Thursday, 21 February 2019
It's very unusual for Simon Wren-Lewis to make a mistake, which is why I have followed his blog for several years. Plus I am going to nominate him for a gong (whether he likes it or not).
However in his para starting "The argument that..." he falls for the popular myth that if something is funded via debt, future generations have to pay, in that they have to repay the debt. That idea doesn't just break the laws of economics: it breaks the laws of physics. To illustrate, if a bridge is built in 2019, the blood sweat and tears needed to build the bridge and the steel and concrete used in its construction absolutely have to be sacrified in 2019 or earlier. That is, it is not physically possible to build a bridge in 2019 using steel produced in 2029. Doing the latter involves time travel.
The only exception to the above comes where something is funded with money loaned by a foreign country (as pointed out by Richard Musgrave (no relation) in the American Economic Review in 1939. But since every country faces the same problem as to how to fund green forms of energy production, the above “foreign country” point is of little relevance.
Also Nick Rowe claims to have a complicated method of avoiding the above “physical impossibility” point. I’ve never been much impressed by that, and for reasons explained in articles on this blog a year or two ago. To find them, Google something like “Ralphonomics” “Nick Rowe” “time travel”.
Wednesday, 20 February 2019
Numerous economists do not seem to have worked out that any deflationary effect stemming from tighter bank regulations can very easily be made good by standard stimulatory measures. Examples of economists who have not tumbled to the latter point include the Vickers Commission and Malcolm Sawyer.
That cluelessness on the part of economists partly explains why politicians are putty in the hands of bankers.
Wednesday, 13 February 2019
Monday, 11 February 2019
According to Remainers, the effect of the UK cutting the amount of trade it does with geographically nearby countries would be serious. However, there’s a slight problem with that argument, namely that there are two countries which do a negligible amount of trade with nearby countries (assuming that by “nearby” one means something like “within 2,000km”), and they are Australia and New Zealand.
And to add insult to injury, the latter two countries enjoy higher living standards than the UK.
Also, I particularly like this chart which shows that Australia was totally unaffected by the bank crisis ten years ago. Obviously I can’t prove that resulted from the lack of nearby countries with which Australia trades. But the chart is a bit of a giggle all the same.
Friday, 8 February 2019
Thursday, 7 February 2019
First, we appear to be moving quite rapidly in the direction of a “state money only” system (i.e. full reserve banking), if the above chart is any guide. The chart is from an article by Jo Michell entitled “Misunderstanding MMT” published by “Critical Macro Finance”. (Incidentally that’s not to suggest that Michell supports full reserve.)
At least there’s been a big rise in the proportion of money supplied by central as opposed to commercial banks in the UK, and the sky has not fallen in.
Second: full employment.
Attaining full employment under a “state money only” system (i.e. full reserve banking) is not difficult, at least in principle: all the state (i.e. government and central bank) has to do is create and spend an amount of money into the economy such that households, firms etc have a sufficiently large stock of money that they are induced to spend at a rate that brings full employment.
Clearly that’s easier said than done, but some goes for the existing banking system: attaining full employment is not difficult in principle under the existing system, though that’s easier said than done.
Third: interest rates.
Under a state money only system, people and firms would lend to each other (sometimes direct person to person and sometimes via banks) and there is no obvious reason why under that system interest rates would not settle down to some sort of genuine free market rate of interest.
In particular, in a genuine free market, suppliers bear the full cost of supplying / producing goods and services, and under full reserve, money lenders (aka banks) can only obtain money to lend out by first attracting that money from households, non-bank firms etc. That is, banks cannot simply print / create money and lend it out, as they are able to do under the existing system.
The argument often put for letting commercial banks create money, namely that that cuts their costs and encourages lending and investment won’t wash: reason is that the “freedom to print” is a subsidy of those banks, and subsidies (while they obviously increase turnover for the subsidised industry) do not increase GDP: GDP is maximised where there are no subsidies, except where there is an obvious social case for subsidies.
Moreover, advocates of private money printing (e.g. the Vickers Commission) appear to be totally unaware that more lending by commercial banks means more debt. (I’ve done a word search of the Commission’s report and can’t find any reference to the substantial rise in private debts over the last ten years or so.)
Fourth: bank fragility.
