The senior economists who didn’t know government can print money.

On February 14, 2010, the Sunday Times published a letter by twenty of the World’s leading economists, which is reproduced below under the heading “The Letter”. 

Essentially the letter claims there is a problem with stimulus (of the sort used to combat the recession which started with the 2007/2008 bank crisis). The alleged problem is that governments must borrow in order to obtain the money for stimulus and that there is a limit to the amount of borrowing that governments can do before creditors get worried about the debtor government’s intention or ability to repay the debt. Those creditors, so the letter claims, are likely to demand higher rates of interest as the debt grows.

Well it’s certainly reasonable to be concerned about a micro-economic entity’s intention or ability to repay a debt as the debt expands. A micro-economic entity is for example a household or small/medium size firm.

However, government is a macro-economic entity, and it is always dangerous to extrapolate from the micro-economic to the macro-economics.

In particular, the idea that stimulus has to be funded via borrowing in a country which issues its own currency is plain simple delusional clap-trap: as Keynes explained in the early 1930s, a country which issues its own currency can escape a recession simply by printing money and spending it (and/or cutting taxes).

It beggars belief that twenty of the world’s leading economists are unaware of the latter point, but it seems that they are  – or at least that they were at the time of writing the letter. Certainly the letter says nothing about money printing or money creation.


Central banks.

Incidentally, and in reference to the above idea that government can print money, it should be said that normally it is actually central banks which do the money printing. However central banks are little more than an arm of government: an arm which has varying degrees of independence depending on the country concerned. Thus a central bank is a government department to all intents and purposes.

Moreover there is absolutely no reason why the job of money printing cannot be given to some other government department. And in fact the UK Treasury engaged in some money printing at the start of WWI: it printed so called “Bradbury” pound notes.


Is money printing a panacea?

Of course any of those twenty economists could answer Keynes’s money printing point by claiming that resorting to money printing could lead to a loss of confidence in the country concerned in much the same way as increased borrowing might lead to a loss of confidence.

To be exact, and in connection with the latter point, the twenty economists claim “…there is a risk that a loss of confidence in the UK’s economic policy framework will contribute to higher long-term interest rates and/or currency instability, which could undermine the recovery.”

Well as regards higher long term interest rates, those would not kick in the day after the relevant government announced its intention to implement money printing: reason is that the rate of interest paid on a large majority of debt issued by governments around the world is fixed at the time that debt is issued. Put another way, if creditors were indeed to demand higher rates, and succeeded in getting them, that would only apply to debt which matured and became due for roll-over. And that point is particularly relevant for the UK (where I live): UK debt has an average time to maturity at least double that of the US.

Plus this “twenty deluded economists” affair is very much a UK affair  in that the Sunday Times is a UK newspaper, and most of the signatories to the letter were British.

But suppose creditors do in fact demand higher rates of interest: in the case of a government which issues its own currency, there is no Earthly reason for the relevant government to actually pay those higher rates: the alternative is simply to print money, pay off the creditors, and tell them to go away. Indeed that was pretty much what several governments did a few years after the letter, and in the form of QE. And contrary to the warnings issued by yet more idiot economists, hyperinflation did not ensue.

So that’s dealt with the letter’s “higher long-term interest rates” point mentioned a couple of paragraphs above.


Currency instability.

The other claim in the letter was that “currency instability” could result from excessive national debts, so had it been put to the twenty economists that money printing is an alternative to debt they might have claimed that currency instability would result from money printing just as much as from allegedly excessive national debts.

And to bolster their argument, the twenty economists might have cited Robert Mugabe, who like several national leaders in earlier decades and centuries, resorted to the printing press with excess inflation being the result.

Well the simple answer that is that money printing will only cause excess inflation if the demand that results from that money printing is excessive: i.e. if aggregate demand reaches a level such that the country’s employers cannot meet that demand.

Thus it is certainly not true that money printing automatically results in excess inflation, as was demonstrated (to repeat) by QE a few years after the letter.

As to the “currency  instability” which the twenty economists were concerned about, there again, they could claim that money printing might result in just as much currency instability.

Well first, while it’s possible that foreign exchange traders might take a dim view of a government which announces it intends printing money and those traders might mark the currency down relative to other currencies,  it’s a bit hard to see why “currency instability”, i.e. a currency gyrating up and down, would result.

As for the currency being marked down, that is not really a big deal: currencies regularly rise and fall by 5% or so. Plus when Japan (one of the first countries to go for QE after 2,000) announced its intention to implement QE in early 2001, there was no obvious effect on the Yen/Dollar exchange rate. To be exact, the Yen dropped about 5% over the next year, but then strengthened about 10% over the next two years.

