Sunday, 30 June 2019
Mark Carney opposes QE for the people because he thinks it would result in the Bank of England having negative equity….:-)
I got the above information from Frances Coppola’s new book “The Case for People’s Quantitative Easing”, p.92. There is nothing wrong with Coppola’s demolition of Carney’s claim that I can see. Indeed, there’s not much wrong with the book as a whole: it’s an excellent piece of work.
But it really is bizarre for the governor of a central bank to make the above claim. So I thought I’d add some criticisms of Carney’s claim to those made by Coppola (or maybe I’m just repeating her criticisms using my own words).
Anyway, the first flaw in Carney’s claim is that a currency issuer almost by definition has negative equity, or put another way, the fact of issuing currency decreases the equity of the issuer. For example, there is nothing to stop me writing out IOUs on the back of envelopes and trying to use those bits of paper to purchase goods and services. Assuming I don’t purchase assets with some sort of permanent value, like land or a house, i.e. assuming I use the envelopes to fund current consumption, then every £ worth of envelope reduces my equity by a £.
Indeed, the latter “envelope” scenario is not totally unrealistic in that large firms and rich individuals a century or more ago regularly paid for items they wanted to purchase with so called “bills of exchange” which were basically just IOUs.
Now is the above reduction in equity a problem? Well it’s only a problem if the suspicion arises that I am not ultimately able to pay my debts or meet my liabilities. But governments and their central banks can grab any amount of money anytime off taxpayers. Thus they ought to have no problems meeting their liabilities!
Moreover, no one ever worries about whether government as a whole (including the central bank) has negative or positive equity: that is, no one ever worries about whether total government assets (roads, land, buildings etc) exceed total government debt. Reason is as above: government never has a problem paying its debts because it can simply grab money off the private sector whenever it wants!!
Another weakness in Carney’s argument is that if we go for QE for the people (aka “overt money creation”), and assuming it’s government rather than the central bank itself that spends the “overt money”, then the central bank would presumably get some sort of receipt or bond from government in exchange for money supplied. And that receipt / bond equals an asset as viewed by the central bank.
In that case, the central bank’s equity does not decline, though the equity of government as a whole would decline in that the money was spent on current consumption as opposed to capital investments.
Sunday, 23 June 2019
The IMF has for years backed the “fiscal space” idea: the idea that government should not borrow too much in good times, the idea being that abstaining from such borrowing leaves room to borrow when a recession hits.That idea has an obvious appeal. Unfortunately the idea makes no sense at all. I’ve demolished that idea before on this blog, e.g. here.
Unfortunately the fiscal space idea continues to rear its ugly head: e.g. in this recent Vox article by two Lund University people. (Article title: "Fiscal Policy is No Free Lunch....")
Specifically, they say, “…governments should stabilise the debt-ratio in normal times at a level that allows for ample borrowing and spending if and only if the economy suffers from a major crisis”.
That idea is based on the argument that the larger the debt the higher the rate of interest that creditors will charge for holding debt, all else equal (which is a truism). Thus it would seem that if the debt is on the high side and a recession hits, government will have to pay over the odds to borrow money so as to implement stimulus.
The flaw in that argument is as follows.
If interest on the debt is on the high side, that means there is plenty of scope for using interest rate cuts to impart stimulus! Indeed, the latter policy, i.e. using interest rate cuts to impart stimulus when rates are significantly above zero, is the central idea behind the UK Labour Party’s so called “fiscal rule”: at least according to Simon Wren-Lewis. (Title of SW-L’s article is “Is Labour’s Fiscal Rule Neoliberal.”) See in particular SW-L’s para starting “It is now received wisdom…”.
Also, if the authorities do want to go for fiscal stimulus rather than interest rate cuts, the mere fact that aggregate demand is lower than it should be is (by definition) proof that the private sector is in “money hoarding” mode rather than “spendthrift” mode. I.e. the private sector is not spending enough to bring about full employment.
In that scenario, i.e. given that the private sector is willing to hoard money or government debt, the private sector is not going to demand much of an increase in interest rates or indeed any increase at all for holding more debt!
Incidentally, government debt and money (base money in particular) are virtually the same thing (as pointed out by Martin Wolf, Warren Mosler and others): the only difference is that base money normally pays no interest, whereas government debt is simply base money which yields interest.
