Thursday, 19 April 2018

Is Mariana Mazzucato saying anything new?

To judge by this review of her book in “Nature”, Mazzucato is not saying anything very original. Obviously I need to read her book before passing final judgement on it. But life is short: I do not have time to read all the books I’d like to, so I normally read ARTICLES by authors before deciding to read their books so as to get some idea as to whether their books are worth reading. (Title of the Nature article is, "How to re-tool our concept of value.")

However, the REASONS for the popularity of her book are obvious: the ideas in it have an obvious appeal for the socially concerned, economically not very literate section of the political left. And we are talking about a VERY LARGE number of people there.

I’ll run thru some of the points in the Nature article in the order in  which they appear in  the article.

The first para mentions the need to deal with “climate disruption”. Well about 90% of the population have worked out that climate change is a serious issue! That’s why the world is spending billions on wind and solar energy production!

According to the second para, Mazzucato is keen on the idea that the market price for goods and services is not a good measure of their value.  Well we all worked that out a century ago, didn’t we? That’s why don’t let alcoholic drinks change hands at free market prices: we place a heavy tax on alcohol because of the damage it does.

And the dodgy nature of market prices also explains why we grab vast amounts of money off taxpayers and spend it on public expenditure items like education and health care. That process amounts to over-ruling market forces.

Next, according to the para starting “The international system…”, Mazzucato apparently claims “only goods and services sold in markets are counted” when it comes to measuring GDP. That’s nonsense: public sector spending is included as well.

Next, we are told the market “stokes inequality”. Well of course: the market price for someone with a low IQ and a drink or drugs problem is often around zero. But we don’t let them starve (though of course there’s always the odd few who fall thru the social security safety net, even in Europe).

The second last para starts "Mazzucato deconstructs several other key trends. These include how the financial sector’s “casino capitalism” mislabels market speculation as the creation of value". Well that idea is not original: in 2009, Adair Turner (former head of the UK’s Financial Services Authority) said that much of what the City of London does is “socially useless”.

Monday, 16 April 2018

Millions to become unemployed just because politicians know nothing about economics.

As this Brookings Institution article  rightly says, come the next recession, the Fed may have limited scope for cutting interest rates because they are already very low, and fiscal stimulus may be limited because politicians are worried about the debt and the interest paid on it. Indeed, that happened to some extent in the recent recession. (Title of Brookings article: "Tax and spending legislation disarms us against next recession.")

So what are those pig ignorant politicians (and quite a few pig ignorant economists) worried about? Well first it might seem that as the debt rises, so too will the rate of interest paid on the debt. But that’s unlikely because assuming stimulus really is needed and assuming the Fed recognises that, then the Fed will stop any such interest rate rises by printing money and buying up government debt. Indeed, there’s nothing to stop the Fed cutting interest rates to zero or very near zero. So that’s the alleged “interest on the debt” problem solved.

But politicians will doubtless have another worry: what happens to interest on the debt when the recession is past, and the debt is significantly bigger? Well if debt holders are happy to continue holding debt at a relatively low or near zero rate of interest, then there isn't a problem.

On the other hand, if they start demanding a significantly higher rate, then all the Fed needs to do is to print money and pay off debt holders as debt matures, and tell debt holders to get lost. Of course that money printing could be too inflationary. But that’s not a problem in principle: the Fed just needs to tell politicians to raise taxes or cut public spending with the Fed “unprinting” the money collected or saved.

Note that the latter strategy would have NO EFFECT on demand or numbers employed, strange to relate. That is, while raising taxes normally cuts demand, the purpose of the cut in demand here is simply to keep demand down to a level where it does not cause excess inflation. In other words, in real terms, there would probably be no effect on demand at all.

Unfortunately that’s not the way politicians or voters would see it. Politicians would balk at the latter tax increase. Thus politicians’ ignorance about economics would scupper the latter strategy. And as a result, the above mentioned fiscal stimulus may well not be implemented at all.

Ultimate effect: millions become unemployed because of politicians’ ignorance about economics. And if that isn't a catastrophically stupid way to run a railroad, I don’t know what is.

