Wednesday, 15 July 2020

The IFS and NIESR’s questionable grasp of macro.



 




The people at the UK's Institute of Fiscal Studies are doubtless good bean counters as the name of the organisation implies, but they are widely regarded as having a poor grasp of macroeconomics, e.g. see here and here. The same criticism is not normally levelled at the National Institute of Economic and Social Research, but if this webinar is any guide, certainly one of the directors of the NIESR, Jagjit Chadha does not have a good grasp of macro. (Title of the webinar: "Covid-19: deficits, debt and fiscal strategy.") 

The webinar is on the subject of government debt and deficits, and the IFS and NIESR participants in the webinar devote themselves to worrying about a series of problems in that connection, apparently unaware that MMT has solved those problems (or if you want to claim MMT is Keynes writ large, then let’s say “apparently totally unaware of the fact that Keynes solved those problems.”)

Note that I am not saying MMT and/or Keynes are definitely right: I am simply saying that the IFS and NIESR people involved here seem to be TOTALLY UNAWARE of what MMT / Keynes have to say on the subject of government debt and deficits.

Garry Young (of the NIESR) speaks first. He says (around 9.20) that households are lending to government at the moment!!! So apparently government gets the money it gives to households for unemployment benefit, the furlough scheme etc by borrowing from households!

Well that’s a new one on me.

Next comes Carl Emmerson of the IFS who mentions (around 26.20 and 28.00) the “burden” of interest on government debt. Now there’s a teensy flaw in that idea which is that almost all of the increased amount of debt incurred over the last five years or so has been bought back by the Bank of England. So the alleged “burden” just consists of one arm of government (the Treasury) paying interest to the BoE, who in turn return it to the Treasury in that BoE profits at the end of each year are remitted to the Treasury!!

And if by any chance less than 100% of the debt incurred over the last five years has been bought back by the BoE, it could perfectly well be bought back, if the BoE so decided. Thus the above mentioned “burden” is a myth. (Incidentally, and in contrast, Jagjit Chadha who is the final speaker DOES show a chart which shows the amount of debt bought back by the BoE).

Then Carl Emmerson asks, “…to what extent should we consider tax rises because for example we want to push borrowing back towards its pre-crisis path..”.  But he doesn’t answer the question!!!  Well MMT has an answer: raise taxes if the economy is overheating and inflation is excessive. If not, don’t. And Keynes said much the same. As he put it: “Look after unemployment and the budget will look after itself.”

Put another way, the idea that there is some magic optimum amount of debt and that, if necessary, unemployment should be raised (when it doesn’t need to be because inflation is well under control) in order to cut the debt to the latter magic level is pure nonsense.

Jajit starts at 30.00.  He says first that what’s happening is ”worrying”, but doesn’t say exactly what the “worry” is.

Well never mind: I can read Chadha’s mind, as no doubt can most MMTers. Chadha has been mesmerised (as have many others) by the negative emotional overtones of the word “debt”. If the phrase “government debt” was changed to something like “national savings”, the debt fetishists like Chadha, Kenneth Rogoff etc would immediately stop “worrying”.

Chadha than asks to what extent should we share “risks” with “future generations”. Unfortunately he doesn’t say what these risks are.

Next (around 32.20) he trotts out the well worn nonsense about a high level of debt reducing our capacity to respond to future shocks. The reason that’s not true is as follows.

If the debt is high AND that has cause interest on the debt to rise, then stimulus can be implemented by cutting interest rates or doing some QE, i.e. buying back debt! Easy. And if interest on the debt is low or at zero, then stimulus can be implemented by simply having government and central bank create money and spend it (or do the same thing a round about way, i.e. have government borrow and spend money, with the central bank creating new money and buying back the freshly created debt).

Next, Chadha says (around 40.20) that if markets demand a high rate of interest for holding debt there’s a problem. No there isn't! The solution is . . . wait for it . . . don’t borrow!!  Print money instead!! As Keynes said, the way out of a recession is to spend more, using either borrowed or printed money.

Chadha ends by saying we don’t have much idea what will happen to the debt over the next ten years or so. So what’s the problem there? He doesn’t say.

If there’s a big increase in consumer and business confidence with a resultant big increase in demand and too much inflation, then government can rein that in via extra tax (or public spending cuts). And if the opposite happens, then government and central bank can implement more stimulus. And they will not, repeat not, repeat not necessarily have to borrow more to do that, as hopefully made clear above.


A different article by Jagjit Chadha.

The above nonsense from Chadha does not seem to his having had an off day when doing that webinar: he spouts yet more nonsense in an article entitled “Commentary: Monetary Policy in Troubled Times.”