Wednesday, 19 June 2019
That’s in an article entitled “Some thoughts about the Job Guarantee”. It was published in 2017, but I only just stumbled across it, so thought I’d say a few words about it.
It’s good to see he gets the point that too generous pay and conditions for JG work will result in what he calls the “lock in” effect: i.e. JG people will be induced to stay in their JG jobs rather than seek regular work. The same cannot be said for a significant proportion of JG advocates, who refuse to recognise the lock-in effect.
At worst, the lock-in effect could result in JG actually reducing GDP: i.e. if the main effect of JG is to induce people to move away from regular jobs to relatively unproductive JG jobs, then the net effect could be a cut in GDP. (The reason for thinking JG jobs are relatively unproductive, is that they are by definition jobs which would not take place but for the JG employment subsidy.)
My only quibble with Wren-Lewis’s article is that in his opening paragraphs, he doesn’t get the history of the basic JG idea quite right. He starts: “The idea of the state stepping in during a recession to offer some group of the unemployed a job was selectively adopted by the UK Labour government in 2009: see here by Paul Gregg. Richard Layard has proposed it for the long term unemployed.”
Actually there was a very large JG type scheme in the US in the 1930s (the so called “WPA”) and Pericles had JG scheme up and running in Ancient Athens 2,600 years ago.
Monday, 17 June 2019
People who are under-represented in economics, i.e. women and ethnic minorities, have been getting upset recently about the latter fact and have been demanding more representation for those two groups in economics.
Speaking as a white male, I’m all for women and ethnic minorities having more say in economics if they’re really up to the job. Indeed I would never dream of questioning some womens’ competence in economics, e.g. Frances Coppola, Caroline Sissoko or Islabella Kaminska. Though obviously I sometimes disagree with those individuals on specific points.
But “pluralism for the sake of it” looks like getting out of hand. A nice example is the head of a London based economics think tank who is black and female. Advocates of diversity and pluralism will have been thrilled to pieces at her appointment. Only trouble is that she does not actually seem to have any interest in economics: at least when Googling her name I couldn’t find one single article by her, and she does about one Tweet a week. I.e. her output is approximately one thousandth that of Frances Coppola’s.
I’m not going to actually name her or the think tank concerned, in case I get sued, but you’ll be able to find it easy enough.
This supports the point I made in this blog some time ago, namely that the evidence seems to be that women tend not to be as interested in economics as men.
It could of course be argued that the head of an organisation is mainly concerned with administration rather than producing ideas. Well that idea won’t wash, at least not with me. Mervyn King, former governor of the Bank of England clearly had an interest in and wrote about unorthodox ideas in economics while playing the role of respectable, conservative and orthodox head of a central bank. Same goes for Ben Bernanke.
Saturday, 15 June 2019
In this article, he clearly backs Workfare: he says,
“The existing unemployment benefits scheme could be maintained alongside the JG program, depending on the government’s preference and conception of mutual responsibility.
My personal preference is to abandon the unemployment benefits scheme and free the associated administrative infrastructure for JG operations.
The concept of mutual obligation from the workers’ side would become straightforward because the receipt of income by the unemployed worker would be conditional on taking a JG job.”
But in this article he says,
“Further, the MMT Job Guarantee also has nothing in common with so-called ‘workfare’ or ‘work-for-the-dole’ programs that neoliberal-inspired governments have introduced…”
The reality is that any level of “persuasion” or “coercion” can be used on a JG scheme. Personally I have no objection to a finite amount of persuasion: a relatively generous amount of unemployment benefit for the first two months of unemployment, followed by a cut in benefits unless those concerned take a JG job would be OK by me.
Thursday, 13 June 2019
Summary. The main way central banks cut interest rates is to print money and buy up government debt / bonds. But it can well be argued that government borrowing makes no sense, and thus that there should be no government borrowing. In that case central banks can’t cut interest rates!
Warren Mosler1 and Bill Mitchell2 (the two co-founders of MMT) have argued that government borrowing makes no sense. Milton Friedman3 argued likewise.Plus I argued4 likewise.
Well now, if the above four individuals are right, then central banks will not be able to cut interest rates because the main way CBs cut rates is to print money and buy up government debt!
