Sunday, 28 August 2016
That’s in this Reuters article of his which starts “The concept that the government should serve as an employer of last resort in times of economic stress was first floated by the late economist Hyman Minsky."
Well now much the biggest set of employer of last resort (ELR) schemes in the last century in the US came (unsurprisingly) in the 1930s – at which time Minsky was a teenager! I rather doubt he had a decisive influence on the WPA and other ELR schemes in the thirties. And of course in Germany in the thirties there was something similar: autobahn building, etc.
Going back a bit further in history, there were the work houses in Europe and America in the 1700s and 1800s. Those were ELR of a sort.
And going back still further, two and a half thousand years ago: Pericles in Ancient Greece set up an ELR scheme. In reference to Pericles, Plutarch’s book “The Lives of the Nobel Grecians and Romans” (p.192) says “….it being his desire and design that the undisciplined mechanic multitude that stayed at home should not go without their share of public salaries, and yet should not have them given them for sitting still and doing nothing, to that end he thought fit to bring in among them, with the approbation of the people, these vast projects of buildings and designs of work, that would be of some continuance before they were finished, and would give employment to numerous arts, so that the part of the people that stayed at home might, no less than those that were at sea or in garrisons or on expeditions, have a fair and just occasion of receiving the benefit and having their share of the public moneys.”
Friday, 26 August 2016
Money lenders (aka banks) print or “create” money. See the opening sentences of this Bank of England article (1) for verification of that. In contrast, other types of firm and corporation don’t do that: or at least their freedom to create money is severely restricted, as Richard Werner explains (2).
Now that’s pretty obviously a big leg up for the money lending industry. I mean most firms when they want to come by money have two options: earn it or borrow it. In contrast, and to repeat, private banks are in the happy position of being able to just print the stuff, or at least some of it.
And that is an entirely artificial bias in favour of private banks. GDP is maximised where every firm, industry and product is treated equally, unless there are good reasons which are specific to a particular industry for doing otherwise. E.g. special laws relating to fire-arms and alcoholic drinks are fair enough.
So what good reasons might there be for the latter special treatment of private / commercial banks?
Well one ostensible reason is that letting private banks print and lend out money is stimulatory: it boosts demand. Well sure it does, but so does having the CENTRAL bank do the same thing. I.e. central banks can print and spend new money into the economy (and, in cooperation with government, they can do it in an entirely impartial way, that is, not involving special favours for any particular industry).
Another ostensible excuse for private money printing by banks is that it reduces interest rates which according to some is beneficial.
Indeed, Joseph Huber describes that interest rate reducing effect in more detail in his work “Creating New Money” – see para starting “Allowing banks to create new money…” (3).
Well actually low rates have disadvantages as well as advantages: for example low rates encourage asset price bubbles. In more general terms there must be an OPTIMUM rate of interest.
As I’ve pointed out before on his blog, the concept “optimum” seems to be beyond the comprehension of most of the population and a sizeable proportion of the economics profession. But hopefully most readers of this article understand the concept. So how do we achieve the OPTIMUM rate of interest?
Well how about just letting interest rates be determined by market forces (unless someone can clearly demonstrate that market forces go wrong in this area). And a free market is a scenario where government abstains from granting special favors to one particular industry, e.g. letting money lenders print money.
It was argued above that the nearest thing to a free market involves having the state “print and spend new money into the economy” (i.e. do some helicoptering). That might seem questionable in that having the state doing anything is not normally regarded as a characteristic of the free market. In fact as explained in the previous post on this blog, the latter “print and spend” policy is a very close imitation of the free market. Briefly that’s because the free market’s cure for a recession is the Pigou effect, which involves an increase in the money supply.
Also, when it comes to money, there is really no such thing as a totally free market: “money is a creature of the state” as the saying goes. Or to quote another popular phrase, “money is a social construct”. That is, for any sort of money to work, there has to be general agreement as to what the money unit is, and how to control its production.
To put all that another way, the existing bank system (sometimes called fractional reserve) involves an artificially low rate of interest and hence an artificially large amount of lending, borrowing and debt. Under the alternative system, full reserve banking, commercial banks are barred from creating / printing money, and full reserve is a closer approximation to a free market than the existing bank system. Thus full reserve banking is the GDP maximising bank system.
1. “Money Creation in the Modern Economy” by Michael McLeay & co-authors. Published by Bank of England (Quarterly Bulletin 2014, first quarter.)
2. “How do banks create money, and why can other firms not do the same?”. Richard Werner. Published by Science Direct.
3. “Creating New Money”. Joseph Huber & James Robertson. Published by the New Economics Foundation.
Sunday, 21 August 2016
In a perfectly functioning free market, and given a recession, wages and prices would fall, which would increase the real value of money (base money to be exact). That would encourage spending which would cure the recession. That’s known as the Pigou effect.
Unfortunately in the real world, wages are sticky downwards (to use Keynes’s phrase) thus the free market’s cure doesn’t work too well. However, it can be imitated simply creating and spending extra base money into the economy (helicoptering). That comes to the same thing as the free market cure for a recession. (Incidentally “QE for the people” is another name for helicoptering).
