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.

OMG: “fiscal space” rears its ugly head again.

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!

QED.

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.

Simon Wren-Lewis has thoughts on the Job Guarantee.

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.

Can’t think? Don’t worry: you’re probably suited to running a “think tank”…:-)

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.

Does Bill Mitchell back Workfare or not?

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.

A fundamental flaw in interest rate adjustments.

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.


Conclusion.

The entire conventional wisdom on government borrowing is nonsense, or at least that’s what I’m claiming!

___________

References.
 
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”

Should central banks be socially concerned? – continued.

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.


Financial Stability.

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.


Politics.

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.


Inequality.

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.