Plus the whole purpose of creating new money and spending it is to raise demand, and an entirely predictable result of a rise in demand, all else equal, is a finite deterioration in a country’s balance of payments and a consequent fall in the value of its currency relative to other currencies, which in turn ought to rectify the latter balance of payments problem.


The incompetent twenty.

And note that those signing the letter included many individuals right at the top of the economics profession. For example Sir John Vickers was one of the signatories. He chaired the so called “Vickers report” which was the main official UK government response to the 2007/8 bank crisis. That doesn’t induce me to have much faith in Sir John’s ideas on bank reform. (For a guide to some of the mistakes made by the Vickers commission, Google “ralphonomics” and “Vickers”.)

Another signatory was Olivier Blanchard who at the time was the IMF’s chief economist. But as I’ve explained in earlier articles on this blog, the IMF is clueless. And Bill Mitchell (who like me supports MMT) regards the IMF as being so incompetent that we’d all be better off it was closed down. 

Another signatory was Kenneth Rogoff, a Harvard economist. Again, I have previously dealt with his incompetence.


The economics profession is a gentlemans’ club.

So why does this incompetence persist? Well I suggest Adam Smith gave the answer long ago when he said “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

In other words if economist A spots incompetence by economist B, A will normally not make too much of a song and dance about it: that would bring the profession as a whole into disrepute, which is not in the interests of A.


Why revisit a letter written in 2010?

For the benefit of any readers wondering what the point is of digging up a letter in a newspaper almost ten years later, the first reason is that of course economic history is always interesting. But more particularly some of the signatories of the letter have been trying to claim recently that they never opposed stimulus or money printing in any shape or form.

But that’s just an example of a well-known and predictable phenomenon: first they criticise you, then they question you, then they copy you. If I were in their shoes, I’d probably do the same, cad and rotter that I am!


The Letter.

"It is now clear that the UK economy entered the recession with a large structural budget deficit. As a result the UK’s budget deficit is now the largest in our peacetime history and among the largest in the developed world.

"In these circumstances a credible medium-term fiscal consolidation plan would make a sustainable recovery more likely.

"In the absence of a credible plan, there is a risk that a loss of confidence in the UK’s economic policy framework will contribute to higher long-term interest rates and/or currency instability, which could undermine the recovery.

"In order to minimise this risk and support a sustainable recovery, the next government should set out a detailed plan to reduce the structural budget deficit more quickly than set out in the 2009 pre-budget report.

"The exact timing of measures should be sensitive to developments in the economy, particularly the fragility of the recovery. However, in order to be credible, the government’s goal should be to eliminate the structural current budget deficit over the course of a parliament, and there is a compelling case, all else being equal, for the first measures beginning to take effect in the 2010-11 fiscal year.

"The bulk of this fiscal consolidation should be borne by reductions in government spending, but that process should be mindful of its impact on society’s more vulnerable groups. Tax increases should be broad-based and minimise damaging increases in marginal tax rates on employment and investment.

"In order to restore trust in the fiscal framework, the government should also introduce more independence into the generation of fiscal forecasts and the scrutiny of the government’s performance against its stated fiscal goals.

"Tim Besley, Sir Howard Davies, Charles Goodhart, Albert Marcet, Christopher Pissarides and Danny Quah, London School of Economics;
Meghnad Desai and Andrew Turnbull, House of Lords;
Orazio Attanasio and Costas Meghir, University College London;
Sir John Vickers, Oxford University;
John Muellbauer, Nuffield College, Oxford;
David Newbery and Hashem Pesaran, Cambridge University;
Ken Rogoff, Harvard University;
Thomas Sargent, New York University;
Anne Sibert, Birkbeck College, University of London;
Michael Wickens, University of York and Cardiff Business School;
Roger Bootle, Capital Economics;
Bridget Rosewell, GLA and Volterra Consulting

George Soros’s Institute for New Economic Thinking – or is it “Old Economic Thinking”?

Frances Coppola sets out a nice description here of a conference organised by the so called “Institute for New Economic Thinking” which according to her, consisted mainly of old duffers setting out OLD ideas rather than new ideas. (Article title: “Beyond Disappointment”.)

So how come?

Well my explanation is that INET was set up by George Soros with a seriously large amount of money: $50million to be exact. And that sort of money is guaranteed to attract those who are skilled at attracting grant money from government departments, the Rowntree Foundation and so on. I mean if you are short of something to do, plus you could do with embellishing your CV with “gave keynote speech at the INET conference at XYZ” or something like that, plus you wouldn’t say no to an expenses paid trip to XYZ, then it’s obvious what you need to do.

In contrast, those who actually do have novel ideas but who aren’t so skilled at the “grant money attracting” business don’t stand a chance.