The solution, as advocated by Positive Money the UK based economics think tank, is to separate politics from economics. That is, have politicians take strictly POLITICAL decisions, like what percent of GDP to allocate to public spending and how that is split between education, defence, etc), while decisions on the size of stimulus packages are taken by economists.


Thursday, 12 April 2018

Random charts - 57.

Pink text on charts below was added by me.

Wednesday, 11 April 2018

Feeble criticisms of MMT by Thomas Palley.

Palley tries to criticize MMT in an article entitled “Modern Money Theory (MMT) vs. Structural Keynesianism”.

His first criticism (his section 1A) is actually valid or at least part valid. That’s the idea that MMT is just Keynes writ large. Others (e.g. Simon Wren-Lewis) have made the same criticism. That criticism is fair enough, but have you ever tried reading Keynes General Theory (his most famous book)? It’s near incomprehensible. In contrast, MMT takes the basic Keynsian ideas and sets them out in a relatively clear manner.

Next (section 1B) Palley says “First, MMT economists used to say it is easy to have full employment without inflation. I don’t think that is true. As you edge toward full employment, inflation will increase.”

In fact MMTers have never denied that inflation puts a limit on the amount of stimulus that can be implemented, i.e. that inflation tends to rise as full employment is approached.

But I agree with Palley’s point that some MMTers appear to play fast and loose with deficits and appear to suggest that governments can simply print money willy nilly.

Next, Palley says, “MMT economists tend to say the central bank should park the interest rate at zero and forget about it. I think that is crazy. It is throwing away an important economic policy tool, and it would likely promote dangerous asset price inflation..”.

Wrong. Warren Mosler (and indeed Milton Friedman) backed a zero interest regime, and it’s an idea I agree with, but it’s not an idea widely promoted in by MMTers.

Re “asset price inflation”, the first flaw in that idea is that asset bubbles are not exactly unknown given more normal rates of interest: it was an asset price bubble while interest rates were at normal levels that was largely responsible for the bank crisis ten years ago!

Second, if we had a permanent zero rate, any amount of deflation (i.e. cut in AD) can be implemented via fiscal means: to be exact, the state can in principle always raise taxes and “unprint” the money collected. Of course that is difficult to do in a scenario where a bunch of economic illiterates known as “politicians” are determined to have a say in how large the deficit / surplus should be, but IN PRINCIPLE, the zero rate idea is doable.

Moreover, a permanent zero rate does not mean we would have to stick to and EXACTLY zero rate of interest all the time: that is, if a sudden dose of deflation were needed, a temporary rise in interest rates could easily be implemented, with the objective being to return to zero as soon as possible.

But the real killer argument for a permanent zero rate is that it brings about a genuine free market rate of interest: the rate of interest which maximises GDP. That’s on the grounds that, as is widely accepted in economics, the GDP maximising price for anything is the free market price, unless there is a clear social case for a non free market price (e.g. kids’ education is available for free because of the obvious social benefits).

So why does a zero rate give us a genuine free market rate of interest?

Well clearly the state or central bank performs a useful service is issuing enough money to induce the private sector to spend at a rate that brings full employment. (The more money people have, the more they tend to spend.) But is there any point in the state issuing so much money that it then has to offer interest to holders of that money interest in order to persuade them not to spend away their excess stock of money? Absolutely none!

That process, i.e. upping the rate of interest just to persuade people with large wads of $100 bills not to spend those bills, so to speak, clearly results in an artificially high rate of interest. Indeed that artificially high rate is absurd in that it results in forcing every mortgagor to pay an artificially high rate of interest on their mortgage most of the time just to enable the state us use interest rate cuts to adjust demand.

Exchange rates.

Next Palley says “MMT economists say all a country needs is a floating exchange rate, and then it can use money financed budget deficits that push the economy to full employment.”

Well what’s wrong with floating exchange rates!!!! The US, UK and Eurozone have a floating rate. It’s news to me that that’s some kind of disaster.