It is precisely the fact of letting commercial banks issue money which renders them fragile and causes bank failures, bank crises and ten year long recessions like the one we’ve just been through. Reason is that it’s the “borrow short and lend long” process that makes banks fragile, and money by definition is a short term liability of a bank. (See the abstract of paper by Douglas Diamond and Raghuram Rajan.)
Fifth: why no deposit insurance for unit trusts?
If having government stand behind the liabilities of lenders (i.e. deposit insurance) is desirable, why limit that luxury to entities that happen to call themselves “banks”? That is, there are unit trusts (“mutual funds” in the US) some of which perform almost exactly the same function as banks. That is they accept money from people and lend that money on (mainly to large borrowers like non-bank corporations.)
Yet bizarrely, unit trusts are specifically prohibited from making the promise that banks make to their depositors, namely that “you’re guaranteed to get at least £X back for every £X you deposit with us”. That is a glaring anomaly.
Sixth: duplication of effort.
Given that states already create money in the form of base money, what exactly is the point of their creating money in a second way, i.e. standing behind privately created “funny money”? That’s duplication of effort (unless there’s a very good reason for taxpayers to stand behind privately created funny money).
To be more accurate, banks can on the face of it create money without state support (i.e. without deposit insurance), and indeed they were doing that in the US in the 1920s and 30s. Trouble is that about a third of deposit money during that period went up in smoke, thanks to bank failures. Thus that so called money was not really money at all, if by money one means something guaranteed not to lose value (inflation apart). (That “one third” figure comes from p.9 of Irving Fisher’s book “100% Money and the Public Debt”.)
I.e. that so called money was more in the nature of shares in relevant banks, and as is normal with shares, some of those share-holdings lost value in spectacular fashion.
Wednesday, 6 February 2019
This recent article by Murphy is frankly BS from start to finish. (Article title: “The Political Economy of Labour’s Fiscal Rule.”) There is so much rubbish in it that it would take me too long to deal with it all, but I’ll take approximately the first half of the article, just as a sample.
Incidentally, Tim Worstall has often referred to Murphy as “Murpha-loon” in the past, which is a name I’ll use here.
The first bit of nonsense is Murpha-loon’s claim that “It is a rule written to re-establish the neoclassical economic order of central banks running monetary policy in pursuit of a form of financial stability that favours one very particular group in society, who are already very favoured because neoclassical economics assumes that they should be.”
So the Labour Party is guilty (apparently unbeknown to itself) of promoting the interests of a “favoured” “group in society”?? This is - how can I put it - “interesting”. I’m all agog. Anyway, moving on…
Independent central banks.
The next “interesting” bit of Murpha-loon’s article is where he says “I don't believe in independent central banks. In fact, I do not believe we have ever had one. I have evidenced that.”
Well the article of his linked to there doesn’t actually provide any “evidence” that central banks are not independent!!! The reality is actually that there are all shades of central bank independence: i.e. some are very much under the thumb of politicians and some are not. To illustrate, there was obviously a significant increase in the degree of the Bank of England’s independence when Gordon Brown gave it nominal independence in 1997.
Next, Murpha-loon accuses Wren-Lewis and Portes of backing balanced budgets. Specifically Murpha-loon accuses WL&P of claiming “fiscal policy should be avoided because governments should balance budgets”.
Actually anyone acquainted with WL’s articles over the last few years will know that he has devoted tens of thousands of words to attacking the balanced budget idea: indeed, WL has his own special name for the daft balanced budget idea. He calls it “macromedia”: at least “macromedia” is approximately synonymous with balanced budgets in WL’s articles.
Next, Murpha-loon says “And third, like Keynes, I believe in long term low interest rates. And by low, I mean very low. And why do I do that? Because I think that to raise interest rates would trigger a credit crisis of untold magnitude in the UK, and beyond. And I cannot countenance that social cost.”
Well now, how does Murpha-loon square that with the fact that mortgagors were paying three times the rate of interest in the 1990s that they pay nowadays, yet economic growth was perfectly respectable in those days?
Of course a sudden rise in interest rates would cause problems, but a gradual rise would not be a huge problem.
To be fair, I favour low interest rates as well, but (to repeat) the idea that a rise in rates would necessarily bring a “credit crisis of untold magnitude” is obvious nonsense.
Next, what makes Murpha-loon think WL&P are actually advocating high interest rates? As the Labour Party fiscal rule clearly explains, when interest rates are significantly above zero, interest rate cuts would be used to impart stimulus, thus under that regime, rates would bump along just above zero most of the time!!!!