Of course CBs are able to buy corporate debt. But in the case of QE (at least in the UK, where I live) only a minute proportion of the total debt bought up was corporate as opposed to government debt, and quite right. Reason is that if a CB buys up corporate debt it is taking a commercial risk, and it’s not really to job of CBs to do that.
As distinct from interest rate cuts, there are interest rate increases. An absence of government debt does not stop a CB raising rates: it can wade into the market and offer to borrow at above the going rate, and then not do anything with the money borrowed. CBs in some countries may not actually be allowed to do that at present, but there’s no good reason they shouldn’t.
And that set up, i.e. where a CB can raise rates but can’t cut them does make some sense in that it’s compatible with Friedman’s ideas: Friedman claimed that governments should not borrow except in emergencies. The emergency that Friedman had in mind was war. But another possible emergency is a big outbreak of irrational exuberance which needs to be damped down via various deflationary measures. Tax increases or public spending cuts are one option, but if they proved insufficient, then the latter sort of interest rate increased implemented by a CB might be in order.
So why do governments borrow?
If, as suggested above, there are no good arguments for government borrowing, it is legitimate to ask why such borrowing takes place. The answer is: “political expediency”.
That is, politicians always prefer to fund public spending via borrowing rather than via tax because voters are painfully well aware of tax increases, whereas they tend not to attribute interest rate increases to government borrowing.
David Hume, writing about three hundred years ago, was well aware of the latter point. As he put it, “It is very tempting to a minister to employ such an expedient, as enables him to make a great figure during his administration, without overburdening the people with taxes, or exciting any immediate clamours against himself. The practice, therefore, of contracting debt will almost infallibly be abused, in every government. It would scarcely be more imprudent to give a prodigal son a credit in every banker's shop in London, than to empower a statesman to draw bills, in this manner, upon posterity.” That’s in his essay “Of Public Credit”.
Simon Wren-Lewis5 is clearly aware of that phenomenon: he calls it the “deficit bias”.
What’s the GDP maximising rate of interest?
Having argued that the GDP maximising rate of interest is obtained where the state (government and CB) issue a liability (zero interest yielding base money) but do not pay interest on any of that money, there is actually another point which supports that argument, which is thus.
When governments borrow rather than simply print money and spend it, essentially what they’re doing is saying to themselves, “let’s print and spend, though in order to damp down the inflation that might result from that printing, we’ll borrow back some of the money we printed.”
Now issuing enough base money go give us full employment without exacerbating inflation too much clearly makes sense: it maximises GDP. But to print too much money, and then deal with the inflationary consequences by borrowing some of it back is an obvious nonsense. That is clearly not a strategy which will maximise GDP: reason is that it results in interest rates being artificially high.
The entire conventional wisdom on government borrowing is nonsense, or at least that’s what I’m claiming!
1. See 2nd last paragraph of Mosler’s Huffington article, “Proposals for the banking system.”
2. See Mitchell’s article “There’s no need to issue public debt”.
3. See Friedman’s article: “A Monetary and Fiscal Framework for Economic Stability”, American Economic Review. See his para starting “Under the proposal….”.
4. Musgrave. See article entitled “The Arguments for a Permanent Zero Interest Rate.”
5. Wren-Lewis. See his article entitled: “Budget deficits, fiscal councils and authoritarian regimes”
Tuesday, 11 June 2019
On 5th June I criticised on this blog a letter (organised by Positive Money) from ninety academics in The Guardian which argued for the Bank of England to do more about climate change and other social issues like inequality.
So it was nice to see an article in the Financial Times the next day (6th June) also criticising the Guardian letter. The article was by Tony Yates (former economics prof in Birmingham, UK and former BoE economist).
Yates’s article was followed by an FT article by Positive Money people defending their Guardian letter. I’ll run thru the Yates and PM article in the paragraphs below, dealing with some but certainly not all the points in those articles.
Yates’s first point is that “Climate change mitigation is to be tackled by a combination of legislation, taxes and subsidies, imposed by an elected central government.” That comes to much the same as my point on 5th June that GOVERNMENT has far more powers to raise the cost of fossil fuels via subsidies (and/or subsidise renewable forms of energy) than central banks.