In contrast, while interest rates would doubtless fall in a recession given a free market, there is nothing much to stop them falling in the real world. There is thus little reason to think that additional and ARTIFICIAL attempts to cut interest rates engineered by central banks resemble the free market’s cure for recessions.
Indeed, there are obvious anomalies with interest rate cuts. First, any increased demand resulting from such cuts is concentrated in the capital goods sector of the economy, and that means more dislocation than if the increase in demand is spread more widely thru the economy (as occurs under the free market’s cure for recessions). Second, recessions are not necessarily caused by a decline in demand for capital goods: they can be caused by a decline in consumer confidence, i.e. a decline in demand for consumer goods. Third, even if a recession IS CAUSED by a decline in demand for capital goods, the assumption that that decline should be made good is questionable.
A classic example of that was the decline in demand for housing / property which sparked off the 2007/8 recession. That in turn was caused by the irresponsible lending (particularly in the US) which preceded the recession. Now the idea that the best cure for a recession sparked off by irresponsible lending is to encourage more lending is stark, staring, raving bonkers. It’s LUNATIC.
Yup. The emperors running the show really don’t have any clothes.
The only possible problem with helicoptering comes when it needs to be reversed. Certainly things are more complicated there than in the case of an interest rate hike. However, the fact that some measure is easy for the authorities to implement is not a brilliant argument for it if that measure does not actually have much effect: and the evidence seems to be that interest rate adjustments do not actually have much effect.
Second, if an extra thousand bureaucrats are needed in a country like the UK (with a population of about 60 million) to manage reversing QE for the people, that is a complete irrelevance in the total scheme of things.
As mentioned above, reverse helicoptering has potential problems. Altering sales taxes like VAT doesn’t seem to be too difficult: the UK cut and then increased VAT during the recent recession.
Putting a stop to new orders for government purchased stuff would not be difficult either. On the other hand cutting the state pension or unemployment benefit obviously involves potential political problems.
So I suggest the optimum policy is to use helicoptering as far as possible, while only using interest rate adjustments to the extent that helicopter adjustments prove too difficult.
Friday, 19 August 2016
John Williams of the San Francisco Fed published an article recently advocating a bigger role for fiscal policy.
One relevant passage reads:
"Turning to policies that can help stabilize the economy during a downturn, countercyclical fiscal policy should be our equivalent of a first responder to recessions, working hand-in-hand with monetary policy. Instead, it has too often been stuck in a stop-and-go cycle, at times complementing monetary policy, at times working against it. This is not unique to the United States; Japan, and Europe have also fallen victim to fiscal consolidation in the midst of an economic downturn or incomplete recovery.
One solution to this problem is to design stronger, more predictable, systematic adjustments of fiscal policy that support the economy during recessions and recoveries (Williams 2009, Elmendorf 2011, 2016). These already exist in the form of programs such as unemployment insurance but are limited in size and scope. Some possible ideas for the United States include Social Security and income tax rates that move up or down in relation to the national unemployment rate, or federal grants to states that operate in the same way. Such approaches could be designed to be revenue-neutral over the business cycle; they also could avoid past debates over fiscal stimulus by separating decisions on countercyclical policy from longer-run decisions about the appropriate role of the government and tax system. Indeed, economists across the political spectrum have championed these ideas."
Well quite. In fact why not take it a stage further and simply fund fiscal deficits via new money? I.e. for each dollar of fiscal stimulus, there’d be an extra dollar of base money in the hands of the private sector (which is monetary stimulus of a sort). And that’s what’s advocated by Positive Money, the New Economics Foundation and Richard Werner.
But instead of the latter monetary policy in the form of adjusting the private sector’s stock of base money, Williams seems wedded to adjusting interest rates. Well the problem with that is that is first that there’s a wealth of evidence that interest rate adjustments don’t actually have much effect. Second, the lag between interest rate changes and actual changes in investment spending are long. Third, the GDP maximising rate of interest is presumably the free market rate. That is, ARTIFICIAL adjustments to interest rates are not on the face of it a GDP maximising way of attaining full employment.
Reference. 'Monetary policy in a low R-Star world'. John Williams.
Wednesday, 17 August 2016
I’m sceptical about Keen’s debt jubilee idea.
His argument, far as I can see, is thus.
1. Private debts have risen sharply over the last two decades or so.
2. When debts in the aggregate are paid off, or even when their growth ceases, the effect is deflationary.
3. When that deflation comes, governments won’t provide enough stimulus, ergo we need a jubilee.
The weaknesses in that argument are thus.
First, the rise in debts is not surprising given the fall in interest rates over the last two decades. To that extent, paying interest is not a big problem.
Second, the latter theoretical “not a problem” point seems to be born out in practice. That is, the proportion of debts which are “non-performing” is currently not at any sort of danger level. At the height of the crisis, that danger level was arguably approached in the US where “non-performers” rose to near 10% of total debtors. But that US problem has since subsided. As for Keen’s native Australia, which he seems to be particularly concerned about, “non-performance” seems to be a “non-problem” according to this chart.