And MMTers do not (to repeat) say “Let’s print money willy nilly with inflation going thru the roof, and with the exchange rate constantly depreciating.”. Their basic claim (as Pally himself points out) is that demand should be as high as is consistent with acceptable inflation. As to the exchange rate, that can be left to find its free market level at that “acceptable” level of inflation.

And finally, in his section 2A, Palley says “MMT is best understood as political polemic…”. Well there’s some truth in that: i.e. campaigning for something substantially different to the existing order (e.g. a permanent zero rate) is “political” by definition. But what’s wrong with arguing for a system which is substantially different from the existing and clearly flawed system? The first people to advocate central banks were “political polemicists”. Now they’re part of the establishment.

On the other hand Palley says MMT is simply Keynes writ large. Well to the extent that that’s true, MMT is advocating nothing new, so it’s not political!!!

Sunday, 8 April 2018

The IMF is still away with the pixies…:-)

Bill Mitchell (Australian economics prof) published an article in 2013 entitled “IMF still away with the pixies”, which claimed the IMF had a poor grasp of macroeconomics. Unfortunately things have not improved much if a recent article published by the IMF is any guide. It’s entitled “Climbing out of debt.”

The argument in the article runs as follows.

National debts are relatively high right now, and given that interest rates may return to their pre-crisis levels in the near future, that means a high interest payment burden on taxpayers unless something is done to cut debts. And that in turn means taxes need to be raised or public spending cut. Thus the question arises as to which of those two options is the better: raising taxes or cutting public spending – in particular, which has the bigger effect so far as reducing GDP goes.

The IMF authors claim that public spending cuts are in fact the better option. Their concluding paragraph reads:

“The bottom line is that reducing the debt-to-GDP ratio depends a lot on how the budget deficit is corrected…….Deficit reduction policies based on spending cuts, however, typically have almost no effect on output, so they are a sure bet for a reduction in debt to GDP.”

That whole argument is actually nonsense on stilts, basically because there is no need for government to borrow at all. The bulk of public spending is already funded via tax, and it would be easy to fund ALL public spending via tax (plus a bit of good old money printing – of which, more below).

But let’s examine that point in more detail.

First, far from there being any particularly good reasons for funding public spending via borrowing, politicians’ motive for doing so is in fact suspect: one of politicians’ main motives is to ingratiate themselves with voters by imposing the burden of today’s public spending on future generations. As David Hume writing over 200 years ago 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 impower a statesman to draw bills, in this manner, upon posterity.”

Next, the IMF authors’ toying with different effects on GDP coming from public spending cuts as compared to tax increases is nonsense because GDP should ideally always be kept at the “capacity” level: the level where unemployment is minimised in as far as that’s compatible with avoiding excessive inflation. And indeed that is more or less where the economy is right now: unemployment is at near record low levels.

Now if the economy is at or near capacity with inflation not a serious problem, why are IMF people even contemplating reducing GDP just so as to reduce the amount of interest paid on the national debt? If it’s desirable to cut that interest rate burden that’s very easily done without there being any effect on GDP at all: just have the central bank print money and buy up government debt! Or if you like, continue with QE.

Of course that might have too much of a stimulatory or inflationary effect, but that effect is easily countered by raising taxes and “unprinting” the money collected. Indeed Milton Friedman and Warren Mosler argued that governments should never incur any debt at all: i.e. they argued that all public spending should be funded via tax. Thus the above “continue with QE and raise taxes as necessary” is simply a movement towards the set up advocated by Friedman and Mosler (FM).

Incidentally, note that while raised taxes normally make households worse off, that’s not the case here because the sole purpose of the latter tax is to cut demand to a level that the economy can meet without excess inflation. I.e. in that that tax deals with excess inflation, it probably makes households BETTER OFF.

There are absolutely no strictly economic or technical problems involved in the latter “buy up government debt and raise taxes” ploy. The big problem is POLITICAL: that is, politicians, 90% of whom do not have even the most basic qualification in economics, think they are qualified to decide how much debt government should incur and how large the deficit should be.