Well that’s it. Can’t be bothered with any more of this nonsense. Hope I’ve provided enough evidence that Murpha-loon is clueless.
Incidentally, if you’re wondering why I don’t answer Murpha-loon’s points in a comment after his articles, reason is that he bans anyone from commenting if they have the temerity to disagree with him in too direct a fashion.
Monday, 4 February 2019
This from George Osborne in 2010:
“So while private sector debt was the cause of this crisis, public sector debt is likely to be the cause of the next one. As Ken Rogoff himself puts it, “there’s no question that the most significant vulnerability as we emerge from recession is the soaring government debt. It’s very likely that will trigger the next crisis as governments have been stretched so wide.”
The latest research suggests that once debt reaches more than about 90% of GDP the risks of a large negative impact on long term growth become highly significant. If off –balance sheet liabilities such as public sector pensions are included we are already well beyond that. And even on official internationally comparable measures of debt, we are forecast to break through 90% of GDP in just two years time….”.
Well now the first problem there is that the UK’s debt to GDP ratio just after WWII was 250%: nearly three times Rogoff’s allegedly disastrous 90%. Moreover, that 250% does not include the public sector pensions element which Rogoff uses to get his 90%. So if public sector pensions WERE ADDED to the 250% that would probably take it above the latter “three times”.
But what happened just after WWII in the UK (and indeed other countries with similarly high debt:GDP ratios after WWII)? Nothing much: economic growth in the 1950s and 60s was just fine: indeed better than it’s been for the last few years.
Moreover, Rogoff’s 90% figure was subsequently shown to be nonsense.
Hat tip to Laurie MacFarlane for the above material. See here and here.
As Laurie MacFarlane says “It’s a damning indictment of the economics profession that people like Roghoff still have top academic positions.”
Sunday, 3 February 2019
The University College London Institute for Innovation and Public Purpose (IIPP) are pushing what they call “mission orientation”. That’s the idea that many of the technological advances over the last century or so have stemmed from grandiose and totally uneconomic projects which, by way of compensation for the vast amounts of money spent, have at least yielded some technological spin offs. Examples include President Kennedy’s Moon shot, the main purpose of which was to get one up on the Russians. Also of course, numerous military projects (where money is almost no object) have yielded spin offs.
Therefore, so the IIPP argument goes, we need to dream up specific “missions” like sending people to Mars or whatever, so as to benefit from yet more spin offs. The above IIPP folk are led by Mariana Mazzucato.
Indeed, there’s a picture of the Space Shuttle at the top of one of Mazzucato’s articles.
Plus IIPP are advertising for a space specialist to advise them on which space missions would be best with a view to bankrupting the UK (forgive my sarcasm).
The first obvious flaw in the mission orientation idea is that while some missions have brought significant benefits, others have not. For example trying to fly people across the Atlantic at supersonic speed is a great “mission”. Trouble was that Concorde turned out to be a commercial flop: it cost taxpayers hundreds of millions.
Nuclear power stations have also totally failed to live up to their initial promise.
Another flaw is that while “missions” like the Moon shot obviously result in spin offs, it is not at all obvious that those sort of multi billion dollar spectaculars are an EFFICIENT way of producing technological advances. That is, there is a huge amount of research which DOES NOT have any particular billion dollar missions in mind which ALSO produces benefits.
Indeed, it is very debatable as to whether much importance should be attached to improvements in rocketry that stemmed from the Moon shot, because it was obvious around seventy years ago that weather satellites and communication satellites would bring big benefits. Thus there was a motive to improve rocket technology ANYWAY.
Ironically, there’s a technological advance which Mazzucato loves to quote which is a classic example of the benefits of what might be called the “non mission” approach. That is, as she rightly says over and over, the various technological advances that have made smart phones possible have come about as a result of dozens of INDIVIDUAL government funded research projects (e.g. into making silicone chips faster and smaller), and NOT AS A RESULT of a “mission” in the form of “let’s have smart phones on which we can look at videos in 20 years time”.
Another spectacular piece of false logic repeated over and over in IIPP material is the idea that because a mission orientation approach is needed to deal with climate change, that that somehow supports the case for the mission orientation approach. I would expect the average Daily Mail reader to be able see the flaw in that argument. But for the benefit of those who can’t, the flaw is as follows.
