jobs that is. Seems the lefties with permanent secure jobs don’t give a toss for those with insecure short term contract jobs. So those lefties are obviously genuine socialists – ho ho.
According to an article in the Financial Times, 11th August, entitled “Decay of the permanent jobs as France balks at labour reform” the costs of getting rid of those with permanent jobs are now so horrendous that the large majority of NEW jobs are now short term contracts.
So the ACTUAL EFFECT of job security legislation is, if anything, the opposite of the INTENDED EFFECT. Not that that will worry the ideologically pure lefties with secure jobs.
And that’s enough sarcasm for one day.
That’s in this Financial Times op-ed. Quite what qualifies Greenspan to write articles on this subject is a mystery, given the part he played in setting up a bank system that collapsed and cause chaos in 2007/8. For more in Greenspan’s incompetence, see here and here.
Anyway, good to see him come round to the view that Dodd-Frank is a waste of ink and paper and that higher bank capital solves the problem. That “substantially higher capital” view is shared by Martin Wolf, chief economics correspondent at the FT and Anat Admati. That is, the two latter advocate something like a 25% ratio: much higher than the ratio contemplated by the current lot of regulators.
Hopefully Greenspan, Wolf, Admati and others will next ponder this question / conundrum, which will get bank capital right up to the 100% level, which is what’s involved in full reserve banking. The question / conundrum is this.
If, having raised capital ratios to the 25% or so level governments still say they’ll rescue banks in the unlikely event of failure, that constitutes a subsidy of banks, and subsidies misallocate resources. So that’s not permissible if we want to maximise GDP rather than featherbed bankers.
Alternatively, if government completely washes its hands off banks the same way government makes no undertaking to rescue garages or restaurants in trouble, then all of those who fund banks in effect become shareholders, even if they call themselves depositors or bondholders. At least they become shareholders in that, at worst, they stand to lose their stake in a bank. And that equals a 100% ratio, which to repeat is what’s involved in full reserve banking.
According to this Wiki article, the real bills doctrine is as follows, to quote:
“According to the Real Bills Doctrine, unrestricted intermediation either by private banks or by a central bank has a beneficial economic effect. The doctrine proposes unrestricted discounting of real bills – evidences of indebtedness which, in accordance with Adam Smith's definition, are safe or free of default risk. The doctrine asserts that one function of banks is to issue notes or similar liabilities that are more convenient and easily held as assets than the bills being discounted. The keystone of the doctrine is that no government regulation ought to restrict the scope of such intermediation. In particular, market forces through competitive banking can be relied on to prevent excess credit creation. Moreover, if there happen to exist regulations that inhibit private intermediation - for example regulations that prohibit banks from issuing bearer notes that make a central bank the monopoly issuer of currency-like assets, then the central bank ought to conduct open-market operations or provide a discount window in order to vitiate such restrictions. By doing this, it brings together borrowers and lenders who might otherwise not be matched.”
Well having private banks issue “currency-like assets” is fine by me as long as the state, i.e. taxpayers, don’t subsidise the process. But the problem is that THEY DO.
That is, once a private bank has issued “currency-like assets”, the holders of those assets, i.e. depositors, then demand that the state makes those assets totally safe. And if the state gives in to that demand (which it has done since WWII) then to all intents and purposes, private banks are then able to print money, in a way which is not a hundred miles from what those backstreet counterfeiters do.
Private money creation enhances intermediation?
Also, let’s examine the last sentence of the above quote, which read: “By doing this, it brings together borrowers and lenders who might otherwise not be matched.”
Well clearly if firm A supplies goods to firm B on credit, and B gives A an IOU, and A can then go along to the central bank and get cash for that IOU, then that encourages firms to supply each other with goods on credit. And that will increase aggregate demand. GDP will rise, assuming the economy is not already at capacity. Of course if the economy IS ALREADY at capacity, then the effect will be excess inflation.
But assuming there’s scope for more demand, why raise demand by encouraging non-bank firms to lend to each other, or supply each other with goods on credit? The basic purpose of the economy is to supply consumers with what they want. So if the economy is operating at below capacity, consumers should be given more of the stuff that enables them to get what they want, and that stuff is known as “money”.
As for firms which supply goods to each other on credit, there’s absolutely no reason for the state, or central banks, or taxpayers to get involved. For example if firm X wants to try to sell a debt owed to it by firm Y, that’s fine by me, just as long as taxpayers, government and the central bank doesn’t get involved.
A number of deluded individuals seem to think that the magic potion “growth” will solve Greece’s problems.