Another apparent problem with adopting or moving towards the FM “no borrowing” scenario, is that if there is no government debt, then it is more difficult for central banks to control interest rates (central banks normally control interest rates by buying and selling government debt).

I.e. stimulus would be effected mainly or exclusively by creating more money and spending it (and/or cutting taxes), and given the snail’s pace at which politicians decide how to spend extra money, things would need to be speeded up there. But there are no strictly technical or economic difficulties there.

For example in the UK, it is common for the finance minister to announce changes to the sales tax, VAT, and the tax on alcohol and fuel, and to effect those changes within 24 hours. That is not particularly democratic, but it is quick, plus there is nothing to stop other democratically elected politicians, in particular UK House of Commons debating the matter at their leisure, and pushing for a change to how taxes are collected over the long term: e.g. more coming from income tax and less from VAT.

Ben Bernanke actually gave his blessing to a system of that sort, i.e. a system where the Fed decided the SIZE OF the deficit (i.e. how much new money to create) while politicians decided EXACTLY HOW to spend that money (more on education versus more on infrastructure versus more on tax cuts, etc). See para starting “A possible arrangement…” in his Fortune article entitled “Here's How Ben Bernanke's "Helicopter Money" Plan Might Work”.

And finally, even if there is no government debt, there is nothing to stop a central bank raising interest rates if it wants to simply by wading into the market and borrowing at above the going rate. Various central banks may not be allowed to do that under the existing legislation in various countries. But there is not good reason for central banks not being allowed to do that. Thus the law can easily be changed.

Friday, 30 March 2018

The US national debt.

John Taylor  (of “Taylor Rule” fame) and three other economists have an article in the Washington Post in which they complain about the size of the US national debt.

One of their main concerns is the simple minded point that the debt consists of BIG NUMBERS: they claim it will reach $20 trillion in five years time. Well the US economy is a BIG ECONOMY, so its national debt is quite likely to be a big number.


I have some equally dramatic news: the total money supply for the US is a big number too! Do we conclude that hyperinflation will break out tomorow?

A better measure of the size of the debt is the debt/GDP ratio, which in the case of the US is not even half where it was in the case of the UK just after WWII. That large UK debt did not prove a big problem, even though the UK was near bankrupt at the time and not the sort of debtor that you’d think any sensible creditor would want to lend to.

Taylor & Co are actually right to be concerned about the size and debt and deficit, but their arguments are short of brilliant, to put it politely.

For example they completely fail to mention the most important point of all here, which is that deficits (and thus a rising debt) are fully justified in recessions, as explained by Keynes almost a century ago, but there is much less justification for large deficits when the economy is at or near capacity, which is where the US economy is right now. (Paul Krugman made the latter point, but evidently Taylor & Co don’t get it.)

Next, Taylor & Co say “To address the debt problem, Congress must reform and restrain the growth of entitlement programs…”.

Well now, if it’s essential to cut down on “entitlements” (aka social security), how come numerous countries round the world, particularly in Europe, devote a much larger proportion of their GDP to social security than the US, but nevertheless manage to keep their deficits under control? Well the explanation is desperately simple: the latter  countries collect enough in tax to more or less cover the cost of their social security system!

It’s very easy in principle to have your country devote anything between 0% and 50% of its GDP to social security: just collect enough tax to foot the bill.

Moreover, the question as to how big a country’s social security system should be is a clearly POLITICAL point: it is thus not a point on which professional economists like Taylor ought to express an opinion while wearing their economist hat. I’m not interested in Taylor’s personal political views, and doubtless he is not interested in mine.

I’m giving his article only five out of ten.

Wednesday, 28 March 2018

Muddled thinking on the Job Guarantee.

Job Guarantee (JG) is the idea that government can create a near limitless number of jobs for the unemployed. The idea goes back a very long way: Pericles in Ancient Greece implemented a JG scheme of a sort 2,600 years ago.