Positive Money’s response to that is straight out of la-la land, far as I can see. They say “Some of the most important levers which would allow us to address the challenges of our age sit outside the government’s control. For example, the UK will only be able to reach net zero emissions by 2050 by dramatically stemming the flow of finance towards fossil fuels.”
So how is the BoE supposed to “stem that flow”? To illustrate, if a heavy fossil fuel user wants to issue shares or bonds to fund its activities, the BoE has no powers to prevent that. Of course the BoE could clamp down on bank lending to heavy fossil fuel users, but if heavy fossil fuel users’ access to banks is restricted, that isn't much of a problem for them because, as just intimated, heavy fossil fuel users can issue shares or bonds instead.
Yates next point (in his next para) is that financial stability risks emanating from climate change (which the Guardian letter makes much of) are small compared to other financial risks (trade wars, Brexit, etc). I didn’t make that point on 5th June, though I have made the point in earlier articles on this blog.
Yates next point (his next para) is that asking the BoE to do something about climate change is to politicise the BoE. I.e. it would be OK to try to persuade government to get the BoE to do something about climate change, but it’s definitely not OK to try to get the BoE to act independently of government in that regard. I also made that point on 5th June.
Next, Yates deals with the claim in the Guardian letter that monetary policy can influence inequality, thus the BoE should pay more attention to the equality changing effects of its policies. (Perhaps the most popularly cited instance of that is the way that QE has allegedly boosted asset prices, and thus made the rich richer.) Yates answers that by pointing out that inequality in the UK over the last ten years or so has been little different to the 1990s.
Plus I particularly like this para of Yates’s: “Monetary and financial policies probably have consequences for lots of things: the crime rate; public physical and mental health. But we don’t task the Governor with those responsibilities. We have the Department for Health and the Home Office.”
Do Positive Money and the 90 academics understand Pareto Efficiency?
The latter “ignore the side effects” idea is very much what so called “Pareto Efficiency” is all about. PE, to quote the first sentence of a Wikipedia article on the subject reads: “Pareto efficiency or Pareto optimality is a state of allocation of resources from which it is impossible to reallocate so as to make any one individual or preference criterion better off without making at least one individual or preference criterion worse off.”
Essentially that boils down to saying that if GDP or output per head can be improved by some measure, then the fact that that improvement makes a particular set of people worse off is irrelevant, because those worse off individuals can always be compensated out of tax taken from those who have benefited, with the net result that everyone is better off.
E.g. if a central bank thinks an interest rate adjustment will cut unemployment, the CB should go for it. Any inequality increasing effects can easily be dealt with via the existing tax and social security system.
The alternative is for CB committees to get involved in liaising with any number of worthy committees concerned about equality. The bureaucracy there doesn’t bear thinking about.
Thursday, 6 June 2019
A significant proportion of lefties spend so much time admiring what they believe to be their moral superiority to the political right that they forget to actually think. The result is that they advocate nonsense policies.
A classic example is the recent article in Tribune (a long established UK left wing periodical) by James Meadway criticising MMT. His third last paragraph claims, “If Labour wishes to make permanent changes — including permanent increases in public funding for public services — we must establish clear lines of tax funding for day-to-day spending, and set out a path for future deficits to follow.”
Well if you remember, that “path for future deficits to follow” was very much the policy adopted by George Osborne, the UK Tory Party finance minister. To be exact, the farcical Osborne “we’re going to cut the deficit” story was briefly as follows.
George Osborne 2010:
“We will eliminate the deficit by 2015.
Tory Manifesto, 2015, p.9:
“We will eliminate the deficit by b2017.”
Osborne Budget speech, 8th July 2014:
“We will eliminate the deficit by 2020.”
Tory manifesto, 2017, p.64:
“We will eliminate the deficit by 2025.”
If James Meadway’s “path” is anything like Osborne’s, then Meadway’s “path” is a joke.
What’s wrong with the latter “path” is that it’s plain impossible to predict what future deficits (or surpluses) need to be. A recession could hit in two years’ time, in which case a larger than normal deficit will be needed. Alternatively, an outbreak of irrational exuberance in two years’ time is possible, in which case it could be desirable for government to rein in excess demand by running a surplus.
As Keynes argued in the 1930s and as MMT has argued more recently, the deficit simply needs to be whatever minimises unemployment without exacerbating inflation too much. Whether that’s a large and all-time record size deficit, or no deficit at all is totally immaterial.