The argument is that more GDP will enable the Greek government to collect more tax and thus repay debts. Well unfortunately growth as such will not necessarily solve the problem.
To illustrate, to the extent that growth comes thanks to more demand from Greek consumers, that will simply draw in more imports, which in turn puts Greece further into debt. And if there’s one thing Greece just cannot take on any more of right now it’s debt.
On the other hand if growth comes thanks to increased demand for Greek exports, or more import substituting activity by Greeks, then Greece’s debts decline, and demand from Greek consumers can be bumped up.
So the crucial point is to improve the Greek balance of payments. Thus those wicked, evil EZ authorities who are imposing austerity on Greece with a view to bringing internal devaluation to Greece and hence making Greece more competitive are doing the right thing – or rather the “least worst” thing - out of a selection of even worse alternatives.
That is, a system under which a country has to undergo years of austerity in order to solve a balance of payments problems is utterly chronic. But that’s common currencies for you.
If I were Greek, I’d be pushing for Greece to leave the EZ and re-adopt the Drachma. And it seems that a majority of those with an interest in economics agree with that idea if the poll at the end of this article is any guide.
I’m incandescent with contrived righteous indignation. Reasons are as follows.
David Cameron has recently been criticised for using the word “swarm” in reference to the – er – swarm of African migrants gathered at Calais attempting to get to Britain. And the politically correct have got all worked up about that use of the word swarm. (Yes, they’re always getting worked up about some word or other: that’s because they’re too dim to deal with the BASIC arguments for or against anything.)
Anyway, the only problem there is that the word swarm has often been used in the past in reference to various groups of people: football supporters, supporters of particular political parties, and so on.
So what the politically correct are advocating is discrimination on the basis of race: that is, they’re saying it’s OK to use the word swarm in reference to football supporters etc, but not OK to us the word in reference to African migrants. And that equals racism, because it involves treating two groups which a different racially in a different way. That’s racial discrimination.
Racism perpetrated by self-styled anti-racists. Mind that’s about the millionth example of that phenomenon.
Nasty, pompous, sanctimonious, hypocritical lot the politically correct, wouldn’t you say? Mind, most self-appointed moral authorities are that way. For example there’s the Catholic priests who do strange things with choir boys and the Muslim clerics who spew out hate speech.
And as for the Muslim clerics who back the abduction of young girls and selling them into slavery, or the Muslim clerics who back the murder of authors and cartoonists, words fail me.
It’s nice to see a new study from IZA, the German institute for the study of labour, confirm what I said a few years ago, namely that what might be called “traditional Job Guarantee”, i.e. subsidised short term jobs in the public sector, aren’t as good as the equivalent PRIVATE sector jobs.
See for example the para starting “Second, the time profile...” in the IZA study.
The problem with “traditional Job Guarantee”, is that that form of employment does not seem to improve the employability of those involved. In contrast, the private sector equivalent DOES IMPROVE employability.
Unfortunately, many of the advocates of traditional JG have for years simply ignored this empirical evidence. That is, they constantly go on about the skill enhancing characteristics of public sector JG. Plus they keep going on about how such employment allegedly maintains work habits for those involved. Well the empirical evidence just doesn’t support that.
That’s not to say, of course, that everything is perfect with the UK’s private sector subsidised employment system, i.e. the Work Programme. But at least one of the basic elements of the Work Programme, namely private sector subsidised employment seems to be right.
Nor am I suggesting A BAN on public sector subsidised employment. I can’t see much harm in those with a preference for public sector work as opposed to private sector work having the option of at least AIMING FOR temporary subsidised public sector work, in as far as they have a choice.
Training.
In contrast to the IZA study’s support for private sector JG, the study did NOT CONFIRM one claim I made a few years ago. That was that private sector subsidised employment produces better results than training. I.e. the IZA study seems to have found that training does produce beneficial results.
However, we need to be careful about what is meant by “training”. Some types of training, e.g. university courses leading to vocational or science degrees certainly pay for themselves. In contrast, some of the training offered as an alternative to JG can be low quality, and not worthwhile.
Tony Yates (economics prof in Birmingham, UK) thinks “print and spend” (e.g. a la Corbyn / Murphy) would be inflationary.
Let’s examine his reasons.
The first major weakness in the idea that “print and spend” is necessarily inflationary is that we’ve actually implemented print and spend BIG TIME over the last few years, and excess inflation is nowhere to be seen.