Climate change is a totally unique event in the history of mankind: it is a once in a hundred thousand year event, or perhaps a once in a million year event: that is, the human race is having a damaging effect on the climate which can only be rectified by spending VERY LARGE amounts of money. Plus the benefits of doing that are obvious and large: avoiding climate catastrophe.
To claim that therefor spending very large amounts of money on projects where the benefits are not all that clear will bring similar benefits is just glorified false logic.
Saturday, 2 February 2019
The article is entitled “Modern Monetary Theory and Policy” (published by the American Enterprise Institute).
One of Veuger’s first crititicisms of MMT is that MMT has “little focus on topics such as long term economic growth”. Well the answer to that is the fact of an economist or group of economists concentrating on topics A,B and C, while ignoring D, E, F etc is not a brilliant criticism of their treatment of A, B and C.
Because a biologist concentrates on four legged mammals while largely ignoring birds, is that a valid criticism of the biologist’s work on four legged mammals? As I’ve pointed out before, it’s amazing what a poor grasp of simple basic logic some economists and economic commentators have.
Friday, 1 February 2019
That’s in a Prospect Magazine article by him published a few days ago and entitled “Nonsense economics: the rise of modern monetary theory.”
Portes’s first criticism of MMT, in his first para, is: “…for some proponents of “Modern Monetary Theory” (MMT), Labour’s adoption of a “fiscal credibility rule” (based in part on academic work by Simon Wren-Lewis and me), means that “Labour is committed to the thinking which will deliver more austerity.”
Well actually there’s a good reason for thinking Labour’s fiscal rule would deliver austerity: it’s in the first three sentences, which are in bold, and thus (according to Labour) presumably of particular significance. The sentences are pure Margaret Thatcher / Angela Merkel “handbag economics”: i.e. the idea that government budgets should balance in the long term.
However, and to be charitable to Labour, I suspect those sentences are just there for show: i.e. every political party must be seen to be concerned about the deficit, since nine out of ten voters think that’s an important issue.
Thus both MMTers and Portes are part right and part wrong there.
Next, Portes makes the odd assumption that since he is writing in the UK, he needs to turn to the individual who he claims is the leading UK authority on MMT, namely Richard Murphy. If Portes was living on one of the smaller Shetland Isles, would he seek out the views of the leading islander on this subject, namely fisherman Jock McTaggart who once tried to get to grips with an introductory economics text book and didn’t get very far?
In fact Murphy’s views on economics are questionable, which is why Tim Worstall has often referred to Murphy as “Murpha-loon”. Plus Murphy only cottoned onto MMT two or three years ago: given that MMT was started by Warren Mosler about twenty years ago, Murphy could be described as a bit of a Johnny come lately.
Government money creation.
Portes’s next criticism is that MMT’s claim that governments create money out of thin air is not new (Portes’s two paras starting “First it says…”.) Well my answer to that is that at the start of the 2007/8 recession, Ben Bernanke was very evasive on the question as to whether governments and their central banks create money out of thin air. Thus MMT had good reason to affirm that they do actually create money. (See first two paras of this article of mine for more on that.)
Spending comes before tax.
Next, Portes devotes about a third of his article to an idea popular in MMT circles, namely that government and central bank must logically spend money into the private sector before such money can be taxed out again. As Portes rightly says, that has led some MMTers to claim we can do more public spending and impose less tax than conventional economics claims.
The reality, as Portes rightly argues, is that whether $X is spent a few months before or after $X is taxed out of the private sector is thoroughly unimportant.
There’s more to MMT.
A weakness in Portes’s article is that it does not cover the full range of MMT ideas. For example there’s the “permanent zero interest rate” idea. Warren Mosler (founder of MMT) and Matthew Forstater published an article on that entitled “The Natural Rate of Interest is Zero”. Also I published an article on that topic entitled “The Arguments for a Permanent Zero Interest Rate”.
The above permanent zero interest rate idea is not actually a hundred miles from the basic idea in the above mentioned Labour Party fiscal rule. That is, according to the latter rule, interest rate cuts should be used to impart stimulus when interest rates are significantly above zero, while fiscal kicks in when rates are near zero. The result would be interest rates bumping along only slightly above zero most of the time, which of course is not far from a permanent zero interest rate policy.