Monday, 20 April 2015

Study “reveals” that the rich have knobbled government.

I like this United Press International article entitled “The US is not a democracy but an oligarchy, study concludes.” The study has apparently been done by folk at Princeton and Northwestern Universities.

The summary of the article reads "The central point that emerges from our research is that economic elites and organized groups representing business interests have substantial independent impacts on US government policy, while mass-based interest groups and average citizens have little or no independent influence.”

Er yes. I suspect most taxi drivers are aware that Jamie Dimon and Lloyd Bankfiend make regular trips to the White House with a view to licking the president’s arse - sorry I meant with a view to discussing paying for election expenses. Any connection between those payments and subsequent bank friendly legislation, and a continuation of “socialism for the rich” are of course entirely coincidental.

I wouldn’t describe the above study as revelatory.

Sunday, 19 April 2015

More rubbish on secular stagnation.

Summers’s original SS idea, was that we’re doomed because there’s been a significant rise in the desire to save and there’s nothing we can do about it because interest rate cuts are the only way of raising demand, and interest rates are currently at or near zero. (More on the latter point here.)

Summers may not have heard of Keynes, but Keynes pointed to the same problem about seventy years ago. Keynes called that the “paradox of thrift”. That’s the fact that saving money reduces demand and raises unemployment. And as Keynes rightly pointed out, the solution is essentially to print more money and spend it till “savings desires” are met (to use MMT parlance).

However, the Financial Times has done us the great service of adding to the nonsense. In this op-ed article the FT claims that the solution to SS is “Investment and productivity have meanwhile disappointed. These factors strengthen the case for the government borrowing to invest. The purpose would be to raise the sustainable growth rate.”

Well there’s certainly a strong case for Keynes’s “print and spend” solution, but why concentrate on “investment”?

Of course “investment” is an EXTREMELY SEXY word. If you run around advocating more investment and you’ll have a HUGE following, even if the investment you propose is completely pointless. Investment involves sacrificing current consumption, and ever since the world began, human beings have adhered to a variety of religions all of which have one thing in common: sacrifices must be made to placate the Gods. God knows (pardon the pun) why that desire to lash oneself with chains like Shiite Muslims on their way to Karbala is so ingrained in the human brain, but it just is.

Anyway, returning to economics, whence the assumption made by the FT, namely that because stimulus is needed, that therefor the stimulus must take the form of more investment? There is only one valid reason for making an investment, and that’s the fact that the investment seems to pay for itself: i.e. it’s a cheaper way of doing something than a more labour intensive method.

And there is very little reason to think that the number of potential investments which meet the latter criterion will hugely expand just because stimulus is needed.

As for the fact that productivity improvements have recently been poor, that poor performance is NOT NECESSARILY down to lack of investment: it could be that the pace of technological change is slowing (or to be more accurate, the pace at which technological change can boost productivity via sundry investments may have slowed).

So how do we determine the truth or otherwise of the latter point? Well it ‘s easy: just carry on making investments where they pay for themselves, and not  where they don’t. To repeat, the fact that stimulus is needed to counter secular stagnation has no bearing on the latter “pay for themselves” point.

But I’m probably wasting my breath. The desire to lash oneself with chains overrides logic.

Saturday, 18 April 2015

Does Adair Turner understand debt?

I’m a fan of Adair Turner (former head of the UK’s Financial Services Authority). But he rather goes off the rails in this article, where he (and co-author Susan Lund) worry about rising levels of debt.

As Turner and Lund point out, just under half the increase in debt worldwide in the last five years or so is attributable to increased NATIONAL debts. The first flaw in that argument is that (as pointed out by Martin Wolf in the Financial Times recently) national debt at low rates of interest is essentially the same thing as money (base money to be exact).

As Wolf put it, “Central-bank money can also be thought of as non-interest-bearing, irredeemable government debt. But 10-year Japanese Government Bonds yield less than 0.5 per cent. So the difference between the two forms of government “debt” is tiny…”. Indeed interest rates on government debt is currently at an all time low (Greece and one or two other countries apart).

Another relevant factor when it comes to the similarity between government debt and money is the TERM of the debt: i.e. the time till maturity. That is, government debt is simply a promise by government to pay the debt holder $X in Y days or Z months time. And if there’s say just one week till maturity, then what’s the difference between $X on the one hand, and on the other, a promise by government to pay you $X in a week’s time? Not much difference!