That is, we’ve implemented fiscal stimulus and followed that with QE. And that all nets out to “the state prints money and spends it”. (Fiscal stimulus equals “government borrows £X and spends it and gives £X of bonds to creditors. QE = “the state prints £X and buys back the bonds”. That all nets out to “the state prints £X and spends it”.)
Politicians and the printing press.
One reason Yates gives for thinking print and spend would be inflationary is that politicians would be tempted to spend too much with a view to ingratiating themselves with voters particularly just before elections. As he puts it here:
“One of the reasons I am against using helicopter money as a counter-cyclical monetary policy tool is that, once society gets a taste for it used in these circumstances, there will be pressure to use it for acyclical purposes, financing whatever might win an election.”
Well the simple answer to that point is that there is just as much temptation for politicians to use EXISTING or OTHER forms of stimulus to organise a pre-election boom. By “other forms of stimulus” I mean interest rate cuts, budget deficits, QE, etc.
But we manage to keep the latter problem under control, don’t we children? And how do we do it? Well one way is to give the central bank a big say or the final say on the size of any stimulus package, which is exactly the arrangement in the US, and UK and various other countries. That is, the central bank has control of interest rates, which is a not bad tool to raising or lowering demand (though I’m not WILDLY in favour of it). That is, the central bank has the power to counteract, if not totally nullify what it sees as excess or deficient demand brought about by the fiscal authorities, i.e. politicians.
And as long as the central bank has that power, then the pre-election boom problem is ameliorated if not totally abolished.
Now EXACTLY AND PRECISELY THE SAME arrangement can be implemented in a regime where print and spend is the main stimulatory tool. That is, the central bank can be given the job of determining the amount of extra money to be printed. And where that’s the case, there shouldn’t be any pre-election booms.
And what do you know? That arrangement (i.e. where it’s a central bank committee or some similar committee that determines the amount to be printed) is exactly the arrangement advocated by Positive Money, the New Economics Foundation and
Prof Richard Werner in their submission to Vickers.
Note that the fact that a CB committee determines the TOTAL AMOUNT of stimulus does not, repeat not, mean that that committee decides strictly political matters, like how printed money is allocated to different government departments. That distinction between economics and politics is clearly set out in the above submission to Vickers.
Incidentally another relevant and strictly political point is the question as to what proportion of GDP should be allocated to public spending. Again, the above submission to Vickers leaves that strictly to politicians and the electorate. And that means (as the submission points out) that a right wing government might choose to “print and cut taxes” rather than “print and spend” on infrastructure or whatever.
And finally, the above is not to suggest that Corbyn and Murphy are totally clued up on this issue: they're both new to the subject and haven't got a good grasp of it yet.
Larry Elliot is The Guardian’s economics editor, and in this article he claims that many governments are out of ammunition for dealing with the next recession, should one arise. He cites for example the fact that interest rates are already at or near zero, so there’s no chance of “ammunition” from that quarter.
He then considers other possible forms of ammunition including “print and spend”, which is approximately the same thing as peoples’ QE, a policy which has recently appeared in the lime light thanks to Jeremy Corbyn’s adoption of that policy. Larry Elliot however doesn’t like the idea.
He claims that “…in some countries, including the UK, the increased spending would result in higher imports and a balance of payments crisis…” and that there’s “risk of hyper-inflation.”
Well as regards imports, ANY FORM of stimulus or increase in aggregate demand tends to suck in imports, so that point is irrelevant.
As to inflation, it is of course true that whenever the words “print” and “money” appear in the same sentence, every economic illiterate comes up with the knee jerk reaction: “inflation”. Indeed, millions of economic illiterates produced that knee jerk reaction when money printing in the form of QE was first mooted. But mysteriously no excess inflation appeared.
Moreover, the basic purpose of any form of stimulus, whether print and spend (P&S), interest rate cuts, QE or whatever, is to create enough jobs to take us up to the full employment level. And at that point, no further increase in demand is possible because the effect will tend to be to increase inflation rather than increase numbers employed.
So . . . if inflation DOES APPEAR as a result of P&S, that simply proves that P&S has been successful: given us full employment – indeed it proves that P&S has gone a bit too far.
Complaining about the inflationary effects of P&S is a bit like saying you shouldn’t put fuel in your car because you might continue pouring fuel into the tank after the tank is full and spill fuel over the garage forecourt. There’s actually a brilliant solution to that problem which you may have worked out: don’t try to put too much fuel in the tank!
Why do I have to explain this bog standard, boring elementary stuff to the economics editors of national newspapers? Sigh.