Alternatively, if Meadway’s “path” consists of some ideas or principles which can be used to determine the size of the deficit rather than trying to predict the actual size of the deficit in pounds or dollars, he doesn’t explain what those principles are. But never mind: all is not lost! The Labour Party did actually publish a set of principles for determining the deficit quite recently: that’s the Labour Party’s new so called “fiscal rule” (1). But Meadway seems to be unaware of that document.
The basic principle behind Labour’s fiscal rule is that interest rate cuts should be used to impart stimulus when interest rates are significantly above zero, while fiscal stimulus should be used when interest rates are at or near zero.
And what do you know? That’s not a hundred miles or anywhere near a hundred miles from MMT! To be exact, the founder of MMT, Warren Mosler, advocated a permanent zero interest rate policy (2). In other words under Labour’s new fiscal rule, interest rates bump along just above zero, while according to Mosler, interest rates should be kept permanently at zero.
Having said that, the first two sentences of Labour’s fiscal rule do rather contradict the small print: that is the first two sentences claim there should be a target for debt and deficit reduction. However it’s pretty obvious that those two sentences were inserted to placate the economically illiterate electorate and economically illiterate newspaper economics commentators who are under the illusion that national debts are like household debts in that they need to be repaid at some point.
Certainly Simon Wren-Lewis, who authored Labour’s fiscal rule, said he had nothing to do with those first two sentences.
1. “Labour’s fiscal rule is progressive” by Simon Wren-Lewis.
2. “The Natural Rate of Interest is Zero”, Journal of Economic Issues.
Wednesday, 5 June 2019
When dozens of academics sign a letter to the Guardian, there’s a good chance the letter contains a fair amount of nonsense. And so it is with this letter published yesterday. Title of othe letter is "Next Bank of England governor must serve the whole of society."
Their first point is thus.
“First, environmental breakdown is the biggest threat facing the planet. The next governor must build on Mark Carney’s legacy, and go even further to act on the Bank’s warnings by accelerating the transition of finance away from risky fossil fuels.”
Well now for the woolly minded that seems to make sense. After all environmental breakdown is a serious issue, plus the Bank of England is a powerful organisation, thus it must follow that there’s much that the BoE can do about environmental breakdown, surely?
Well no actually. That’s false logic.
The most the BoE can do is implement some sort of bias against industries which are into fossil fuel consumption when it comes to QE: i.e. buying corporate bonds. But there are several problems there.
1. QE has only been in operation for a small proportion of the time since WWII, and has always been viewed as a temporary measure.
2. The actual number of corporate bonds bought by the BoE relative to the number of UK government bonds bought as part of QE has been minute. The equivalent proportion for the Fed was A BIT higher, but not much higher.
3. The fact of the BoE buying the bonds of corporations A & B while not buying those of X & Y does not have a significant effect on the costs of funding those corporations. At a wild guess, having the BoE buy the bonds of corporation Z might cut the costs of funding the corporation by about one percent.
4. The latter ridiculously small change in the cost of funding corporations is near irrelevant to the powers that government has when it comes to discouraging fossil fuel consumption or subsidising solar and wind power. That is, there is in principle absolutely no limit to the size of tax that government can place on fossil fuels or the size of the subsidy it can offer for renewable forms of energy.
5. The decision to favour non fossil fuel consuming industries is very much a political decision, and that is not a decision for a central bank. Thus the authors of the Guardian letter really ought to be pestering politicians to instruct the BoE to implement an "anti fossil fuel" policy: they should not be trying to get the BoE do implement that policy without reference to politicians.
The next point in the letter is thus.
“Second, rising inequality, fuelled to a significant extent by monetary policy, has contributed to a crisis of trust in our institutions. The next governor must be open and honest about the trade-offs the Bank is forced to make, and take a critical view of how its policies impact on wider society.”
Well presumably that’s a reference to the fact that QE has boosted asset prices, which in turn has obviously benefited “asset owners” i.e. the well-off. But there is a problem there, which is that it can well be argued that the entire government debt should be QE’d!!!