Two or three articles have appeared recently about JG which contain several errors. I.e. advocates of JG are full of enthusiasm, but less full of carefully thought out ideas as to how JG can best be orgainized. That helps explain why numerous JG type schemes have been set up in the past, and then abandoned within a few years when it became clear they were an expensive farce.

One of the above mentioned papers is entitled “Guaranteed Jobs through a public service employment program” and is published by the Levy Institute. The authors are mainly academics at the University of Missouri–Kansas City.

The first mistake is that the authors advocate (p.2) a wage for JG work of $15 an hour plus various fringe benefits like Medicare: about double the existing US minimum wage. But the minimum wage for the rest of the country is not raised by the same amount: in fact the authors say nothing about it being raised at all. And the big idea is that employees will quit regular jobs for JG jobs unless regular employers pay the new $15 minimum. As the authors say, “…this becomes the effective minimum wage across the country—a wage other employers will have to meet..”

Now it’s not very clever to induce people to quit regular and relatively productive jobs for JG jobs which are inevitably LESS productive! For each person doing that, GDP is reduced!

Incidentally the reason for thinking JG jobs are relatively unproductive is that those jobs would not exist but for the “special measure” or “special inducement” that is JG: that is, employers (both public and private) create the most productive jobs first, so to speak, and only create less productive jobs if special measures like JG or some sort of employment subsidy makes it worthwhile for them. For example the people of any country exploit its best agricultural land first, and only use poorer land if they absolutely have to.

To summarize, if one of the objectives is to raise the minimum wage for the country as a whole to $15 an hour, why not do just that: raise the minimum wage to $15 an hour for every employer!!

Public versus private sectors.

Next, on page 3, the authors advocate limiting JG jobs to the public sector, their reason being:  “…we would not allow for-profit firms to participate—as they might try to replace part of their workforce with federally paid or subsidized workers.”

Well the first problem there is that public sector employers are under much the same cost cutting and output maximising pressures as private sector employers. Thus the temptation to replace regular employees with subsidised JG employees exists in both sectors.

Another problem is that the public sector employs relatively skilled people compared to the private sector, and as the Levy authors rightly say, the unemployed tend to be unskilled. As George Johnson writing 40 years ago in a Brookings Institution work* put it in relation to the above two problems, “The problem with using state and local government for jobs programs is that….it is an extremely skill intensive sector. Even a significant relaxation of hiring standards would not make the jobs program based on grants to state and local government equivalent to a subsidy on low-wage labour. The incentive of the local government manager is to use the grants to hire persons he believes will be the most productive given his needs (and probably whom he would have hired anyway).”

Indeed, the latter “would have hired anyway” problem was a big problem with the Comprehensive Employment and Training Act set up in 1973, according to Helen Ginsburg**.

Moreover, the reality is that the above “replacement” problem occurs ten thousand times a day even without JG: men constantly “replace” women and vice-verse. Young people constantly ”replace” old people and vice versa (older workers actually did very well in the recent recession compared to young people).

A certain amount of “replacement” is inevitable. The basic justification for some sort of JG scheme is that the unemployed are made available to employers at a realistic price, i.e. very little, or even for nothing. That’s an improvement (at least in theory) on the existing situation, where if someone is worth less than the minimum wage / union wage etc they aren’t employed at all.

The price can never be tailored EXACTLY to the actual worth of each employee, thus there is bound to be some replacement. But JG is nevertheless a possible improvement on the existing system.

Also, if the time for which a JG employee stays with a given employer is strictly limited (perhaps to a couple of months or so), that will tend to induce the employer to claim the JG employment subsidy only in respect of people who are of peripheral use to the employer. Put another way, employers are bothered about losing VALUABLE employees, but they are not bothered about losing relatively unproductive employees, e.g. JG employees.

Temporary subsidized private sector jobs bring benefits.

And apart from that, there are further reasons for allowing private sector employers to make use of JG people: one is that the empirical evidence shows that those who have done temporary subsidized work of the JG type have a better post JG employment record than those who have done JG jobs in the public sector or with charities.

Undercutting existing employers.