The idea that an economy can benefit from, or recover via increased exports has always been popular. Of course that idea is valid in the case of a country with a persistent external or “balance of payments” deficit. But not otherwise.
Unfortunately that blindingly obvious point doesn’t seem to have got thru to the world’s leaders.
For example David Cameron is enthusiastic about increasing British exports, and so is Obama in the US.
And then the Germans constantly lecture the rest of the EU on the need to become more German, i.e. get themselves ridiculous balance of payments surpluses.
Plus Draghi has done nothing to bolster the Euro, presumably because he thinks increased exports from the EZ would be beneficial.
And now the Chinese are in on the act. They’ve just devalued their currency so as (at least according to the BBC) to enable them to export more.
I assume the above nutters have done some market research on Mars and Jupiter so as to make sure there actual customers there who want to buy stuff from planet Earth when every single country on Earth has an external surplus.
There has been an upsurge in interest in the UK in the last week or two in the idea that the state should simply print money and spend it, and/or cut taxes when stimulus is needed, rather than BORROW money and spend it. E.g. see this article by Simon Wren-Lewis (Oxford economics prof). As Thomas Hirst put it in the opening sentence of his article published on 9th August, “Over the past few weeks there has been a lot of discussion on the topic of a People's Quantitative Easing …”
That increased interest is partly down to the fact that Jeremy Corbyn who is running for leadership of the Labour Party has endorsed the idea. Of course Corbyn being on the political left wants “print and spend” rather than “print and cut taxes” which is what a right wing politician might go for. But the basic principles behind the two versions of the idea are much the same.
I have a few quibbles with some of these recent articles, and the purpose of the paragraphs below is to deal with these.
The History.
The “print and spend” idea goes back a long way. Keynes advocated it in the 1930s – see 5th paragraph here. That’s the sentence starting “Individuals must be induced…” (2nd half of the 5th para). And Milton Friedman in a paper published in 1948 argued that (at least in peacetime) the only liability that the state should issue should be base money: i.e. he argued that governments should not issue interest yielding debt. See para starting “Under the proposal..”
In short, Friedman’s proposal was more extreme than Corbyn’s: Friedman advocated a total ban on “borrow and spend” and replacing it with “print and spend”, whereas Corby advocates just supplementing “borrow” with “print”.
Slippery slopes.
Thomas Hirst and Tony Yates (economics prof in Birmingham, UK) seem to be worried about the fact that once printing starts, that’s the beginning of what Yates refers to as a “slippery slope” – leading at worst to full blown Mugabe type hyperinflation.
Well the solution to that problem was set by the three authors of this submission to the Vickers commission.
Their solution is to have the TOTAL AMOUNT of printing (i.e. total amount of stimulus) determined by some sort of central bank committee or some other committee of economists independent of government. Meanwhile, strictly POLITICAL matters, like what proportion of GDP is allocated to public spending remain (quite rightly) with politicians and the electorate.
And that’s actually very similar to the EXISTING system in that many central banks already have the final say in the size of any stimulus package: that is, they have to power to counteract any fiscal stimulus which the CB believes to be deficient or excessive. CBs do that by adjusting interest rates, QE, etc.
Of course it’s always possible that politicians would put pressure on CBs (especially just prior to elections) to allow too much printing. But by the same token, politicians can put pressure on CBs under the existing system to keep interest rates too low for too long.
Thus THERE IS NO REASON WHATSOEVER to think that the dangers of excess inflation are any more under “print and spend” than under the existing regime.
Moreover, we’ve actually implemented print and spend over the last few years in that we’ve implemented fiscal stimulus followed by QE. (Fiscal stimulus equals “government borrows £X, spends it back into the private sector and gives £X of bonds to creditors”. And QE equals “the state prints £X and buys the bonds back”. That nets out to “the state prints £X and spends it”.)
Another alleged problem to which Hirst refers is “highly uncertain estimates of the amount of available slack in the economy..”. Well that again is just as much a problem under the existing regime.
Full reserve / 100% reserve banking.
Incidentally, the above Friedman paper had something else in common with the above Vickers submission, namely that both works advocated full reserve banking: a system under which the only form of money is state issued money. That is, private banks are not allowed to create or “print” money.
As Friedman put it, “The particular proposal outlined below involves four main elements . . . . . 1, A reform of the monetary and banking system to eliminate both the private creation or destruction of money and discretionary control of the quantity of money by central bank authority. The private creation of money can perhaps best be eliminated by adopting the 100 per cent reserve proposal, thereby separating the depositary from the lending function of the banking system.”
