Friday, 27 October 2017
We can’t print and spend money willy-nilly when inflation is at the 2% target.
Quite why it’s necessary to make the above point is a mystery. I’d have thought it was obvious.
One recent attempt to claim we can in fact print and spend like there’s no tomorrow was penned by an anaesthetist and physicist both of whom live within 20 miles of me. Tim Worstall and Richard Murphy respond to their article. The net result is a bit of a car crash. The article itself is fundamentally flawed. Murphy’s response is pure chaos. Worstall’s is much clearer, though I’m not sure about one of his points. Anyway, I’ll wade through this to see what can be salvaged.
The authors of the anaesthetist / physicist article are David Laws and Charles Adams respectively (L&A). (Title of their article: "Is a World-leading NHS healthcare NHS an affordable option."
First, a number of physicists have opined on economics, and some of them have a very good grasp of the subject. For example there is William Hummel, so I don’t automatically reject material written by physicists on economics.
L&A do have some grasp of economics. Unfortunately they seem to think we can just print money willy nilly and spend it on the National Health Service (NHS) – e.g. see their final para. Well as Keynes explained, the way out of a recession is to have the state print or borrow money and spend it in whatever amounts are needed to end the recession. So what L&A say is true during a recession.
Unfortunately that “free lunch” is not available once the economy has recovered, that is, once inflation has hit the 2% target. And inflation in the UK is currently more like 3%. So no free lunch!!!
The only possible escape from that dilemma would arise if inflation is cost push rather than demand pull: indeed that situation obtained, at least according to the Bank of England, during the first two or three years after the 2007 crisis. Subsequent events proved the BoE right. So congratulations to the BoE for that.
As for L&A, they don’t even consider the “cost push / demand pull” question, thus their claim that we can print money willy nilly and produce a Rolls Royce NHS as if by magic is nonsense.
L&A’s next mistake is to attach importance to the multiplier (their second last para). Certainly that’s in line with standard economics text books, which also attach importance to the multiplier. However, as I explained here, the multiplier is one big irrelevance.
The dual circuit.
Next, L&A have some strange ideas on what might be called the “monetary dual circuit”. That’s (roughly speaking) the fact that there are two sorts of money: central bank issued money and private bank issued money.
They say “…the commercial bank circuit serves private needs while the government circuit serves collective needs. The bank circuit exists to serve individuals and ‘capitalism’, while the government circuit exists to deliver on democratically controlled promises.”
Actually we could perfectly well have a system where the only form of money is central bank created money. Indeed a system of precisely that sort has long been advocated by several Nobel laureate economists including Milton Friedman. That system is also currently supported by Positive Money, and New Economics Foundation, Laurence Kotlikoff and others.
Incidentally if you’re wondering why I am responding to L&A here rather than in the comments after their article, one reason is that L&A seem to be unwilling to publish comments which disagree with their ideas. Certainly a suspiciously large proportion of the comments positively drool over L&A’s article. This “suppression of dissenting voices” is common in academia nowadays. Anyone who thinks academia is a bastion of free speech nowadays is very naïve. I dealt with this problem here.
So if you want to know where students get their anti free speech tendencies from, it looks like they get it to some extent from the elders and betters, i.e. their teachers – of course I use the phrase “elders and betters” advisedly.
Tim Worstall’s response.
Tim Worstall’s response to L&A is roughly speaking the same as mine, namely (and to repeat) that it’s perfectly possible to print money and spend it in a recession so as to bring about more NHS (or anything else). Or at least TW says “It is possible to get all Kenyesian about this and say when in recession we can boost output of all things – and maybe there’s some truth to that.”
Well is TW supporting Keynes or not? It isn't entirely clear is it? If he wants to challenge the basic point made by Keynes, namely that the way out of a recession is to “print and spend” then TW needs to spell out his reasons in detail.
So if TW is supporting Keynes, then I agree with TW. If he isn't, I want to see detailed reasons.
Murphy’s response to L&A and TW is shambollic. It is long, complicated and I haven’t got time for it. Murphy claims one minute that we can print and spend like there’s no tomorrow, while a para or two later, he concedes that option is not available once the economy is at or near capacity, as explained above.