But if you don’t like my explanation for what’s going on, here is a slightly different, but equally cynical explanation. (Article title: “George Soros’ INET: A conspiracy theory assessment”, by Norbert Haering.)

__________

P.S.  I am grateful to "Rethinking Economics" for reminding me (via Twitter) about that Coppola article.

 

Random charts - 70.

Headings in large pink text were added by me.

The UK school building heated entirely by solar.

 

That’s the extension to the St George’s School, Wallasey, Cheshire, designed in 1959.

The south wall of the building is nothing but glass, and the floors and walls of the building are made of very thick masonry and concrete which absorbs heat on sunny days and releases it on cold days.

Obviously the lighting and heat emitted by children in the building contribute to heating the building.

A book on solar heating, “Your Solar Energy Home” by D.Howell says (p.12), “When architect A.E.Morgan designed the building, higher authority insisted he include a boiler. Imagine what a delicious day it was for Mr Morgan when after four years occupancy and not a day of use from the boiler, he was allowed to remove it.”

Article in the Frankfurter Allgemeine by Dirk Ehnts on MMT.

The article title is “Die Lösung liegt in höheren Staatsausgaben.”

I only read part of the article (the part highlighted by Lars Syll). So I won’t pass judgement on the article as a whole. But there’s a mistake in it, as follows.

Incidentally, I don’t speak German very well: I just used on of those instant online translation services to translate the article into English.

Anyway, the paragraph starting “Solange Geld auf dem…” claims deficits (i.e. private sector surpluses) are needed because people want to save for retirement and businesses want a positive cash flow. The flaw in that idea is as follows.

In the simple case of where the number of pensioners is constant as a proportion of the population and there is zero economic growth and zero inflation, clearly it is true that people want to save cash plus government debt/bonds among other things for their retirement. But they run down that stock of assets during retirement: i.e. money and other assets flow from pensioners to younger people who themselves are saving for retirement. So in that scenario, there is no need for a government deficit.

As for businesses, it is reasonable to assume they want a stock of cash, but again, in the above “zero growth and zero inflation” scenario, there is no reason for that desired stock to expand every year.

I suggest the actual reason for more or less non-stop deficits is that the private sector (including those saving for pensions and businesses) want a more or less constant stock of cash and government debt. (The sum of those two is sometimes referred to by MMTers as “Private Sector Net Financial Assets” (PSNFA)).

However, inflation constantly eats away at the real value of that  stock. Ergo the stock has to be constantly replenished, and that can only be done via a deficit.

Thus (and reverting to pensioners) pensioners’ desire to save does explain the need for deficits, but it’s not the desire to save as such which is the explanation. It’s the “inflation eating away at the real value of PSNFA” which is the explanation.

Indeed, on the subject of PSNFA, note that when I referred to “cash” above, I should really have said “base money” (i.e. state issued money as opposed to commercial bank issued money). Reason for that is that base money is a net asset far as the private sector is concerned (i.e. it is PSNFA), whereas commercial bank issued cash is not: that is, for every dollar of commercial bank created cash, there is a dollar of debt owed to a commercial bank, thus commercial bank issued money nets to nothing.

Incidentally, I’ve been pointing to that “inflation explains deficits” point for several years now. I’ve never seen any other economist grasp or appreciate the point.

Random charts - 69.

Headings in pink were inserted by me.

Should central banks target unemployment?

A problem with much of the political left is that they are keener on virtue signalling than thinking up policies that actually benefit those they claim to be concerned about, i.e. less well off. For politicians (left or right of centre) that virtue signalling does of course make electoral sense: it wins votes.

But it’s disappointing to see a non-politician getting involved in the latter nonsense. Ann Pettifor in this article claims that central banks should target unemployment as well as central banks’ traditional target, i.e. inflation. John McDonnell, the Labour Party finance spokesman advocates the same.

Well “targetting unemployment” sounds very caring and saintly, but what does it actually mean? After all, central banks already target unemployment in that they target inflation. That is, inflation and unemployment are inversely related, thus the inflation target, which consists of keeping inflation down to 2% actually amounts to targeting unemployment: that is, it consists of minimising unemployment in as far as that is consistent with acceptable inflation.

Moreover, if say inflation was at 2% and unemployment was above target, what’s the Bank of England supposed to do? Abandon the inflation target? Neither Ann Pettifor nor John McDonnell tell us.

McDonnell actually went even further down the “daft targets for central banks” road when he suggested the BoE should target productivity! Well I ask you: what’s the BoE supposed to do if productivity increases are below target? I’m all ears, but I don’t seriously expect to hear anything inspiring from McDonnell.