Friedman repeated his advocacy of 100% reserve banking a decade later in his book “A Program for Monetary Stability” (Ch3, under the heading “How 100% Reserves Would Work”).
Moreover, it’s no coincidence that two works advocate a combination of “print and spend” and 100% reserve banking. Reason is that the two mesh nicely. That is, if (as under print and spend) the main or only form of stimulus is new money created by the state, that type of control of demand is more precise if private money creation is banned or curtailed as is the case with 100% reserve banking. Put another way, if private money creators cannot give us housing bubbles out of the blue, then gyrations in demand should be ameliorated.
Simon Wren-Lewis.
The main difference between SW-L’s ideas on print and spend and the above submission’s is that SW-L claims that print and spend should only be used when interest rates are at or near zero (i.e. when interest rates can’t be cut any further). That is, SW-L is saying that interest rate adjustments are fine when rates are above zero.
In contrast, the above submission specifically criticises interest rate adjustments, and I agree with the authors there, i.e. I disagree with SW –L. Strikes me there are two weaknesses with interest rate adjustments. First there is decent empirical evidence that they are not very effective. In the words of Jamie Galbraith, “Firms invest when they can make money, not when interest rates are low”.
Richard Musgrave (no relation) was an American economist of German heritage who died in 2007. Thanks to Econoblog 101 I’ve learned that Richard Musgrave made the point that governments which issue their own currencies do not need to borrow, since they can simply print money. To quote, he said,
“The government is never forced to borrow in the market or to maintain and service outstanding debts. There is always the option of monetizing the debt, that is, of printing money and purchasing the outstanding obligations. Whether this is done outright or through the open-market operations of the central bank need not concern us now. For purposes of the discussion, both central bank and Treasury are considered integral parts of one and the same public policy. If it is decided not to monetize the debt, there should be a good reason, since the servicing of the debt involves a cost to the government. This cost must be looked upon as the price paid for persuading people not to spend on consumption or private investment but to tie up their funds in the purchase of public assets. This purchase of nonspending, or illiquidity, serves to avoid the inflationary increase in private expenditures that could result if the debt were turned into money. It is this purchase of nonspending, or illiquidity, that is the crux of debt policy.”
As I’ve pointed out before, Milton Friedman and Warren Mosler made the same point.
Another point Richard Musgrave made, and which I like is that paying down national debt costs a country nothing in that its debt is held by natives of the country concerned. Reason is that that repayment simply involves reshuffling assets and liabilities around amongst citizens of the relevant country. In contrast, paying down the debt may involve a cost where debt is held by entities OUTSIDE the relevant country. And even there, a cost only arises if those “outside entities” reinvest the proceeds of sale of national debt outside the relevant country. In contrast, if the proceeds are reinvested inside the same country, then there again, that just amounts to reshuffling assets and liabilities inside the relevant country.
Richard Musgrave made that point in a paper in the American Economic Review just prior to WWII. Unfortunately that point seems to be beyond the comprehension of Kenneth Rogoff and others at Harvard.
And while I’m bragging about how clever we Musgraves are, I’d like to mention my musician cousin Thea Musgrave.
Plus there is Kacey Musgraves, the singer. I bet that “s” at the end is a mistake. I’m sure she’s a genuine Musgrave. Here she is:
Apart from interest rate cuts, budget deficits and the usual forms of stimulus, there is another possible form of stimulus that hasn’t been put into effect to date (at least not in an explicit and overt way), and that’s to simply have the state print money and spend it in a recession. One currently fashionable name for that policy is “peoples’ QE” (PQE).
Unbeknown to most economists (far as I know) that idea is not new: Keynes said in the 1930s that “print and spend” would be a perfectly viable form of stimulus. However, the idea has gained additional attention in the UK of late because one of the runners for the Labour Party leadership, Jeremy Corbyn and his adviser, Richard Murphy advocate the idea.
That idea, or something very similar, was also advocated by Positive Money, the New Economics Foundation and Prof Richard Werner in their submission to the Vickers commission a few years ago. Incidentally, the authors of that submission now claim the ideas in it are a bit dated. Actually I beg to differ: that submission strikes me as a brilliant piece of work, and while the authors have doubtless updated their ideas in some ways, the submission basically has stood the test of time.
One slight difference between PQE Corbyn style and PM & Co’s equivalent is that being on the political left, Corbyn presumably rules out using extra money to cut taxes, whereas PM & Co aim to be politically neutral: that is they accept that a right of centre government might want to implement stimulus via tax cuts rather than via extra public spending.