Indeed, short term government debt is used in lieu of cash in the world’s financial centres.

So when T&L say “Much of this debt accumulation was driven by efforts to support economic growth in the face of deflationary headwinds after the 2008 crisis”, that can be more accurately re-phrased as “It has proved necessary to supply the private sector with a larger money supply in order to keep the private sector spending at a rate that brings full employment”.

And frankly I don’t see much wrong with doing that. If people want to carry around more dollar bills in their wallets (or keep wads of dollar bills under their mattresses), what’s the problem? Let them have the dollar bills they want!

T&L then say “But excessive reliance on debt creates the risk of financial crises, which undermine growth.” Really? Japan has had HUGE levels of government debt for a long time and far as I know, no “financial crises” has resulted from that.

I’m not suggesting that supplying the private sector with a larger than normal stock of money (in the form of government debt or base money) is TOTALLY without risks: it’s always possible the private sector goes wild and tries to spend it all at once which would cause rampant inflation, unless government managed to counter that with some sort of deflationary measures. But it’s better aim for full employment and accept that risk, than have excess unemployment isn't it?

Private debt.

As distinct from government debt, there is PRIVATE debt, and that, as T&L rightly point out has risen substantially. On the other hand, and to repeat, interest rates are at record lows. In fact they’ve been declining steadily for thirty years. Thus debtors can now take on more debt than they used to. So to that extent, there is nothing to worry about.

P.S. (6.30, same day): I should perhaps have answered the question as to what to do if and when interest rates rise on national debts. Answer: don't roll them over. I.e. just print money and pay back creditors. And if that's too inflationary, then raise taxes, i.e. grab that money back from the private sector. Easy.

Friday, 17 April 2015

Make work and the WPA.

An idea which has been around for a VERY LONG TIME, is that it is in theory possible to abolish unemployment by simply having government pay the unemployed to do SOMETHING instead of nothing (well, “nothing” plus a bit of job searching).

Those refusing this sort of work, could be regarded as having turned down work, and could thus perhaps no longer be classified as unemployed. Hey Presto: unemployment vanishes. Well in theory it does!

That sort of idea was implemented big time in the 1930s, for example there was the “Work Project Administration” in the US which built vast numbers of roads, bridges, buildings, etc. And 2,600 years ago Pericles in Ancient Athens did the same: put the unemployed onto public construction projects (according to  “Unemployment in History” by John Garraty, Ch.2, p.13)

I’ll call this idea “Job Guarantee” (JG) because that’s currently a popular label. And one important question to sort out is whether JG should take the form of SPECAILLY SET UP PROJECTS, as was the case with the WPA in the 1930s, or whether such work should be merged with the EXISTING public sector: i.e. should JG employees be allocated to EXISTING public sector employers (schools, the armed services, etc)? I’ll consider whether JG employees should be allocated to existing PRIVATE SECTOR employers below.

In fact there’s a simple flaw with specially set up projects which is that (almost by definition) they involve a odd ratio of different inputs – permanent skilled labour, unskilled labour, materials, and capital equipment.

That is, a typical JG “specially set up” project consists of a relatively large number of recently unemployed people (who tend to be unskilled) working alongside a smaller than usual quantity of skilled labour, capital equipment, etc. And that means inefficiency.

Of course a JG specially set up project CAN INVOLVE a relatively large amount skilled labour, capital equipment etc as was the case with many 1930s WPA construction projects, but in that case, such schemes come to the same thing as a normal or regular employer! In short, specially set up JG schemes are in check mate: either they involve an odd ratio of inputs, or they don’t in which case they amount to a normal employer.

In the UK there is a JG scheme up and running at the moment called the “Work Programme” which allocates subsidised employees to existing employers public and private. So in that that scheme allocates JG people to existing employers, the Work Programme makes sense (not that I’m suggesting the Work Programme is anywhere near perfect.).

Incidentally, some readers may want to raise the objection at this point that public sector employers like schools and hospitals can find work for hoards of unskilled youths is plain unrealistic. That’s true, but private sector JG solves that problem. Speaking of which….

Private sector JG.

A second important question that needs answering in relation to JG is whether JG people should be allocated to PRIVATE SECTOR employers.

A plausible reason for limiting JG to the PUBLIC SECTOR is that no extra DEMAND is needed in order for the output to be produced and consumed: that is, the output is simply given away. Ergo (allegedly) there’s no inflationary threat. 