Third, I agree (as claimed by Keen) that when it comes to implementing the right amount of stimulus, governments and central banks are pretty incompetent. In the recent crisis, that was thanks to the “pro-consolidation, pro-austerity” ideas coming from the IMF, OECD, Kenneth Rogoff, George Osborne, etc.
However, a debt jubilee does not solve the latter problem. That is, it’s perfectly possible for a recession to be sparked off by factors other than excessive debt. I.e. the best solution is to get it into heads of the latter economic illiterates (Rogoff etc) that given a recession (caused by debts being paid off or anything else) there is no reason to hold back on stimulus.
Fourth, it’s impossible to forgive one person $X of debt without robbing someone else of $X of savings, and that’s politically risky. Those robbed are liable to riot, or resort to other violent or illegal counter measures.
Plus, once savers suspect their savings are likely to be confiscated, they’ll charge MUCH MORE for saving/lending for the next two or three decades. Thus it’s very debatable as to whether debtors / mortgagors would gain much in the long run.
However, Keen proposes getting round the latter problems by dishing out as much freshly created money to non-debtors as to debtors! In his words:
“A Modern Jubilee would create fiat money in the same way as with Quantitative Easing, but would direct that money to the bank accounts of the public with the requirement that the first use of this money would be to reduce debt. Debtors whose debt exceeded their injection would have their debt reduced but not eliminated, while at the other extreme, recipients with no debt would receive a cash injection into their deposit accounts.”
Well the obvious problem there is the ENORMOUS amount of stimulus involved: that is, we’d get hyperinflation. Here are some figures.
According to the first two charts in Keen’s article, the private debt to GDP ratio in the US peaked at 300% in 2010, while in Australia, it peaked at 150%. So the “Keen” solution would involve printing and distributing an amount of money equal to 600% of GDP in the case of the US (that’s 300% for debtors and another 300% for creditors to make sure creditors are not unfairly discriminated against in this massive distribution of freshly printed money). And in the case of Australia, the figures would all be half that much.
Those figures are completely lunatic. It couldn’t be done even if the process was implemented over several years. Milton Friedman never had anything like that in mind when he suggested helicoptering.
Obviously the above figures are all halved if we take the Australian 150% figure rather than the US 300% figure. But the stimulus is still of unheard of proportions.
But that’s not the end of the problems. People who are happy going into debt would then find their debts much reduced, thus they’d go running along to their bank demanding far bigger mortgages with a view to buying much larger or more expensive houses.
Unless something was done to curtail that activity, the alleged debt problem would just reappear in a few years. Thus we’d have to implement much stricter rules about who can borrow how much: all thoroughly bureaucratic.
I suggest it’s easier to work WITH the grain of what people and lenders want to do that work against the grain. That is, I prefer a system under which people can borrow what they want, as long as their bank thinks they’re creditworthy: i.e. as long as the bank thinks they’re able to eventually pay off the debt and in the meantime, pay the interest.
The only slight reservation that needs making to the above “hyperinflation” points is that arguably Western economies are not at capacity, thus there is room for some more stimulus (done via the Keen jubilee method or in some other way). Well clearly there is SOME TRUTH in that point. But Western economies have largely recovered from the recession which started in 2007/8, thus there wouldn’t be room for the MEGA STIMULUS package which is inherent to Keen’s jubilee.
P.S. (22nd August 2016). In the original version of the above article (published 19th Aug) I got in a muddle with the above 300% and 150% figures. I estimated the amount that needed to be printed and distributed at HALF the right figues. Correction made 22nd Aug..
Tuesday, 16 August 2016
I don’t have time to do a complete demolition job on this Guardian article, but I’ll deal with one key point which is the claim (an ever popular one) that “Britain, like Switzerland, relies on migrants not just to fuel its economy but to prop up key public services such as healthcare.”
The answer to that point is that Britain is only reliant on immigrants to run the health service because successive governments, Labour and Tory, have failed abysmally to train enough medics. To put that another way (for the benefit of low IQ cretinous Guardian readers) had Britain trained the right number of medics over recent decades, there’d be little need for immigrant medics.
That of course is not to criticise ALL IMMIGRATION. That is, even if each country aims to train the right number of bricklayers, plumbers, lawyers, medics, etc there will always be temporary shortages and surpluses of specific skills. But there is no excuse for a total failure to train anywhere near the right number of people for each profession.
But if failure to train a sufficient number of medics is a brilliant idea, perhaps we can look forward to some dim-wit effete Guardian journalist advocating the same total failure in respect of chefs, bricklayers, electricians, you name it.
Reference: "Theresa May's Swiss holiday will show her just how bad Brexit could be". Ian Birrell. The Guardian.
P.S. (Same day, 16th August, 2016). I could of course have tried to answer that Guardian article in the comments section after the article. But unfortunately The Guardian is terrified of free speech: normally it won't publish strident criticisms of it's articles, or so I've found.