Unfortunately the above “Johnny come latelies” (Corbyn, Murphy, etc) make a couple of mistakes in connection with PQE which PM & Co’s submission warned against and managed to avoid, and the purpose of this article is to deal with those mistakes.
Gyrations in public spending.
One mistake by Corbyn, Murphy & Co is one I’ve pointed out several times, but to little avail. It’s thus.
“Print and spend” is a form of stimulus, and the amount of stimulus needed varies greatly from one year to the next. Indeed, occasionally no stimulus is needed at all. That means that if infrastructure spending is tied to the amount of print and spend implemented, then the amount spent on infrastructure (or other types of public spending) will gyrate from year to year by far more than makes sense. Indeed, specific infrastructure projects might come to a halt in years when no stimulus is needed, which would be absurd.
In short, PQE in that it consists of printing money and spending it on one area like infrastructure makes no sense. Thus all forms of public spending should be funded basically in the normal way, that is via tax and government borrowing. While in years when a decent dollop of stimulus is needed, MOST FORMS OF public spending, not just infrastructure, should be given a boost from “print and spend” – that’s assuming the government of the day prefers extra public spending to tax cuts.
Unfortunately the latter very simple point seems to be beyond the comprehension of Richard Murphy. As Tim Worstall has repeatedly pointed out, Murphy’s mouth is considerably bigger than his brain. E.g. see here and here.
Helicopter drops should boost just private, not public spending?
One variation on PQE is to print money and simply hand it out to households, a policy advocated by Eric Lonergan. As he puts it, “The smart version of “helicopter drops” involves equal cash transfers from the central bank to the household sector subject to its inflation target.”
I have doubts about that, and for the following reasons.
The decision to boost just private spending and not public spending in a recession contains a blatantly POLITICAL element: that decision boosts private spending as a proportion of GDP. And it is very definitely not the job of the central bank to change the proportion of GDP going to public and private sectors.
PM & Co’s submission didn’t make that mistake. That is, under their system, a central bank committee (or some similar committee of economists) decides on the overall SIZE of a stimulus package, while politicians and the electorate decide how that stimulus is allocated (to public versus private sector, and if it’s to the public sector, which government departments etc get the money).
As for Eric Lonergan’s REASONS for favoring households rather than public spending, I’m not impressed. One of his reasons (set out in an article by Eric Lonergan and Mark Blyth) is that it allegedly takes too much time for politicians to decide how to implement stimulus.
Well that idea was flatly contradicted by what happened in the recent recession in the UK where VAT was cut and then raised all without the express approval of parliament. In other words as long as parliament gives PRIOR CONSENT TO presidents, prime ministers and other senior politicians having some leeway in dealing with a recession, then those senior politicians can implement a boost to sundry forms of government spending (or adjust taxes) at the drop of a hat.
Lonergan and Blyth’s point about politicians being an obstacle to spending and tax decisions may well be a problem at the moment in the US, where Congress resembles a monkey house with two gangs of monkeys fighting for supremacy. But in most European countries, the above “prior consent” would be no problem at all for 95% of politicians once the logic is explained to them.
Moreover, in view of the above mentioned need to avoid excessive gyrations in the amounts spent on particular areas of public sector activity, the above prior consent would simply be consent to adjusting more or less ALL FORMS of public spending (and possibly tax as well) by about the same amount. And that ipso facto does not amount to a dramatic change to the shape of the economy.
Conclusion.
Positive Money and PM’s above mentioned co-authors got this peoples’ QE stuff right first time. In contrast, the “Johnny come latelies” are making a mess of it .
If government so much as hints that it might rescue banks or depositors, that constitutes a subsidy of banks, and subsidies do not make economic sense. They reduce GDP.
Alternatively, if government explicitly declares it will never ever rescue banks or depositors, then all of those who fund banks, including depositors, effectively become shareholders: that’s shareholders as in “someone who at worst stands to lose everything”.
But that leaves a problem: what about people who want money lodged in a totally safe manner? Well they’re easily catered for by entities, banks, or bank subsidiaries which accept deposits and keep the money in a totally safe manner: i.e. don’t lend it on or invest it, except perhaps lend the money, short term, to government. (Money market mutual funds in the US that claim depositors’ money is totally safe will soon have to abide by that rule.)
To summarise, those who want total safety can get it, while the bank system is no longer subsidised. GDP should rise as a result. And that all equals full reserve banking.
Can self funding insurance save conventional banking?
