Saturday, 30 March 2019

It’s a herculean task getting simple new ideas into the heads of the self-styled “intelligentsia”.

For years, Positive Money has been trying to get it into the heads of UK politicians that the bulk of the money supply is created by commercial banks rather than central banks. PM has had limited success: the proportion of members of parliament who understand that point has risen from a miserable 10% or so around eight years ago, to a miserable 30% now I believe (though I’m not an expert on the exact figures).

However, in this article I want to concentrate on an equally simple point which is equally difficult to get across. This is an idea first set out, far as I know, by Positive Money. PM have repeatedly set out the idea plus I’ve repeatedly set it out on this blog over the years. But looks like I need to set it out again (and again, and again, and again). Some of the people who don’t understand the idea are listed at the end below. Some are economics professors, who you might think would be open to new ideas.

Unfortunately that’s far from true: people at the top of professions often seem to be under the illusion that they are omniscient: quite often they’re the opposite, i.e. pig ignorant. 

I’ll use short words and sentences and simple language as far as possible so as to make it easy to understand. Here goes.

There is a problem involved in deciding exactly who decides the amount of stimulus the economy gets. The problem is this.

Stimulus can come in the form of extra public spending and/or tax cuts (funded either by borrowing or by new money). Interest rate cuts are another option of course, but I’m concerned with the first option here.

The problem is that while politicians and the electorate obviously have the right to decide clearly political questions, like what proportion of GDP is allocated to public spending and how that is split as between education, health, etc, politicians are almost completely clueless when it comes to technical economic points, like measuring inflation and deciding how big the deficit should be (i.e. how much extra public spending / tax cuts there should be) in order to deal with a given excess amount of unemployment.

Thus if for example some sort of fiscal responsibility committee (made up of economists) or a committee at the central bank decide on the size of the deficit, it might look like they are necessarily also making or at least influencing above mentioned political decisions.

Well there is actually a simple way round that problem explained long ago by Positive Money. That is, it is perfectly possible to have a committee of economists of the sort mentioned above decide on the size of the deficit, while politicians retain the right to decide the above mentioned strictly political decisions. The way to do it is as  follows, and by the way I’ll assume just to keep things simple that stimulus is implemented via what is sometimes called “overt money creation” (OMC). OMC simply consists of the authorities creating new money (base money to be exact) and spending it (and/or cutting taxes), and idea recently given the thumbs up by Ben Bernanke and the deputy governor of Japan’s central bank. 

The committee decides how much stimulus there shall be (expressed in terms of pounds / dollars etc, or in terms of a percentage of GDP), while politicians decide the above mentioned strictly political points.

To illustrate, the committee could announce for example “There needs to be stimulus to the tune of 3% of GDP in the next six months, and here’s the money.” Meanwhile politicians are free to pitch public spending at say 30% of GDP and taxes at 27% (leaving a deficit of 3% which is funded by the latter new money). Alternatively politicians can make that 35% and 32%, 40% and 37% or whatever they want.

Do you get it now? Under that system, politicians have complete control over the proportion of GDP allocated to public spending, while those who are technically qualified to decide how much stimulus there should be make that decision.

Moreover, that system is not actually much different to the existing system under which politicians can pitch the fiscal deficit at whatever amount they like, but the central bank (assuming it is independent) has the power to adjust what it sees as a deficient or excess amount of stimulus stemming from that fiscal deficit via interest rate adjustments.

As for economists and others who seem unable to grasp the idea that having a committee  of economists decide the size of the deficit does not need to involve that committee in riding roughshod over the democratic / political rights of politicians and the electorate, here is a sample. Incidentally that should not be taken to imply that I think the economists and others below do not do good work in some respects. 

Economists who don’t get the above points.

Bill Mitchell. See his first para, sentence starting “For the record I am deeply opposed…” in his article entitled “Effectiveness and primacy of fiscal policy – Part 1.”

Incidentally, I actually tried to explain the above solution in a comment after Bill’s article, but he censored it. As you doubtless know, many academics nowadays are scared stiff of free speech and open debate.

John Cochrane. See his article entitled “Central Bank Independence”, passage starting,  “We all know how to stoke inflation…”. (I actually tried to explain the above Positive Money point in the comments after Cochrane’s article. Cochrane seems to be more open to free speech than Mitchell.!!).

Ann Pettifor. See article entitled “Why I disagree with Positive Money and Martin Wolf.”

Malcolm Sawyer (former economics prof at Leeds University, UK). See his paper “Full Reserve Banking: More ‘Cranks’ Than‘Brave Heretics’” in the Cambridge Journal of Economics – passages starting “The central bank imposes a target growth….” (section 5.1)  and passage starting “…an FRB will nullify…” in his “Concluding Remarks”.

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