There is so much nonsense, statements of the blitheringly obvious and self contradiction in the aritcle that it would take all day to deal with it all, so I’ll concentrate on just one sample paragraph, which runs as follows.

“Monetary  financing,  though,  is  the  direct  purchase  of  debt  by  the  central  bank.  It  bypasses  the  transmission  mechanism  in  the  real  economy  and  simply  hands  unfunded resource allocation or tokens (money) to the Treasury, which compete with private sector allocations. There may be no intention of raising tax to meet these overdrafts. And the bonds are held permanently by the central bank with an increase in its balance sheet. If the private sector thought that these tokens were claims on real  resources  then  they  would  have  some  stimulatory  effect on the economy (see Buiter, 2014). Indeed if one took  the  view  that  households  would  always  demand  central  bank  money,  were  it  issued  in  ever  larger  quantities,  and  placed  a  positive  value  on  it  related  to  the  claims  on  output,  then  it  could  always  be  relied  on  to  boost  output,  even  in  a  helicopter  drop.  But  the  prospects  for  a  stable  demand  for  central  bank  money  in the presence of a large or repeated deployment of this tool  seem  to  be  strictly  limited.  And the magnitude  of  any stimulatory effect seems unlikely to be much larger than a more standard form of debt issuance with QE."

First, consider his claim that “the direct purchase of debt by the central bank”…  “simply hands  unfunded resource allocation or tokens (money) to the Treasury..”.

Well that’s not true. When a CB purchases government debt, relevant DEBT HOLDERS (mainly private sector entities like pension funds, banks, insurance companies) hand over their Gilts (in the case of the UK) to the CB, and get cash in return. So it’s those private sector entities not the Treasury that get extra cash or “tokens” as Chadha calls them!


People won’t use a cash windfall to buy stuff?

Next, Chadha says “If the private sector thought that these tokens were claims on real resources then  they  would  have  some  stimulatory  effect.” Whaaat? So the recipients of that newly created cash cannot use it to purchase real estate, shares, houses, apartment blocks etc etc? That’ll be news to thousands of individuals, pension funds, etc etc who have used their pile of cash to purchase real estate, shares, houses and apartment blocks!!!!

Next come these two sentences of Chadha’s: “Indeed if one took  the  view  that  households  would  always  demand  central  bank  money,  were  it  issued  in  ever  larger  quantities,  and  placed  a  positive  value  on  it  related  to  the  claims  on  output,  then  it  could  always  be  relied  on  to  boost  output,  even  in  a  helicopter  drop.  But  the  prospects  for  a  stable  demand  for  central  bank  money  in the presence of a large or repeated deployment of this tool  seem  to  be  strictly  limited.”

Well now that all hinges on exactly what one means by “strictly limited”. Chadha might possibly be right to suggest that if every family in the country that didn’t already have a nice middle class home and two cars was given enough money to purchase the latter goodies, then in the event of dishing out EVEN MORE money to those people, a significant proportion would react along the lines of: “No thanks. I don’t need any more worldly wealth. A middle class home and two cars is all I need”.

But even that’s clearly not true: that is, the fact is that when people with comfortable middle class lifestyles win several million in a lottery, there’s a strong tendency for them to go on a spending spree: purchasing cruises, holiday homes and so on (surprise surprise).

But the important point here is that there is no need for everyone, or even a small proportion of the population to splash out on cruises and holiday homes in order to attain the desired objective, namely a five or ten percent rise in aggregate demand: i.e. enough to bring about full employment. All that is needed is enough increased spending by the “non middle class” to get them part of the way to a middle class lifestyle.

The idea implicitly put by Chadha that the non middle class will not be interested in that small improvement in their circumstances if they’re given the cash to let them make that improvement is plain ridiculous.

To illustrate with some VERY ROUGH numbers pulled out of thin air, assume a third of the population are “comfortable middle class”. Also assume that the remaining two thirds are on half the income of the latter middle class. What percentage increase in the non middle class’s spending (disposable and non-disposable) is needed to give a ten percent rise in aggregate demand? The answer is 20%. Do the maths yourself if you don’t believe it.

So Chadha is saying that the non middle class given enough cash to enable them to enjoy somewhere around a 20% rise in living standards would not spend the cash or even a significant proportion of it: clearly a ridiculous claim.

And even if a proportion of the recipients of freshly issued cash DID decide to use the cash to work fewer hours rather than consume more, what of it? Those “hours not worked” would constitute VOLUNTARY unemployment, and that’s not a problem. I.e. if someone decides to work 30 hours a week rather than 40, they have an absolute right to do so. It’s INVOLUNTARY unemployment that governments and central banks should be concerned about not VOLUNTARY unemployment.



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