However there is what looks like an escape from that check mate position for conventional banking, as follows. If the state saves banks and depositors from possible extinction or ruin via some sort of self funding insurance system (like FDIC in the US), then the conventional arrangement of lending on depositors’ money can be retained, while at the same time no subsidy is involved.
Unfortunately there are problems there, as follows.
1. All forms of insurance involve the temptation to so to speak “cheat the insurer”. That is, if you can take extra risks and keep the profit when the risk pays off, while passing the bill on to the insurer when they don’t pay off, then you’ll benefit. Obviously all types of insurers take steps to minimise that problem, but the problem can never be wholly eliminated. (10% of claims in respect of house and car insurance in the UK involve an element of fraud).
So to that extent, the costs of funding a bank just via shareholders (who are in effect “self insurers”) must be lower than funding a bank via depositors who are insured by the state (or some other organisation).
2. If the state insures banks and/or depositors, it’s always possible the state UNDERESTIMATES the suitable premium. In that case we all know who comes to the rescue: the long suffering taxpayer. In contrast, under a “shareholder / self insurance” system, if shareholders underestimate the risks, then those shareholders, not taxpayers pay a penalty. I.e. no subsidy is involved.
3. Re government saving banks as opposed to saving depositors, while lender of last resort loans are supposed to be at penalty or commercial rates, in practice they aren’t. Exactly what constitutes penalty rates is debatable of course. But as a rough guide, Warren Buffet loaned $5bn to Goldman Sachs at 10% at the height of the crisis. That was a loan between two private sector entities, so presumably 10% was a realistic “penalty rate”. In contrast, the $13tr or so loaned by the Fed was at nowhere near that rate.
As for deposit insurance, in the UK, that is funded by taxpayers, not by commercial banks.
All in all, the idea that state backing for commercial banks will ever be on a strictly commercial basis is a joke. Come a crisis and in the heat of the moment, the temptation is to throw huge amounts of public money at the problem and at sweetheart rates of interest. And where the AMOUNT involved ($13trillion) is about three quarters of US GDP, we are talking a HUGE subsidy.
4. Contrary to popular perception, Walter Bagehot did not approve of lender of last resort loans. In the last chapter of his book “Lombard Street”, he expressed disapproval of it, but said he thought it was so ingrained in the system that it would be too difficult to remove.
Conclusion.
While it might seem that self-funding insurance can come to the rescue of conventional banking, that idea is badly flawed. So the conclusion is that conventional banking is well and truly in check mate.
“QE for the people” is a hot topic in the UK at the moment, so this recent BoE blog post is currently of relevance. The article is by Fergus Cumming and it makes claims which are debatable, to put it politely.
First, he attaches importance to Ricardian equivalence (RE). RE is basically as follows.
Governments have to incur debt so to fund stimulus, so at some point they’ll have to repay that debt via extra tax – extra tax on households for example. Thus households will not spend additional income that comes their way as a result of stimulus because they allegedly think they’ll have to pay extra tax to fund that repayment at some point.
If you think RE is an idea straight out of la-la land, you’re not alone. As Jospeh Stiglitz, the economics Nobel Laureate put it, “Ricardian equivalence is taught in every graduate school in the country. It is also sheer nonsense.”
Second, and as to actual REASONS why RE is nonsense, do you really think the average household spends time looking at the figures for stimulus, and working out how much extra tax they might have to pay several years hence? It’s hilarious: about 97% of households (at a guess) haven’t the faintest idea where to find relevant figures.
Third, the ACTUAL EVIDENCE is that RE is nonsense: that is, the evidence is that when government implements stimulus (e.g. puts tax cuts into effect) households actually spend a significant proportion of that additional after tax income.
Helicoptering is not reversible?
Next, the BoE article claims that conventional QE is reversible (in that the central bank can always sell the bonds it has bought back into the market) whereas helicoptering (aka QE for the people) is allegedly not reversible. Complete nonsense.
If the state prints money and distributes it via tax cuts or extra public spending, it can subsequently very easily reverse that process. First, it can raise taxes and “unprint” the money collected. Secondly, it can wade into the market and offer to borrow any amount it likes simply by offering an interest rate slightly above the going rate.
Actually doing that might require a change in the rules governing the central bank, but that’s just a technicality.
And finally towards the end of the BoE article it is claimed that:
“A successful helicopter money injection is difficult to achieve in principle because it requires people to believe that the government and central bank want to relinquish control of future inflation.”
Whaaat?