However, an obvious flaw in that idea is that we’ve seen a HUGE INCREASE in the proportion of GDP allocated to the public sector (aka the “give away” sector) over the last century or two, yet there’s been no corresponding decline in unemployment. So what’s the explanation? Well we need to look in a little detail at what causes inflation (demand pull inflation to be exact).


The cause of inflation.

Inflation rises when employers cannot find enough of the ultimate source of all supply, i.e. labour (skilled labour in particular). And when people get regular jobs they normally cease looking for alternative jobs: i.e. they cease being a source of skilled labour for labour shortage areas (skilled ones in particular).

Thus if employment is at the maximum feasible level (sometimes called NAIRU) and government creates new public sector jobs, that will be inflationary NOT JUST because of the extra spending, BUT ALSO because skilled labour shortages are exacerbated.

So if JG labour is to be allocated to private sector employers, a way must be found to increase demand which DOES NOT increase demand for skilled labour. And JG ought to do that since JG labour is supplied to employers at a subsidised rate (or for free), which in turn means employers will raise the number of unskilled employees they take on relative to the number of skilled employees.

Plus (to repeat) it’s important not to reduce the efforts by JG people to find regular or unsubsidised work when they get JG work. And that can probably be achieved by having pay for JG work about the same as the pay obtainable on unemployment benefit. Indeed the UK’s Work Programme pretty much fulfils that requirement: pay is not spectacular.

Another point in favour of private sector JG is that the “post JG” employment records of those who have done private sector JG is much better than those who do JG jobs in the public sector or charity sector, according to some Swiss research. See here and here.

And a further advantage of private sector JG is that the private sector is better at employing the relatively unskilled than the public sector.


Is JG worth it?

That is, does the output obtained from JG employees exceed the administration costs of JG schemes? The administration costs of the Work Programme have been so high that it’s questionable whether JG schemes are worthwhile. Or maybe it’s the Work Programme as such that is at fault.

One possibility which might have a better cost/benefit ratio is to make JG purely voluntary (as was the case with one Swiss JG scheme): that is not incorporate any sort of Workfare element. By “Workfare element” I mean “do this job else your benefit gets cut”.

Thursday, 16 April 2015

Bernanke's blog.

I like this passage from a recent post.

"Finally, a principal motivation that proponents offer for changing the monetary policy target is to deal more effectively with the zero lower bound on interest rates. But economically, it would be preferable to have more proactive fiscal policies and a more balanced monetary-fiscal mix when interest rates are close to zero. Greater reliance on fiscal policy would probably give better results, and would certainly be easier to explain, than changing the target for monetary policy. I think though that the probability of getting Congress to accept larger automatic stabilizers and the probability of their endorsing an alternative intermediate target for monetary policy are equally low."

Translated into plain English, that's "Economic growth in the US would be much better if it weren't for that monkey house down the road known as "Congress"".

Further translations of overly diplomatic language into brutally realistic English will appear here from time to time.


Wednesday, 15 April 2015

Martin Wolf keeps repeating Summers’s secular stagnation nonsense.

Martin Wolf is the Financial Times chief economics commentator and he is my own favourite economics commentator (an accolade which is of course much more important than the above FT one). But he goes off the rails in today’s FT.

His basic claim is that, “Output . . . is financially unsustainable if generating enough demand to absorb the output of the economy requires too much borrowing or real rates of interest that are far below zero.” Wolf actually attributes that idea to the latest IMF World Economic Outlook. But I’ve been through that IMF document and while there is material that hints at the latter “unsustainable” idea, I couldn’t find anything very specific. But never mind.

The important point is that the above “unsustainable” argument is plain wrong and the flaw in it is simple and is thus. Demand CAN BE generated by cutting interest rates, but it’s not the only way. One of the alternatives is simply to have the state create and spend new money into the economy (and/or cut taxes). Indeed, that’s exactly what we’ve done over the last three years or so. That is, we’ve implemented fiscal stimulus (government borrows money, spends it and issues bonds to its creditors), and followed that by QE (the state prints money and buys back those bonds). That nets to “the state prints money and spends it, and/or cuts taxes”.

Indeed, the latter method of implementing stimulus is exactly what the leading advocate of Modern Monetary Theory, Warren Mosler, proposes in his “Mosler’s law”. That law reads “There is no financial crisis so deep that a sufficiently large increase in public spending cannot deal with it.”