To be more exact, Milton Friedman and the two co-founders of MMT (Warren Mosler and Bill Mitchell) have argued for a “zero government borrowing” regime. Obviously an initial effect of that is to boost asset prices, but that effect can always be nullified by extra tax on the well-off and/or more social security and similar for the less well-off.
Indeed, that’s a nice example of so called “Pareto efficiency” (an idea thought up by the Italian economist Vilfredo Pareto). Basically a policy is Pareto efficient if it increases GDP (or output per hour), and nothing else matters. In particular, if one group of people are made worse off by a policy, that doesn’t matter, because tax and or the social security system can be used to ensure that that group is not adversely affected.
At least that’s my definition of Pareto efficiency. If you want to be sure you have a grasp of the idea, obviously you’d be advised to look at a few dictionaries of economics and text books.
The letter’s third point is thus.
“Third, the UK economy is increasingly unbalanced and skewed towards asset price inflation. Banks pour money into bidding up the value of pre-existing assets, with only £1 in every £10 they lend supporting non-financial firms. The next governor must seriously consider introducing measures to guide credit away from speculation towards productive activities.”
Well the claim that “Banks pour money into bidding up the value of pre-existing assets..” is presumably a reference to the fact that a large proportion of bank lending goes to mortgages applied for by people who are buying EXISTING houses rather than NEW houses.
Well my answer to that is: “What else are banks supposed to do?”
Firstly it is perfectly reasonable for a bank to demand security or “collateral” when granting a loan. Or do you seriously want the bank which holds your money to lend to drunks lying in the gutter who have no assets? If so, you’re asking for your money to be flushed down the drain pretty quickly.
To be more realistic, do you really want your bank to engage in so called “NINJA” mortgages? NINJA stands for “No Income, No Job or Assets”. It was exactly the latter sort of lending that helped give us the 2007/8 bank crisis.
Second, as you may or may not have noticed, houses normally last a hundred years or more. That inevitably means that a large majority of those buying a home, buy an EXISTING house, rather than one that has just been built.
The final sentence of the letter reads, "We need a governor genuinely committed to serving the whole of society, not just financial markets". Well actually one of the main decisions taken by central banks every month is deciding whether to implement more (or less) stimulus in the form of interest rate adjustments, QE or whatever. And the purpose of that is always to minimise unemployment without exacerbating inflation too much.
Well now minimising unemployment is very much a form of "serving the whole of society, not just financial markets" isn't it?
Tuesday, 4 June 2019
The article is entitled “Stop trying to use monetary policy for your ideological whims” and is by Joakim Book. I left a less than flattering comment after the article as follows.
Joakim Book’s article is nonsense, like many other recent articles on MMT. MMT does not advocate, to quote Joakim Book’s first paragraph, that “worrying about the deficit or government spending is unnecessary”: that is MMTers have repeated till they are blue in the face that inflation puts a limit to the size of the deficit.
What MMT however DOES CLAIM, which is a bit different to the conventional wisdom, is that the size of the deficit and debt PER SE are irrelevant. I.e. MMT says (much as Keynes said) that the deficit should simply be whatever brings full employment without excess inflation. That’s in stark contrast to the ludicrous George Osborne policy on deficits which consisted of repeatedly promising to abolish the deficit in about three years’ time, only to find he COULDN’T reduce it: a policy being copied by the Labour Party incidentally.
In contrast to the above technical point about deficits, MMTers (like Keynes) do tend to be left of centre and do advocate a number of types of public spending increase, like the Green New Deal, which Joachim Book mentions. However it’s not just left of centre people who claim something needs to be done about climate change: plenty of right of centre people think likewise. Indeed, a large majority of scientists agree that we need to do something, and fast.
Joakim Book then displays his ignorance of this whole subject even more starkly when he claims that Positive Money’s “agenda has always been more narrowly focused on advocating for “a fair, democratic and sustainable economy” – predominantly through the use of monetary reform along MMT lines.”
Well the big problem there is that MMTers do not have much to say on the subject of “monetary reform”!!!! Joakim Book might as well have accused the Archbishop of Canterbury of having strong views on the design of Formula One racing cars!!!
It’s true that Warren Mosler (founder of MMT) does have views on bank reform. But that’s hardly surprising given that he runs a bank. But apart from about one article by Mosler on that subject, MMTers are pretty well silent on “monetary reform”.