The exact reason for that bizarre claim are not well set out, but presumably the argument is that helicoptering is irreversible, ergo it will lead to excess inflation. Well as I just explained above, helicoptering IS REVERSABLE!!!!
And it’s not just any old politician: it’s Chris Leslie, the Labour Party’s economics spokesman or “shadow chancellor”. His article is in the New Statesman.
After some introductory waffle, he says, “Take, for example, the proposal for a ‘People’s Quantitative Easing’ where the Bank of England is instructed to use QE to directly finance infrastructure and public service projects. At one level it sounds so easy – if there’s a shortage of money, just print some more! But ending the Bank of England’s independence…”
Hang on. Why does giving the central bank the right to print money and let government spend it constitute “ending the BoE’s independence”? It doesn’t!!!!!
Indeed some of the of keenest proponents of the above “print and spend” idea, (e.g. Positive Money and the New Economics Foundation) SPECIFICALLY advocate that the if the above print and spend policy is implemented, the central bank should REMAIN independent.
That’s not to say the central bank should have the right to make obviously political decisions, like how much is spent on health, roads or education. But it SHOULD be independent in the sense of deciding how much stimulus is suitable. But central banks already have a dominant say on the latter point, so the likes of PM and the NEF are not advocating anything the slightest bit revolutionary there.
Chris Leslie continues, “But ending the Bank of England’s independence and reversing one of Labour’s most enduringly successful reforms would risk a major hike in lending rates, taking money away from schools and hospitals as debt servicing becomes more expensive.”
Now why on Earth does “print and spend” necessarily result in higher interest rates? Obviously if the amount of print and spend was excessive, then one way of countering that excess would be to raise interest rates. But it’s a bit daft to implement EXCESSIVE stimulus via print and spend and than counter that with higher interest rates.
Assuming the central bank is half competent, it won’t do that.
Next, Chris Leslie says, “And resorting to the printing press to artificially create money for public expenditure purposes would be a major distortion for the economy. Such a new monetarism would spark higher inflation and make it harder for those on lower incomes to afford goods and services…”.
First, who said that new money necessarily goes to extra “public expenditure”? As PM and NEF make clear, it’s up to the government of the day whether it wants to spend extra money on more public expenditure items, or whether it wants to spend it on tax cuts: which would result in more PRIVATE spending.
Second, there’s Leslie’s idea that money printing is “distortionary”. Quite the reverse: what IS DISTORTIONARY is the alternative method of adjusting stimulus, i.e. interest rate changes. Reason is that those changes affect only a limited proportion of the economy: those households and firms which are significantly dependent on variable rate loans. In contrast, those with no loans at all, or with loans where the rate of interest is fixed for several years hence, are not affected.
You might as well boost the economy by doing helicopter drops just on households where the head of household has red or blonde hair.
As for the rest of Chris Leslie’s article, I can’t be bothered with it. He obviously hasn’t a clue.
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Also there’s no need to feel guilty about devoting all your article to whinging rather than making constructive suggestions: if you WERE TO MAKE constructive suggestions, no one would be interested.
Solving the problem as to how REALISTIC solutions to the Greek problem would actually work is far too much like hard work for 99% of the population. In contrast, they’ll pay good money to have their emotions aroused.
For example Heiner Flassbeck (a former State Secretary in the German Federal Ministry of Finance) suggested import tariffs as a solution for Greece’s problems about a month ago. And certainly that would, at least in theory, solve Greece’s problems. That is, it would allow demand to be increased and unemployment reduced in Greece, while not at the same time throwing the country’s balance of payments back into deficit, which in turn would mean Greece going further into debt.
But do you think anyone has taken an interest in that constructive suggestion? Dream on.
Your article will contain blatant self-contradictions like claiming that pushing Greece out of the EZ is wicked at the same time as claiming the Grexit would benefit Greece. But don’t worry: almost none of the twits reading the article will notice the self contradictions.
This CEPR article by John Schmitt claims that one argument for increasing the minimum wage is that such an increase might boost demand.
The argument there is that the low paid spend a realtively large proportion of their income, thus a transfer of income from employers to the low paid should increase demand.
Er . . . I suggest that’s false logic. Reson is that it costs nothing in real terms in increase demand, thus there is no point in making any sort of sacrifice (e.g. distorting labour markets) in order to increase demand.
As Milton Friedman put it, “It need cost society essentially nothing in real resources to provide the individual with the current services of an additional dollar in cash balances.”
However, as intimated above, that’s not to criticise OTHER arguments for a minimum wage increase.