Next, (p.3 top of 2nd column) the Levy authors say they envisage limiting the amount of construction work involved in JG because that might undercut existing private sector contractors. Well now, exactly the same applies to EVERY sector doesn’t it? If a JG scheme runs a cafĂ© or does tree planting (always a favorite with JG advocates) that is likely to undercut existing cafes and firms which plant trees.

The authors do however give a reason for limiting construction work on JG schemes: the Davis-Bacon Act. But that’s a specifically US problem and a very illogical one. That is, where’s the logic in stopping JG people undercutting CONSTRUCTION workers, but allowing them to undercut OTHER workers?

The “existing employer” versus “special scheme” question.

Next, there is an absolutely fundamental question relating to JG, which the authors fail to address, and already alluded to above,  namely should JG people be subsidised into work with existing employers (public and/or private), or should specially set up schemes be created to employ JG people (as was the case with the WPA, at least to some extent).

Well the big problem with specially set up schemes, is that it results in a high concentration of one type of labour (mainly unskilled labour). That is inevitably inefficient, for reasons set out in the introductory economics text books. Put another way, an unskilled person is much more productive working alongside SKILLED people and decent amounts of capital equipment, than working alongside other unskilled people.

Moreover, the latter “existing employer versus special scheme” point provides the answer to the above Davis-Bacon quandary. That is, if JG people are for the most part subsidised into work with existing employers, and classified as “apprentices in need of an employment subsidy” or something like that, employers and unions in the construction trade would probably not object. I.e. if employers and unions in the construction industry see that every other industry is being treated in exactly the same way, they ought to have little reason to complain.

Certainly that would be a very different set up to what happened under the WPA, where what were in effect entirely new contracting firms were set up, employing just WPA people (many of them fully skilled bricklayers, plumbers, etc) which were clearly in competition with normal  contractors. That gave rise to justifiable complaints from the latter contractors.

Another JG proposal.

Another lot of JG type proposals comes in a “Centre on Budget and Policy Priorities” article. Like the above Levy article, this lot advocate a wage, including non-wage benefits, well above the existing minimum wage.

They also claim that, “Workers would have the opportunity to advance within the program, rising from the minimum wage in the program to an estimated mean salary of $32,500.” Well the problem there is that JG people are supposed to be available at a moment’s notice for suitable regular vacancies when the latter appear. I.e. JG work is essentially TEMPORARY in nature. That rather clashes with “advancing within the program.”

Note that the nearer JG people are to becoming PERMANENT employees, the less the effect of JG: someone who is permanently wedded to a job is not available for other vacancies. That is, aggregate labor supply to the regular jobs market is reduced, which is inflationary, which means demand has to be reduced, which destroys regular jobs, assuming unemployment is already as low as it can go without exacerbating inflation.

That explains why there has been a HUGE increase in public sector employment over the last century, but no apparent effect on unemployment. That is, simply setting up public sector PERMANENT jobs (whether they’re called “JG jobs” or not) has no effect on unemployment.

Centre for American Progress.

A third article on JG appears in “The Nation.”  This article, in contrast to the above Levy article, advocates a fair amount of construction or infrastructure type work. It’s time for the advocates of JG to get that point sorted out, isn't it?

This article also advocates apprenticeships. Well more training and apprenticeships are fine, but (to repeat) they don’t have much to do with JG. To repeat, JG people are supposed to be available for regular vacancies as soon as the latter appear. If someone is in full time training or a full time apprenticeship, then they’re not available for the latter sort of vacancy.

The CAP article, like the Levy article, also advocates a $15 an hour wage. To repeat, DOUBLING the minimum wage is a big step to take and needs far more thinking about than the Levy or the CAP articles engage in.

Conclusion. There is too much poorly thought out material out there when it comes to JG.

** Helen Ginsburg, “Full Employment and Public Policy: The United States and Sweden”, Ch2, p.51.

* G.E.Johnson, ‘Structural Unemployment Consequences of Job Creation Policies’ , ‘Creating Jobs’, editor: J.L.Palmer, published by the Brookings Institution, 1978.