The above Wolf idea, namely that there is nothing government can do to increase demand when interest rates are zero is exactly the fallacious point that Lawrence Summers made in his original “secular stagnation” speech to an IMF audience in 2013.

As Summers put it, “But imagine a situation where natural and equilibrium interest rates have fallen significantly below zero. Then, conventional macroeconomic thinking leaves us in a very serious problem…”. Er no. There is NO PROBLEM there whatever. As to “serious problems”, forget it.

Actually it’s not entirely clear what Summers is trying to say, but in as far as his speech is decipherable, I go along with the summary of it set out by Gavyn Davies in the Financial Times.

As Davies puts it, “In a largely unsuccessful effort to close the gap, the central banks have created asset price bubbles (technology stocks in the late 1990s, housing in the mid 2000s and possibly credit today), since this has been the only means available to boost demand.”

I.e. Davies seems to be saying that central banks have cut interest rates to near zero (which has created “asset price bubbles”). Plus Davies confirms that what Summers seems to suggest is that interest rate cuts are the “only means available to boost demand”, to quote Davies. That is nonsense.

The reality (as MMTers keep pointing out) is that a government which issues its own currency can choose any combination of interest rates and stimulus it wants. For example with a view to escaping zero rates (which according to the IMF, Martin Wolf and Summers is some sort of horrendous problem), such a country just needs to proceed as follows.

First print and spend large dollops of money into the economy (and/or cut taxes). That will raise the private sector’s stock of money (base money to be exact). And there has to be some point at which (as MMTers keep pointing out) the private sector has so much money that interest rates have to be raised in order to prevent aggregate spending rising too far and sparking off excess inflation.  Moreover, the latter strategy can in principle be used to raise BOTH stimulus AND interest rates as far as you like. And what’s nice about that solution is that it disposes of the asset price bubbles (if you believe they’re a problem).

It should of course be said that while the latter strategy is a very simple solution IN PRINCIPLE to the problem that Summers, Wolf etc seem to think is insoluble, that does not mean that actually implementing the strategy would be all plain sailing. But then steering a course between excess inflation and excess unemployment is NEVER EASY!!!

Another possible criticism of the above “print money” strategy is that it is arguably a classic example if the very problem to which Wolf alluded in the quote at the outset above. That is, Wolf says that a boost to the economy is not “sustainable” if it involves much more borrowing or a much lower interest rates than we’re used to. Likewise it could be argued that issuing larger amounts of base money than has hithertoo been the norm, is not “sustainable”.

Well the answer to that is that just because something is unusual by historical standards, that does not mean it is unsustainable. It could be the new norm. To illustrate, if the citizens of some European or North American country took to accumulating large stocks of saving like Japanese households do (in the form of base money and/or government debt) then the government of that country would just have to accommodate that desire to save by running a relatively large deficit for several years, and thus letting private sector savings build up.

Doing that, while it does have obvious risks, is better than making no attempt to boost demand and thus having an excessive proportion of the workforce condemned to unemployment.

Tuesday, 14 April 2015

Iceland to ban private money printing / creation?

Frances Coppola correctly identifies a weakness in the proposal to ban private money creation or "printing" in the tweets below.  Incidentally the Icelandic proposals are a straight copy of Positive Money proposals far as I can see.

I reproduced those tweets via screen shots which is a quick though not the best way of doing it. If you find them too blurred, clicking on them may help.

The weakness Frances points to is that the investment account department or subsidiary of a bank can still suffer a run or go bust. One answer to that is simply to raise the capital ratio of the department / subsidiary to whatever level makes failure near impossible. I suspect Pos Money's answer is the same, though I don't speak for them.

However I don't like that solution. I'd prefer to simply raise the capital ratio to 100%, which amounts to funding those investment account departments just with equity: i.e. there'd be nothing that faintly resembles a deposit or "money". And indeed the latter is what happens under the version of full reserve advocated by Milton Friedman and Laurence Kotlikoff. Reasons are as follows.

Under full reserve banking, people and firms can keep whatever amount of money they like in a totally safe form in the safe accounts: that's basically the amount of money that households and firms need for day to day transactions. Though if a household or firm really wants to keep far more than that amount of money in a totally safe form, they're free to do so.

Having done that, what then is the point in offering something that's getting a bit close to money in transaction accounts? That's duplication of effort.

Note: the material below is NOT A COMPLETE reproduction of our twitter conversation, but it will give you a flavor.